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APERTASVCA Workshop14 January 2019

Agenda VCA Workshop

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I. Setting the Scene and Introduction

II. Value Chain Analysis: Visualization

Techniques & Infographics per industry

III. VCA Case Studies

Appendices

Agreements and

rulings

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Real time access and validation

Information request based on outliers

Horizontal supervision

ICAP

Multilateral audits

Transaction Year-end Return filing Audit MAP

Uncertain tax positions (UTP) -

FIN 48/ IAS 12

Change of paradigmChange of paradigm

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Holistic versus Transactional: Valuation of Intangibles

Holistic view

Transactional view

Years Income stream

1 x2 x3 x4 x5 x

Inbound Logistics Operations Outbound Logistics

Marketing Sales

(Brand and Patents )

Services & After Sales

Support

M ultiple years connected between transactional, Holistic and fair m arket value of intangibles

Discounted Cash Flow of intangibles

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II. VALUE CHAIN ANALYSIS: VISUALIZATION TECHNIQUES & INFOGRAPHICS PER INDUSTRY

Value Chain Analysis: Visualisation Techniques

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• The various techniques to visualize the value chain of a company are:

o Pie Chart visualization;

o Porter’s style visualization;

o Process contribution analysis/ Balanced score card; and

o Canvas/ Intangible approach

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VCA Technique 1:How to analyze and align the operating model

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Alignm ent Between G ross Margin, Operating Margin, and F T E sIllustrative

Misalignment is visible when expressed as the ratio of country and total group for gross margin, operating margin, and

F T E s . The higher the delta, the greater the need to provide explanations to the Tax authorities.

G r o s s M a r g i n ( G M ) R a t i o

Country GM to Total G roup GM

O p e r a t i n g M a r g i n ( O M ) R a t i o

Country O M to Total G roup O M

F u l l T i m e E m p l o y e e ( F T E ) R a t i o

Country FTE s to Total G roup FTE s

The Netherland

s33%

Germany19%

China17%

United Kingdom

31%

The Netherland

s60%

Germany5%

China5%

United Kingdom

30%

The Netherland

s6%

Germany13%

China23%

United Kingdom

58%

VCA Technique 2:Basic Approach to divide the residual profit

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Legal Entities

Residual: Other: Cost Plus: Cost Plus or Percentage of Operating Margin:

IP Owner Match making

Finance Activities (cash pool)

Contract manufacturing Contract R&D

Local sales or marketingoffices

Support Services (admin, legal, HR etc.)

Starting PointDeterm ine EBIT%

Key People FunctionsAllocation of EBIT% Allocation of People

Functions and EBIT%

ResidualInvestm ent C enter P ro fit C ente r

ü C apita l m arke t/cus tom er d riven ac tiv itiesü M ostly perfo rm ed fo r s takeho lders /M N E as a w ho leü C ore A ctiv itye .g ., IP O w ners

ü C apita l m arke t/cus tom er d riven ac tiv itiesü M ostly perfo rm ed fo r ex te rna l cus tom ersü M ostly coree .g ., D is tribu tion C enters

D E M P E F u n c t io n s o + F i l t e r M a t c h - M a k in g

Source: TPA Global. - a Development Enhancement Maintenance Protection Exploitation Functions.

VCA Technique 3(A):Fully Integrated Approach (Process Contribution Analysis)

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Design to build (products)

Key functions performed (and entities responsible for performing)

Unit Unit Unit Unit License HQ OPCOs

Order to cash

Demand to supply (operational infrastructure)

Purchase to pay (vendor)

Finance to manage

Total # of FTEs in each unit

Total cost for each unit

P rim ary B u sin ess P ro cesses

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VCA Technique 3(B):Balanced Scorecard Approach

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Exemplary Balanced Score CardDetermination of contribution to value add

Functions Sub-Function Characterization

Function 1 Sub-Function 1 Routine

Function 1 Sub-Function 2 Non-routine

Function 1 Sub-Function 3 Non-routine

Function 2 Sub-Function 1 Routine

Risks

Risk 1 _ Non-routine

Risk 2 _ Routine

Scoring (absolute)

Scoring as split ratio to be applied to the residual gross m argin

D eterm in ed b ased o n in terv iew sF act rev iew

2013 - 2016

UK DE CH

X

X

X

X

X

X

2017

UK CH

X

X

X

X

X

X

Weight(characterization)

1

2

3

1

2

1

Score 2010 - 2016

UK DE CH

1 0 0

0 2 0

0 0 3

1 0 0

2 0 0

1 0 0

5 2 3

50% 20% 30%

Score 2017

UK CH

1 0

0 2

0 3

1 0

2 0

1 0

5 5

50% 50%

D eterm in ed b ased o n th e literatu re an dd iscu ssio n s w ith th e co m p an y

VCA Technique 4(A):Canvas Approach BMO Strategy

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The Business Model Canvas

K ey P artners K ey A ctiv ities

K ey R esources

C ost S truc tu re

V a lue P ropos itions C ustom erR e la tionsh ips

C hanne ls

C ustom er S egm ents

R evenue S tream s

VCA Technique 4(B):

Intangible Capital Canvas

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Peers8-Which organizations do you consider to be your peers?

Competencies:6 - What are the core

competencies your people

need to support your value creation?

Processes:4a - What are key

processes that supportyour value creation

Value Proposition:3 - What do you do to create

value for your customersand stake holders?

Brand:

→START HERE:(numbers correspond to

Icounts Inventory Questions)

1 – What is your brand?

Customers:2a – Who are your paying

customers?

Production Partners5a - Who are the key

partners who support your value creation

Knowledge/IP4b - What are the keyknowledge, data or IP

needed to support your value creation Partners – Channels::

5b – Who are the key

partners who support your value delivery?

Stakeholders:2b – Who are your

non-paying customersand/or key stakeholders?

Culture7 - What are the key

elements of the culture your

organization needs to support the system?

Tangible Assets:4c – What are key tangible

assets needed to supportYour value creation?

OpCosts + Tangible + Intangible Capex: Profits: Revenues:

Reputation:

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III. VCA Case Studies

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Case Study 1: Five Forces in Porter’s ModelApple Inc

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The five forces as identified by the Porter’smodel are listed below:

• Bargaining power of suppliers• Threat of substitute products or suppliers• Rivalry among existing competitors• Threat of new entrants• Bargaining power of buyers

QUESTION Case Study: Please discuss the business model of Apple and define 3 “value drivers”.

I/C CP+(Flagship store)

Kick back for IP

Suppliers for hardware

10% grossmargin paid

Bermuda Irish

Ireland

Apple owned store

Foxconn and Others

Third partyauthorisedresellers

Customers

Case Study 2: Technique 1Value Chain of a Pharmaceutical Company

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QUESTION Case Study:• The picture describes the value chain of a pharmaceutical company.

• The numbers presented are sales, GM, OM and FTEs. Please visualize a value chain analysis showing distribution of value/ profits among various group entities.

Third party transactions

Contract manufacturing

services

Cost Plus

Return

Intercompany Services

Return for Intercompany Services

Provision of R&D services

Sales

and Marketing

support services

Cost Plus

Return

% of net sales revenue or cost

plus return

Flow of goods

Principal Contract

manufacturer

Contract R&D

provider

Limited risk

distributor

Sales 300 100 120 150

GM 200 80 90 100

OM 150 30 70 80

FTEs 6.5 44.5 14 35

C ontrac t M anufac tu re r

(C N )

C ontrac t R & D C enter(P L)

Loca l S a les and

M arke ting en tities –LR D s

(various loca tions)

P rinc ipa l (N L)T h ird P arty

C ustom ers

Case Study 3: Technique 2Value Chain of a Real estate developer

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C om pany A U S A

(H o ld ing com pany)

X H ote lS pa in

C om pany BS pa in

(subs id ia ry )

100%

100%

Facts:

ABC group is a USA headquartered group, which is involved in the long-term investment and development of commercial real estate and hotels through its subsidiaries.

The process of hotel development involves the following two phases:

• Phase 1: Pre-development and development

This involves activities such as site analysis and selection, market study, feasibility analysis regarding the market feasibility and financial analysis, architecture design, financing, construction and marketing.

In this regard, Company A is involved in Phase 1 of the hotel development process.

• Phase 2: Operations

This involves activities that are required in the running of the hotel such as negotiations with vendors for food services and entertainment facilities.

In this regard, Company B is involved in Phase 2 of the hotel development process.

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2 2

STEPS

STEP 1.Value Chain

Analysis

Each person is a proxy for group-wide headcount involved in the activity

STEP 2.People

Functions

STEP 2.Risks

STEP 2.Assets

Strategic Operational

Technology-relatedintangibles

Marketingintangibles

STEP 3.Entities Define roles of the entities in the joint value creation and responsibilities in respect of the different value drivers and related risks

STEP 2.Functions

Case Study 3: Technique 2 (conti…)Value Chain of a Real estate developer

Please visualise the value chain of ABC group below using Porter’s visualisation technique and also identify the functions, assets and risks assumed by Company A and B.

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Local Sales & MarketingEntities (various EU

countries)

Toll Manufacturer

Case Study 4: Technique 3Value Chain of an Apparel Company

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T oll m anufac tu ring

serv ices

R eturn on asse ts

P rov is ion o f d is tribu tion serv ices

S a les and

M arke ting

support se rv ices

A dm in is tra tive support se rv ices

C ost P lus R eturn

C ost P lus R eturn

% o f ne t sa les revenue (fo r sa les ac tiv ities)

C ost p lus re tu rn (fo r m arke ting)

F low o f goods

F low o f goods

T h ird party transactions

In te rcom pany S erv ices

R eturn fo r In te rcom pany S erv ices

Third PartyCustomers

Third PartySuppliers

Principal (Cyprus)

Shared Services Centers(various EU countries )

Limited Risk Distributor (NL)

QUESTION Case Study:Please visualize a value chain analysis showing the distribution of value/ profits among various group entities.

Case Study 4: Technique 3, continuedValue Chain of an Apparel Manufacturing Company

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# Key Process # Sub-process Definition

1 Management ofPortfolio of IP

1a Design / Licenseto Build

This process refers to the activities of market research, brand strategy development, constructing product lines for each region, development of marketing approach and content, and IP protection and licensing.

1bLicensed Brand

Partner Relationship Management

This process is a derivative of the first process and refers to the management of relationships with the enterprises such as third party owners of brands (with whom the company enters into a licensing arrangement for right to design its products) and development of a storyline around brands using multimedia platforms to enrich brands.

2 Management ofSupply Chain

2a Supply Chain ManagementThis process refers to internal management activities of the company starting from transferring the productsfrom the manufacturing entities to the distribution centers and liaising with local sales units to ensure productsare in the retail shops as per the company’s business strategy.

3a Manufacturing Resource Planning

This process refers to estimating the requirements of the market, estimating the determining the amount of raw materials required, estimating the costs associated with it and planning the budget by keeping these in mind.

3 CommercialExecution

3b Financial Management/ Order to Cash

This process refers to order placement, fulfilment, shipping, invoicing and payment

2b Customer Engagement & Relationship Management

This process starts with engaging with customers through sales and marketing efforts, ensuring timely deliveryand managing customer complaints.

The main value creating processes in this company’s business are shown in the table above.

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Q&A

Any questions?