Latin America s small and medium-sized enterprises: the organisational challenge

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1 Latin America s small and medium-sized enterprises: the organisational challenge An Economist Intelligence Unit report sponsored by SAP

2 Preface Latin America s small and medium-sized enterprises: the organisational challenge is an Economist Intelligence Unit paper, sponsored by SAP. The Economist Intelligence Unit s editorial team conducted the interviews, executed the survey and wrote the report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. Kim Andreasson was the editor and project manager. Dr Scott B Martin was the author of the report. Richard Zoehrer was responsible for layout and design. Our research drew on two main initiatives. We conducted an online survey in November and December 2007 of 175 Latin American executives at small and medium-sized enterprises (SMEs) with global annual revenue of between US$100m and US$400m. To supplement the results, we also conducted in-depth interviews with experts in the region. Our thanks go out to all survey respondents and interviewees for their time and insights. July 2008

3 Latin America s small and medium-sized enterprises: the organisational challenge Summary Small and medium-sized enterprises (SMEs) operating in Latin America face major organisational challenges stemming from globalisation and shifting corporate paradigms. 1 In a world of change, businesses frequently try to seize new export opportunities, compete with imports in liberalised markets, partner with large multinational firms or attract outside investors or buyers. In such an environment, companies with traditional personalised organisational hierarchies tied to a single owner or family will no longer be able to compete. In order to survive, therefore, firms that are locally owned, privately held and often familyrun must develop modern, nimble and transparent management and business structures. It is not only local companies that face challenges, however. Among subsidiaries and branches of multinational corporations, the issue is how to successfully transfer best practices, pioneered by their global parents, to their Latin American operations and adapt them to distinctive local contexts. A major first step for both groups of companies will be to transition from a hierarchy centred on the owner-president or subsidiary president to a more elaborate, networked division of managerial responsibility involving clear separation and co-ordination of senior managerial roles in a modern corporate structure. How far firms go with this division and the extent to which they elevate the status of functional areas vary significantly across firms, particularly between privately held and publicly traded businesses. 1 For the purposes of this report, small and medium-sized enterprises are defined as any company with annual revenue of between US$100m and US$400m. National definitions based on turnover vary, and governments often refer instead to the size of a firm s workforce in making classifications. What are your company's annual global revenues in US dollars? US$100m-US$200m 46% US$200m-US$300m 23% US$300m-US$400m 3 Companies can obtain assistance in their reorganisation in a variety of ways: through relationships with larger firms, business consultancies or the efforts of business associations and governments. About the report This report is based in part on the quantitative findings from an online survey of 175 executives in Latin America conducted by the Economist Intelligence Unit in November and December All respondents were employed by firms with global annual revenue of between US$100m and US$400m. For the purposes of this report, this universe is defined as small and medium-sized enterprises (SMEs), even though in some countries and by some definitions firms in this sample might be labelled as large. The survey respondents represented a broad range of industries and came from a wide spectrum of functions, with the majority from information technology (4), finance (2), and strategy and business development (22%). (Respondents could choose up to three functions.) Sixty percent of interviewees described themselves as board members, C-level executives or vice-presidents. The quantitative survey was supplemented with three qualitative interviews. The Economist Intelligence Unit

4 Latin America s small and medium-sized enterprises: the organisational challenge Introduction Responding to globalisation, firms in Latin America often seek to target new export niches, move up the value chain to more sophisticated processes or compete with ever larger competitors in cut-throat domestic and international markets. s, with a view towards maintaining independence from would-be foreign suitors, choose to move to less competitive niches or to shift their core competencies (for instance, moving from manufacturing a given product to becoming an importer/distributor for that product made by a larger foreign-branded firm). The survey conducted for this report indicated a surprising bright spot in their endeavours that may bode well for the future. When asked whether their respective companies had brought to market a successful innovation in the region, 76% of executives responded in the affirmative. When asked to identify the source of the innovation, 3 of these executives said that a local research team within Latin America was responsible by far the largest single response. This is somewhat surprising at a time when many observers have lamented the lack of technological innovation and research and development (R&D) in Latin America, despite its growing role in the global economy. But the survey also illustrated the following challenges: l Whatever their precise competitive strategy or ownership trajectory and structure, SMEs face enormous internal organisational challenges as they try to embrace a culture of continuous learning. In fact, 42% of respondents to our survey identified changing the organisational culture as the single largest problem they face in the area of innovation. Executives also underlined getting teams to work together (3) and transforming ideas into marketable goods/services (39%) as key challenges to innovation. l One-third of survey respondents said their greatest What would you say are the greatest innovation-related challenges facing your organisation over the next five years in Latin America? (Select up to three) Changing the organisational culture 42% Transforming ideas into marketable goods/services 39% Identifying changes in customer behaviour or needs 35% Getting teams to work together better 3 Difficulty in predicting future trends 2 Containing development costs 2 Reducing time to market for an innovation 19% Identifying and collaborating with suppliers, subcontractors, or other external partners Implementing the latest IT trends Creating the proper incentives to maximise creativity among employees and external partners 16% Eliciting and using customer feedback 1 2% Don t know/not applicable challenge in managing their R&D activities effectively is to adapt innovations from outside Latin America to the local market. l When asked to describe how their organisation analyses strategic issues, a majority (5) said there was no process (5%), claimed it was largely ad hoc (16%) or said it varied by business unit or year to year (30%). In order to respond to these organisational challenges, firms must adopt practices pioneered in more established markets and adapt them to the particular conditions they face in Latin American countries. The bottom line of these practices is to improve the generation, flow and practical utilisation of knowledge knowledge about markets, products and processes. 4 The Economist Intelligence Unit 2008

5 Latin America s small and medium-sized enterprises: the organisational challenge Challenges of reorganisation Traditionally, SMEs in Latin America have had a cumbersome management structure. In locally owned firms, family business cliques have often made for ad hoc decision-making that was mostly opaque to outsiders. Such problems do not disappear overnight even if the original owners of such firms are bought out or become minority stakeholders in the midst of increasing merger and acquisition (M&A) activity. For their part, early generations of multinationals, particularly in manufacturing, were often subject to overly rigid centralised control from the home office and relegated to the minor role of producing for small, protected local markets. Whatever their origin, many firms still operate under the weight of a legacy of substandard quality, management that is either too personalised or bureaucratic, and overweaning state protection that has in many cases given way to benign neglect by state agencies. As a result, lack of access to investment capital, technology know-how and commercial linkages are among the broader challenges facing established SMEs. This basic assessment is also the view held by the experts interviewed for this report: Carlos Lemoine, president of the Centro Nacional de Consultoría consultancy in Bogotá, Colombia; Daniel Villavicencio, a consultant to the Mexican government s Consejo Nacional de Ciencia y Tecnología (CONACYT, National Council of Science and Technology); and Silvia de Torres Carbonell, president of the Fundación Endeavor in Buenos Aires, Argentina. Dr Villavicencio elaborated further that the conditions in which the economic opening has occurred in Latin America has dismantled many value chains, causing many local firms to become concentrated in very small niches in local markets, or to transform themselves [from manufacturers] into sellers of US or European products. He refers, among Lack of access to investment capital, technology know-how and commercial linkages are among the broader challenges facing established SMEs. other things, to the speed of the commercial opening in the last decades of the 20th century and the weakness of policies to support firms in making the transition to a much more competitive environment. In the Colombian context, Mr Lemoine cites high non-wage payroll costs and disloyal competition from the informal sector as further problems, although they are by no means unique to that country. These problems would seem to be related to an obstacle that Ms Carbonell underlines in the case of Argentina, but which also has broader regional resonance considerable regulatory hurdles in setting up and managing a business. Mr Lemoine points out that a major response of local firms in Colombia is to seek alliances with larger firms in order to survive. He cites examples as disparate as airlines, supermarkets, pharmacies and insurance as sectors in which local firms have been displaced or local owners reduced to minority partners. But beyond the issue of whether local entrepreneurs survive are the larger challenges facing established local firms, new foreign entrants and established foreign players alike of how businesses reorganise themselves and their relationships with key outsiders. A major first step is adopting a more modern corporate structure in which a hierarchy centred on the owner-president or subsidiary president gives way The Economist Intelligence Unit

6 Latin America s small and medium-sized enterprises: the organisational challenge to a more elaborate, networked division of managerial responsibility involving clear separation and coordination of senior managerial roles. In contemporary corporations, this typically involves a chief executive officer (CEO) in charge of overall strategy and (usually) investor relations, a chief operating officer (COO) who manages day-to-day operations, a chief financial officer (CFO) in charge of overseeing payments, accounts, payroll and revenue inflows, and a chief technology officer (CTO) who oversees research and product development. Local firms that remain privately held may still resist raising the functional importance of finance and R&D Given their experience, branches or subsidiaries of multinationals may have the easiest time moving to this model and adopting these roles in their Latin American operations. Yet they still face the task of finding appropriate talent to fulfil what are ever-shifting roles, and adapting those roles to different local regulations and business norms. For their part, those SMEs that are now publicly traded (and that often have an overseas presence as well) have been pushed towards such modern management structures by shareholders and the listing requirements of international and local exchange, among other factors. Yet local firms that remain privately held may still resist raising the functional importance of finance and R&D. They may choose instead like the Alpina example in Colombia discussed in the case study on page 7 simply to separate the chief executive and chief operating roles (which traditionally tended to be fused or blurred) without creating the new titles and bundles of once discrete functions implied by COOs and CTOs or their equivalents. Regardless of how they structure their businesses, publicly traded local firms and privately held businesses alike must join their multinational counterparts in beginning to recruit from outside their ranks and the close-knit personal business cliques that have traditionally predominated in the region indeed, sometimes outside even their national borders. Our survey finds that, in fact, meaningful progress is being made towards greater reliance on an emerging marketplace for executive talent search firms or third-party vendors was the most common response to a question about the source of senior management talent Which of the following statements best describes your firm s most successful innovation brought to market within the last five years? Developed by a local research team within Latin America 3 Developed by a global team of researchers from Latin America and other countries 19% Our operations have yet to develop a successful innovation for the Latin American market Acquired an existing product within Latin America and improved it 13% Developed by a research team located outside Latin America 10% Don t know 6% (49%, where respondents were asked to choose three from a list of ten). As recently as a decade ago, such a response would have been much less frequent. It is also somewhat telling that succession planning (25%) still ranked sixth among the ten possible responses about sources of senior talent. It reveals the extent to which family ownership still prevails, but also what are in principle promising efforts to deal with the thorny issue of succession, which is typically the Achilles heel of family-owned and operated firms. 6 The Economist Intelligence Unit 2008

7 Latin America s small and medium-sized enterprises: the organisational challenge But how can firms learn how best to reorganise, and who can assist them in the process? The answer again would seem to depend in part on the type of firm in question. Foreign subsidiaries may rely heavily on templates and best practices developed within their global parents, but they must still adapt them to local laws, customs and business environments. This may entail use of business consultancies that attempt to act as bridges between international experience and local adaptation. Nationally owned firms may have as much to learn by engaging such consultancies as their foreign counterparts. A second source may be the large multinationals that take minority stakes in local firms, are key buyers of their goods and services through subcontracting or outsourcing, or otherwise have key relationships with them. These large multinationals may demand or at least encourage local partners to reorganise along corporate lines with which they are already familiar in global practice. If they are sufficiently invested in these relationships, they may also provide specific guidance as to how to do so. Whatever the immediate source of the advice, pressure and guidance, two other sets of actors can and also should play a key role in assisting firms indirectly or directly in obtaining assistance: business associations and governments. Such entities can pool resources and perhaps secure advice that is lower in cost and more tailored to the specifics of the sectors or regions in which their members operate. For example, as Mr Lemoine notes, business chambers in Colombia often play a key role in helping members to obtain advice about strategic, organisational and technical issues. Governments have in many ways contributed to competitive problems, whether through regulatory obstacles or benign neglect towards the organisational challenges faced by locally owned or based firms as they deal with the consequences of globalisation and rapid commercial opening resulting from national trade policies and international trade agreements. Yet they can also help firms to address these problems, particularly if they work with business associations or private consultancies and seek to A family firm modernises management to go global Alpina Productos Lácteos, a Colombian maker of milk, yogurt, cheese and other dairy products, is a good example of a traditional locally owned firm that has sought to modernise its management structure and operations with apparent market success, while remaining privately held and sticking to a relatively simple top corporate structure. The company, originally founded by two Swiss émigrés in the 1940s, operates factories in Colombia, Ecuador and Venezuela. It currently sells products in 20 additional markets based on a recent export drive, including the United States, Canada, Italy and Spain, as well as 16 other Latin American countries. According to Mr Lemoine of the Centro Nacional de Consultoría in Bogotá, the firm received advice in financial management, export finance and other areas from Colombian consulting firms when it moved to expand exports in recent years. The current president (aka CEO) is Julian Jaramillo Escobar, who was recruited in 2005 because of his financial sector background. (The firm does not list a CFO or CTO on its website or other company documents, only a president and a managing director.) In 2007 Alpina took over an Ecuadorian dairy company and the Ecuadorian assets of a Dutch firm. In addition, it has since announced its intention to acquire a US yogurt maker in order to set up production to serve the Latino and Colombian populations in the Tri-State New York area. n The Economist Intelligence Unit

8 Latin America s small and medium-sized enterprises: the organisational challenge In fact, state policy often, and for understandable reasons, targets smaller firms. In this sense, intermediate size may often mean the worst of both worlds. operate in a market-friendly fashion. Latin American governments have turned against the historical policies of subsidies and protection for particular firms or sectors they frequently used in the decards until the 1980s, notes Wilson Peres, director of the Joint Industrial and Technological Development Unit of the United Nations Economic Commission for Latin America and the Caribbean (CEPAL in Spanish, ECLAC in English) and the United Nations Industrial Development Organisation (UNIDO). Yet the region is experiencing the slow comeback of industrial policy, he writes in The slow comeback of industrial policies in Latin America and the Caribbean. 2 It is occurring, underlines Mr Peres, in a new guise that seeks to be much more attuned to the needs of global competition ( competitiveness policy ) and entails a much lighter state touch. The trend is still tentative, and quite uneven across countries. Programmes that seek to promote technological development and organisational and technical training for firms are one form of competitiveness policy, although much more work remains to be done. Dr Villavicencio, a consultant at Mexico s CONACYT who also teaches sociology at the Universidad Autónoma Metropolitana (UAM)-Xochimilco, cites a number of examples in Mexico of programmes that assist firms along these lines. Some of the programmes he cites, such as the TechBA, or Technology Business Accelerator, target very small, mostly start-up, firms outside the range of our survey. In fact, state policy often, 2 Wilson Peres, The slow comeback of industrial policies in Latin America and the Caribbean, CEPAL Review 88 (April 2006), and for understandable reasons, targets smaller firms. In this sense, intermediate size may often mean the worst of both worlds. Yet some of the other business promotion programmes in Mexico cited by Mr Villavicencio such as the Ministry of the Economy s Fund for Micro, Small, and Medium-Size Enterprises (PYME Fondo), set up in Which of the following statements best describes the process your organisation uses to analyse strategic issues? We have no process 5% Largely ad hoc 16% Consensus-driven 25% Varies by business unit, or year-to-year 30% Rigorous and disciplined in the local office 7% Rigorous and disciplined by a global initiative 1 Don t know/not applicable 2% 2004 provide services to firms that have up to 250 employees in manufacturing or 100 in commerce and services. Some of the medium-sized firms represented in our sample would be eligible, in principle, for such assistance. Much the same can be said of eligibility criteria for policies that assist firms elsewhere in the region some are limited by size of firm, while others are based on other criteria, such as presence in a particular region, cluster or sector of economic activity, potential for job creation and the like. In the final analysis, what matters most is that firms receive guidance and training that is anchored in international best practices, yet tailored to their needs while still being cost-effective. What works internationally frequently needs to be moulded carefully to fit the circumstances and capacity to absorb rapid change of established local businesses. 8 The Economist Intelligence Unit 2008

9 Latin America s small and medium-sized enterprises: the organisational challenge Conclusion As confirmed by the survey, the organisational culture in Latin American SMEs is often deficient. As a result, they face a major set of organisational challenges with a clear common denominator how to adapt international best practices in management and corporate structure to local contexts. One key challenge is how to restructure senior management so as to allow for more agile decision-making. When firms reorganise, they must seek guidance from one of a variety of sources home offices, business consultancies, larger firms with which they are closely connected, business associations or governments. The key will be to learn how to tailor guidance and assistance based on global best practices to a particular firm s needs, and to create the capacity to absorb rapid change. The pace is likely to vary considerably across types of firms, particularly depending on the degree to which their ownership structure subjects them to investor or regulatory One key challenge is how to restructure senior management so as to allow for more agile decision-making pressures to conform rapidly to what are perceived to be international standards. All firms operating in the region, however, face these pressures to one degree or another, and modifying and modernising their decision-making and organisational structures is crucial to meeting competitive challenges. The Economist Intelligence Unit

10 Appendix Latin America s small and medium-sized enterprises: the organisational challenge Appendix: Survey results In November and December 2007 the Economist Intelligence Unit conducted an online survey of 175 Latin American executives at small and medium-sized enterprises (SMEs) with global annual revenue of between US$100m and US$400m.Our sincere thanks go to all those who took part in the survey. Please note that not all answers add up to 100%, because of rounding or because respondents were able to provide multiple answers to some questions. In which of the following Latin American countries is your organisation active? (Select all that apply) Mexico Argentina Chile Brazil Colombia Peru Venezuela 18% Costa Rica 15% Dominican Republic 13% Uruguay 13% Ecuador 1 Bolivia 1 Guatemala 10% Panama 10% Puerto Rico 10% El Salvador 8% Honduras 6% Nicaragua 5% Haiti 2% 28% 27% 3 30% 3 49% What is your primary industry? Manufacturing Energy and natural resources 1 Financial services 10% Consumer goods 8% IT and technology 8% Entertainment, media and publishing 6% Construction and real estate 5% Agriculture and agribusiness Chemicals Healthcare, pharmaceuticals and biotechnology Logistics and distribution Telecommunications Education 3% Government/Public sector 3% Retailing 3% Professional services 2% Automotive Transportation, travel and tourism Aerospace/Defence 18% 10 The Economist Intelligence Unit 2008

11 Appendix Latin America s small and medium-sized enterprises: the organisational challenge 4-% 7.5% 15% 30% What are your company's annual global revenues in US dollars? Which of the following best describes your title? US$100m-US$200m 46% US$200m-US$300m 23% US$300m-US$400m 3 25% 12.5% 6+% What are your main functional roles? (Select up to three) 50% Board member CEO/President/Managing director 10% CFO/Treasurer/Comptroller 9% CIO/Technology director C-level executive 3% SVP/VP/Director Head of Business Unit 6% Head of Department Manager 19% 18% 26% IT Finance 2 Strategy and business development 22% Customer service 20% General management 19% Marketing and sales 18% Operations and production 15% Information and research 13% R&D 12% Risk 7% Human resources 6% Supply-chain management 6% Legal 3% Procurement 3% 2% 4 What would you say are the greatest innovation-related challenges facing your organisation over the next five years in Latin America? (Select up to three) Changing the organisational culture 42% Transforming ideas into marketable goods/services 39% Identifying changes in customer behaviour or needs 35% Getting teams to work together better 3 Difficulty in predicting future trends 2 Containing development costs 2 Reducing time to market for an innovation 19% Identifying and collaborating with suppliers, subcontractors, or other external partners Implementing the latest IT trends Creating the proper incentives to maximise creativity among employees and external partners 16% Eliciting and using customer feedback 1 2% Don t know/not applicable The Economist Intelligence Unit

12 Appendix Latin America s small and medium-sized enterprises: the organisational challenge Which of the following statements best describes your firm s most successful innovation brought to market within the last five years? What is the typical time period within which the management in your company requires an innovation to be cash flow-positive following commercial launch? Developed by a local research team within Latin America 3 Developed by a global team of researchers from Latin America and other countries 19% Our operations have yet to develop a successful innovation for the Latin American market Acquired an existing product within Latin America and improved it 13% Less than 2 years 36% 2 to 3 years 33% 3 to 4 years 9% 4 to 5 years 9% More than 5 years Don t know/ not applicable 8% Developed by a research team located outside Latin America 10% Don t know 6% What are the main reasons why proposed innovations for Latin America are denied funding? (Select up to three) Insufficient return on investment 35% Insufficient profitability 3 Insufficient absolute levels of profit (eg, something can be highly profitable in percentage terms but does not generate sufficient total profit to affect overall firm performance) 23% Insufficient growth 23% Concerns about protecting intellectual property 22% Innovation threatened to cannibalise existing product 22% Innovation inconsistent with organisational strategy or capabilities 2 Latin America not deemed to have a sufficiently high return as a market 20% Lack of customer references 5% Don t know/not applicable 7% Which of the following revenue drivers are most important in helping your organisation decide whether to invest in new ideas in Latin America? (Select up to three) Entering new markets 5 Expanding the range of complementary products around a basic offer/model 53% Increasing share in existing markets and countries 4 Adding new value to a current product (eg, camera phone) 32% Entering a new Latin American country 30% Raising the price of a current product Introducing an entirely new product category (eg, ipod) Don t know/not applicable 12 The Economist Intelligence Unit 2008

13 Appendix Latin America s small and medium-sized enterprises: the organisational challenge For your organisation, what is the greatest challenge in effectively managing R&D activities? (Select up to three) Understanding market needs and working with customers (identify, test and refine) to translate those into the right products or services 43% Getting research, development, manufacturing, business units, and marketing teams to work together to time the creation of new products with development cycles 38% Adapting innovations from outside Latin America so we can exploit the market more effectively 33% Establishing and maintaining quality control and testing to ensure products are market-ready 28% Controlling product development costs 23% Automating manual processes and activities 20% Assessing the performance of key areas in the product development process Finding tools to measure return on product development spending 1 None of the above; there are no significant challenges for my organisation None of the above; we don t manage R&D within the organisation 8% Which of the following statements best describes the process your organisation uses to analyse strategic issues? We have no process 5% Largely ad hoc 16% Consensus-driven 25% Varies by business unit, or year-to-year 30% Rigorous and disciplined in the local office 7% Rigorous and disciplined by a global initiative 1 How effective is strategic planning for Latin America at driving strategic decisions at your organisation? Very effective 9% Effective 5 Neutral (neither effective nor ineffective) 29% Somewhat ineffective Totally ineffective Don t know 2% In your opinion, what are the main issues to consider in developing an effective Latin American strategy? (Select up to three) Remaining aware of, and responsive to, variations in customer demand 49% Balancing centralised with localised decision-making 3 Maximising the value of local market knowledge 32% Organising and training employees to function well with long-distance business relationships and multiple hand-offs 3 Complying with multiple regulatory regimes 30% Cross-cultural communications with customers, employees, partners, and regulators 28% Creating a unified view of our global operations and performance 18% Reducing time-to-market for product/service innovations 16% Investing in IT 16% Containing costs where they are incurred 1 Don t know/not applicable 2% The Economist Intelligence Unit

14 Appendix Latin America s small and medium-sized enterprises: the organisational challenge Which approaches will your company focus on to drive Latin American growth over the next five years? (Select up to three) How would you describe today s market for qualified, high-potential employees within Latin America? Developing new products and services Entering new alliances or partnerships Penetrating new geographic markets 35% Improving core products/services 27% Building closer relationships with customers 25% Accelerating M&A activity 18% Investing in human resources 15% Becoming a cost leader 12% Creating better internal controls and risk management 12% Reshaping the organisation s culture 12% Investing more in brand-building 9% Investing in IT 9% Outsourcing and offshoring more Don t know/not applicable 3% 47% 46% Extreme shortage of talent 10% Limited supply of talent 53% Good supply of talent 37% What do you expect to see in five years? Extreme shortage of talent 10% Limited supply of talent 37% Good supply of talent 53% 14 The Economist Intelligence Unit 2008

15 Appendix Latin America s small and medium-sized enterprises: the organisational challenge How would you characterise the ability of your organisation to meet its demand for IT talent within your Latin American operation? We re unable to meet our demand 9% We re barely able to meet our demand 38% We re able to meet our demand 43% We can hire more than we need 10% How would you expect to characterise that ability in five years? We re unable to meet our demand We re barely able to meet our demand 23% We re able to meet our demand 5 We can hire more than we need 22% Which of the following best describes the relationship between your organisation s business strategy and its workforce strategy in Latin America? Workforce strategy is driven by the overall business strategy 40% Workforce strategy is not formally documented 22% Workforce strategy is developed independently from the overall business strategy 18% Workforce strategy is both driven by, and provides input into, the overall business strategy Don t know/not applicable 3% What do you see as the primary workforce-related issues facing your organisation in Latin America? (Select up to three) Inability to attract qualified candidates 30% Difficulty in modifying other work arrangements due to local labour regulations 27% Employee skills not aligned with current organisational priorities 27% Inability to retain key employees 26% Inability to build an engaged/motivated workforce 22% Difficulty modifying staffing levels due to local labour regulations 19% Inability to rapidly develop skills to address current/future business needs 19% Inability to collaborate/share knowledge across the organisation Lack of leadership capability 1 Lack of IT knowledge 12% Labour costs higher than competitors 1 Unable to adapt global HR practices to local contexts 8% Unable to redeploy/realign resources against new opportunities 6% 2% Don t know/not applicable 5% The Economist Intelligence Unit

16 Appendix Latin America s small and medium-sized enterprises: the organisational challenge How well does your organisation perform the following workforce management activities? Rate each of the following on a scale of 1 to 5, where 1=Very effective and 5=Not at all effective In your organisation, which of the following are the most critical sources for identifying senior management talent for your Latin American operations?(select up to three) 1 Very effective Not at all effective Don t know Forecast daily/weekly labour requirements 18% 23% 18% 3 1 8% 8% Identify available staff with appropriate skills and capabilities 18% 25% 28% 22% 5%2 Identify long-term trends in the supply and demand for labour 9% 23% 29% 25% 12% 3 Incorporate employee preferences into the scheduling process 8% 2 36% 18% 1 3 Integrate employee scheduling with other workforce-related systems, such as time and attendance, skill tracking, learning management 9% % 12% 7% Modify staffing based on changes in business conditions (eg, seasonal demand, new products, new location openings, mergers and acquisitions) 13% 25% 29% 16% 10% 6% Prevent conflicts and otherwise manage employee relations 16% 26% 27% 20% 9% 3 Align internal resource skills with external consulting services 16% 27% 29% 16% 8% 703 Align internal resource needs with external 35 consulting services 13% 28% 3 6% Search firms or third party vendors Referrals from existing employees Lateral hires from our competitors 30% Campus recruiting (eg, undergrad, grad, MBA) 28% Internal job postings (eg, talent in the organisation) 26% Succession planning 25% Leveraging existing relationships with influential contacts 2 Networking through company alumni Talent imported from outside Latin America 10% % 48% 100 What elements has your organisation integrated into its compliance methodology? (Select all that apply) Business processes and controls Performance management and reporting Data and identity management Learning management 4 Risk-driven allocation of compliance resources 4 Don t know/not applicable 8% 47% 55% 69% Please indicate whether you agree or disagree with the following statements regarding your organisation s compliance function. Agree Disagree Don t know Persuasively demonstrates to senior management that compliance risks are under control 65% 23% 12% Anticipates future compliance issues 77% 13% 10% Justifies its expenditures with evidence of compliance activities effectiveness % Integrates tightly with daily activities of line personnel in business functions 7 20% 9% We do not have a compliance function for Latin America 28% 65% 8% 16 The Economist Intelligence Unit 2008

17 Appendix Latin America s small and medium-sized enterprises: the organisational challenge Which of the following statements best describes how your organisation s IT investments made in the last five years have helped it fulfill regulatory requirements? Which of the following best describes your organisation s progress in developing processes to measure and manage the effectiveness of compliance? Addressed real needs and brought control to systems that had grown on an ad hoc basis 4 Enabled the organisation to make business changes that are useful but not required immediately 26% We have not undertaken significant IT investments in the past three years 15% Distracted from more immediate, pressing IT security or other business concerns 1 Don t know We haven't yet started to develop processes 7% We have just begun to develop processes 20% We are well into the development effort but have major components yet to complete 37% We are close to completion We have fully developed processes to measure and manage the effectiveness of our compliance efforts 15% Don t know/not applicable 3% Which of the following digital inclusion challenges in Latin America do you think technology organisations can help to address over the next five years? (Select all that apply) Education access-divide Telecommunication access-divide Rural-urban divide 40% Income divide 39% Language and content access-divide 33% Lack of access to people with disability 30% Lack of charity giving 15% Gender access-divide 1 Education access-divide 5 6 The Economist Intelligence Unit

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