Welcome To The Brave New World In Cross-Border Taxation And Operational Transfer Pricing

Jessica Schubert

Where and how income will be taxed is an increasingly complex problem for multinational corporations, and one that falls squarely in the lap of the CFO and VPs of tax. New OECD BEPS (base erosion and profit shifting) tax reforms and increased enforcement worldwide have brought operational transfer pricing front and center as a process to manage cross-border taxation exposure – and identify and mitigate costs. Global supply chains are vast and complex inter-company economies often invisible to CFOs, and they represent a major source of hidden operating and tax costs if not well managed.

Supply chain taxation issues and sustainable technological solutions were the focus of a September 28 webinar, Shining a Light on Hidden Supply Chain Costs and Tax Exposure, co-sponsored by Deloitte and SAP. The webinar featured three presenters with extensive client-based experience in cross-border finance, taxation, and regulations:

  • Bob Norton, specialist leader with Deloitte Tax LLP
  • Mitch Morris, managing director with Deloitte Consulting LLP
  • Kirk Anderson, vice president, Analytics Product Management, SAP

Operational transfer pricing and supply chain taxation

The webinar focused on how process improvements can reduce ongoing operating costs and financial reporting risk, support global tax planning, and streamline inter-company accounting and operational transfer pricing (OTP). The speakers began by explaining OTP, a process for which multinationals are seeking scaleable and sustainable solutions across their supply chains. Mitch Morris defined OTP as the “systems and processes for transacting, controlling, and determining that all inter-company transactions and related accounting adhere to the company’s transfer-pricing policies.”

Added Bob Norton, “OTP is the connective tissue across people and processes.” However, he emphasized that organizations face an array of challenges as they strive to implement a consistent OTP process, which requires, for example:

  • Profitability analysis across legal entities and functions within those legal entities throughout the global supply chain
  • Uniformly automating cost allocations
  • Accessing both transactional and master data to comply with each country’s transfer-pricing reporting requirements, including new country-by-country reporting mandates
  • Consistent external country-by-country reporting

In addition, CFOs may need to deal with effective tax-rate volatility that can impact quarterly and annual earnings, as well as potential scrutiny by external auditors due to large year-end transfer-pricing adjustments. All of this drives the need to “capture, allocate, and monitor transfer prices” across entities and across borders. And the new country-by-country reporting requirements may necessitate changing business models for compliance, further complicating the OTP pricing process.

Simplifying OTP and reducing risk

OTP is not a new concept. However, before the availability of current technology, it was typically managed via large, complex spreadsheets – so large they were crashing under the weight of growth in the volume and complexity of intercompany transactions. Kirk Anderson discussed in detail how much of the end-to-end OTP process can be automated via SAP’s “digital core” by shifting the process upstream to the source transactional system.

He highlighted “how the digital core solves the multifaceted OTP puzzle” by mitigating risk, facilitating reporting, and offering real-time options to address both problems and opportunities. Kirk and Mitch explained how digitizing the OTP process can make life easier for finance and tax teams. For example, a universal journal removes time-intensive manual reconciliation, replaced by a single source of truth for all financial data, integrated for global collaboration across tax, finance, and supply chain. This approach enables allocation of centralized costs across the business, and seamless integration of actuals and planning in the same system. Management can gain insight into what is actually happening across the business, not just by company and account, but by legal entity, function, and product, with real-time monitoring.

The fact is that using spreadsheet tools for managing intercompany accounting and transfer-pricing monitoring falls short of contemporary demands and creates an unacceptable level of risk. With new technology and a digital core, Mitch added, “We now have a predictive model and can run ‘what-if’ scenarios to reorient how we move goods and services across borders.”

Listen to the full Webinar.

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Jessica Schubert

About Jessica Schubert

Jessica Schubert is the director of Global Partner Marketing, Deloitte Alliance Lead, at SAP. Her specialties include strategic partnerships, business alliances, go-to-market strategy, product marketing, and demand generation.

Disclosure Effectiveness Weakened By Complicated Ownership

Olivia Berkman

Financial disclosures should be tailored to the business and written clearly and concisely for the investor. They shouldn’t be verbose, overly complex reports that don’t meet the investors’ needs and are the product of legal and compliance departments.

“Risk factors have taken on the dynamic of sitting in the corner of the legal department, and the corner of the financial reporting, and have become more of [a] protective type of communication rather than [a] communicative document,” said Sam Eldessouky, senior vice president and corporate controller, Valeant Pharmaceuticals, at a recent Pacesetters in Financial Reporting presentation in New York City.

Indeed, as a result of differing objectives of the legal department and financial reporting, disclosures can fail to be the effective tools for investors they should be. To combat this, disclosures should be continuously updated, based on factors unique to the business, concise, and written in plain English.

According to a recent study by the Investor Responsibility Research Center Institute (IRRCi) and EY, “There is an opportunity for companies to streamline language around common risk factors and to offer more insightful, company-specific information. For risks that are particularly important, a company could enhance its disclosures by providing more descriptions of its risk mitigation efforts.”

Tailored to the company

Risk factors should be very company-specific and not boilerplate. In practice, however, many are generic, unclear, overly voluminous, and not particularly helpful in understanding the true risks of the company.

Unfortunately, many companies view disclosure preparation as a check-the-box type of exercise, instead of detailing the unique risk factors that are relevant and representative of their business.

Panelist Jonathan Nus, executive director, EY, shared that, although comparability exists within an industry, in looking at disclosures of the top 10 companies within an industry, risk factors are overly consistent and comparable because they copy each other.

“I think where it falls apart a lot of times is that risk factors are treated more like a photograph rather than a movie. The disconnect is really between risk factors and a risk profile of a company. Once upon a time, it was very easy to compartmentalize companies within a sector.”

Companies can also fall into the habit of simply carrying forward disclosures from year to year without reassessing their continued relevance. “To the extent that the business profile and the risk profile of a company is changing, the risk factors just aren’t keeping up,” said Nus. “I think what’s happening is that there are some companies that are taking the lead in terms of connecting the dots, and making sure that the KPIs are aligned, the business model is aligned, their key metrics are aligned, but I think a lot of times it’s still treated in silo. I think that’s a major challenge.”

Clearly and concisely for the investor

Zeroing in on the risk factors that are unique to the business is an effective way that companies are reducing the number of risk factors. By identifying risks specific only to them, or combining some closely related risks, readers can better focus on and process the information that matters most to them and help streamline financial reports.

Valeant’s Eldessouky said companies should be thinking about the 10Q as not just a compliance document, but as a communicative document. The focus should be: What kinds of information around risk and risk management are investors looking for?

Moderator Keith F. Higgins, chair, Securities & Governance Practice, Ropes & Gray, and former director, SEC Division of Corporation Finance, explained, “If I were an investor, I’d want to know: How is the company going to be run in the longer term so that my investment will continue to grow and the company I’ve invested in will be able to respond effectively to things that it can’t always anticipate?”

On the lengths of disclosures, Eldessouky shared, “It is growing: 22 risk factors on average, and the average section in the filing is eight pages long. Another study found that the length of risk factor disclosure increased 85% relative to the rest of the 10K. It’s an area where there’s certainly a lot being disclosed. I still think they are somewhat overwhelming.”

Who owns the disclosure?

A reason that the length and complexity of disclosures has increased is that the preparers may have different objectives. On the legal side, disclosed risk factors can serve as mitigating factors if a lawsuit is brought against the company (e.g., if the securities don’t perform as well as expected, the investor was warned of such an outcome). On the financial reporting side, risk factors are intended to describe possible circumstances that could make investing in the company risky or speculative.

“When it comes to risk, there’s not one measure,” said Eldessouky. Members of the financial reporting team, the legal team, and operations may have different points of view on what is risky, and how risky it is. “Trying to balance the different views, what the risk is and putting it into risk factors, I think that’s where the disconnect starts happening in terms of where we are today in terms of how companies outline risk factors.”

Lori Zyskowski, partner, Gibson and Dunn, admitted that risk-factor disclosure is largely driven by the fear of securities litigation. Risk factors are used by companies to protect themselves from being sued for making statements about the future, such as forward-looking statements.

“There’s boilerplate forward-looking statement language in everybody’s 10K that looks at all of the factors and makes sure that the risk factors are also covered,” said Zyskowski. “The problem with that is it enhances the desire to make the risk-factor disclosure longer, and to make it as all-encompassing as possible. The issue is: It’s not as effective if it’s not tied to the company’s actual risks, and if it’s boilerplate and not specific. Quite frankly, the requirements under the rules are to make it specific to the company and not boilerplate. What companies can do is really think about whether or not the risks that they’re listing and describing are truly risks of the company, or whether they’re remote risks.”

Learn how to simplify GRC with automated functions that integrate with your existing processes.

This article originally appeared in FEI Daily and is republished by permission.

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Olivia Berkman

About Olivia Berkman

Olivia Berkman is the managing editor of FEI Daily, Financial Executives International’s daily newsletter delivering financial, business, and management news, trends, and strategies.

Three Ways To Bridge The Finance Talent Gap

Todd McElhatton

Chances are, when I’m not at my day job or with my family, you can find me at my favorite Bay Area wine shop. Before you judge, let me clarify that I am part owner of this particular shop.

Spending my time there, interacting with people of all ages, has validated something for me: Millennials are more willing than any other generation to move on to new opportunities if they don’t feel fulfilled.

As the CFO for a major company, I’ve been thinking about this a lot — mainly because the finance function is changing. It is no longer just about reporting and balancing books, but about shaping a company’s strategy and driving business outcomes.

And in order for the function to continue to evolve, we simply must attract and retain talent. Unfortunately for us, the right talent is in short supply.

Why is there a finance skills gap?

Today, only 33% of CEOs are willing to give their CFOs a passing grade for talent management. In addition, 70% of financial services CEOs are concerned about the availability of key skills in their industry. Why is this happening?

It’s a collection of reasons, but I’ll narrow them down to one: finance’s changing role in business — specifically, finance’s ability to drive business outcomes rather than simply report them.

This is thanks to the increasing capabilities of digital technology and the emergence of new roles in finance: data scientist, market maker, and social and behavioral scientist. Unfortunately for us, there just aren’t that many behavioral scientists out there well-versed in finance, or vice versa. There’s also a general skills gap when it comes to these jobs. According to a report by McKinsey, there could be a need for 736,000 data scientists in 2024, but estimates point to there being only 483,000 in the workforce by then.

Adding to this, people in finance today — especially finance leaders — are expected to be well-versed in soft skills like communications and leadership. One 2015 survey of financial professionals found that two of the top three skills most lacking among entry-level talent were non-technical skills: leadership, strategic thinking, and execution.

As finance’s importance to the business grows, so too will its importance in guiding strategic decisions. Finance has a seat at the table. That seat requires the ability to collaborate, relationship-build, and lead.

Three solutions for the finance community

Responsibility for solving this problem rests on the shoulders of those of us in the finance community. We need to take the following three steps to boost our pipeline of qualified, smart young talent:

1. Automate

Above all else, the action I’d take first would be to automate. I don’t mean to automate entry-level positions. Instead, I mean automate the menial and boring tasks so your entry-level employees can work on more meaningful tasks.

Take the exceptionally mundane task of budgeting. There’s no reason this should be a manual process done on spreadsheets. The times have changed, and so has the field of finance. Automate and give your younger talent meaningful work — something that will make them feel like they’re having an impact.

2. Empower and entrust

We as finance leaders need to ensure that we’re empowering and entrusting our employees. Given how finance is changing, we need to do everything in our power to set up our employees for success. This involves instituting the right kinds of training and creating an environment where risk-taking is encouraged.

Finance used to be a field constrained by monotony and processes. No longer. What we need are new ideas and new ways of doing old things.

If your team is pushing to acquire new technology, hear them out. If a young hire recognizes an inefficiency, listen. And just as important, make sure they feel empowered enough to voice their opinions in the first place. Culture is shaped at the top, and building confidence is one of the surest ways to help develop those soft skills so desperately needed today.

3. Engage

Engagement is crucial. Your employees need to feel like they’re part of the team — that they’re part of something more than a 9-to-5 day.

Not only are millennials likely to seek new opportunities if the work they do doesn’t fulfill them; they are less likely than previous generations to “pay their dues” doing transactional work. In today’s market, they can make those choices. The rise of the gig economy is a testament to that fact.

Today, people can make a living by providing a service online or through an app. In fact, 43% of the American workforce is expected to be freelance by 2020. Millennials are entering a workforce where short-term gigs that don’t provide benefits are growing in popularity. They’re simply responding accordingly.

To retain your young talent, do the opposite of the gig economy. Show them you appreciate them. Make them feel like they’re valued.

Finance is not the same field I entered two decades ago. As finance leaders, we have two choices. For one, we can meet the change and challenges we’re facing head-on, and do everything in our power to best prepare our organization and today’s early talent for the job at hand. Or we can grumble and hope things change. I’ll close with a quick word of advice: Only one of these is a winning strategy.

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This article originally appeared on CFO.com and is republished by permission.

Follow SAP Finance online: @SAPFinance (Twitter)  | LinkedIn | FacebookYouTube

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Todd McElhatton

About Todd McElhatton

As the CFO for SAP North America, Todd oversees the financial activities of the United States and Canada, including forecasting and planning, driving efficiencies, and leadership of the Commercial Finance team, to ensure the overall financial health of the region. Todd brings a 25-year career in finance management, leadership, and business growth with a number of high-profile names in the technology space to his role on the SAP North America executive team. As vice president and CFO of VMware’s Hybrid Cloud business, he led a global team overseeing all finance functions including long-range strategic planning, capital investments, business development and pricing. During his tenure at Oracle as vice president of business, sales and finance operations for Cloud Services, Todd was a key member of the team instrumental in improving the business unit’s profitability, and personally managed a broad array of finance functions that included forecasting and pricing strategy, while leading a global team. After serving in a series of regional and global operations and finance-based roles at Hewlett Packard, Todd assumed overall financial responsibilities as vice president of finance and CFO of Managed Services. He was also previously vice president of finance at WebMD, and started his career as a bank consultant. Todd holds a bachelor’s degree in business administration from Southern Methodist University in Dallas, Texas, and an MBA from the University of Tennessee in Knoxville, Tennessee.

More Than Noise: Digital Trends That Are Bigger Than You Think

By Maurizio Cattaneo, David Delaney, Volker Hildebrand, and Neal Ungerleider

In the tech world in 2017, several trends emerged as signals amid the noise, signifying much larger changes to come.

As we noted in last year’s More Than Noise list, things are changing—and the changes are occurring in ways that don’t necessarily fit into the prevailing narrative.

While many of 2017’s signals have a dark tint to them, perhaps reflecting the times we live in, we have sought out some rays of light to illuminate the way forward. The following signals differ considerably, but understanding them can help guide businesses in the right direction for 2018 and beyond.

When a team of psychologists, linguists, and software engineers created Woebot, an AI chatbot that helps people learn cognitive behavioral therapy techniques for managing mental health issues like anxiety and depression, they did something unusual, at least when it comes to chatbots: they submitted it for peer review.

Stanford University researchers recruited a sample group of 70 college-age participants on social media to take part in a randomized control study of Woebot. The researchers found that their creation was useful for improving anxiety and depression symptoms. A study of the user interaction with the bot was submitted for peer review and published in the Journal of Medical Internet Research Mental Health in June 2017.

While Woebot may not revolutionize the field of psychology, it could change the way we view AI development. Well-known figures such as Elon Musk and Bill Gates have expressed concerns that artificial intelligence is essentially ungovernable. Peer review, such as with the Stanford study, is one way to approach this challenge and figure out how to properly evaluate and find a place for these software programs.

The healthcare community could be onto something. We’ve already seen instances where AI chatbots have spun out of control, such as when internet trolls trained Microsoft’s Tay to become a hate-spewing misanthrope. Bots are only as good as their design; making sure they stay on message and don’t act in unexpected ways is crucial.

This is especially true in healthcare. When chatbots are offering therapeutic services, they must be properly designed, vetted, and tested to maintain patient safety.

It may be prudent to apply the same level of caution to a business setting. By treating chatbots as if they’re akin to medicine or drugs, we have a model for thorough vetting that, while not perfect, is generally effective and time tested.

It may seem like overkill to think of chatbots that manage pizza orders or help resolve parking tickets as potential health threats. But it’s already clear that AI can have unintended side effects that could extend far beyond Tay’s loathsome behavior.

For example, in July, Facebook shut down an experiment where it challenged two AIs to negotiate with each other over a trade. When the experiment began, the two chatbots quickly went rogue, developing linguistic shortcuts to reduce negotiating time and leaving their creators unable to understand what they were saying.

Do we want AIs interacting in a secret language because designers didn’t fully understand what they were designing?

The implications are chilling. Do we want AIs interacting in a secret language because designers didn’t fully understand what they were designing?

In this context, the healthcare community’s conservative approach doesn’t seem so farfetched. Woebot could ultimately become an example of the kind of oversight that’s needed for all AIs.

Meanwhile, it’s clear that chatbots have great potential in healthcare—not just for treating mental health issues but for helping patients understand symptoms, build treatment regimens, and more. They could also help unclog barriers to healthcare, which is plagued worldwide by high prices, long wait times, and other challenges. While they are not a substitute for actual humans, chatbots can be used by anyone with a computer or smartphone, 24 hours a day, seven days a week, regardless of financial status.

Finding the right governance for AI development won’t happen overnight. But peer review, extensive internal quality analysis, and other processes will go a long way to ensuring bots function as expected. Otherwise, companies and their customers could pay a big price.

Elon Musk is an expert at dominating the news cycle with his sci-fi premonitions about space travel and high-speed hyperloops. However, he captured media attention in Australia in April 2017 for something much more down to earth: how to deal with blackouts and power outages.

In 2016, a massive blackout hit the state of South Australia following a storm. Although power was restored quickly in Adelaide, the capital, people in the wide stretches of arid desert that surround it spent days waiting for the power to return. That hit South Australia’s wine and livestock industries especially hard.

South Australia’s electrical grid currently gets more than half of its energy from wind and solar, with coal and gas plants acting as backups for when the sun hides or the wind doesn’t blow, according to ABC News Australia. But this network is vulnerable to sudden loss of generation—which is exactly what happened in the storm that caused the 2016 blackout, when tornadoes ripped through some key transmission lines. Getting the system back on stable footing has been an issue ever since.

Displaying his usual talent for showmanship, Musk stepped in and promised to build the world’s largest battery to store backup energy for the network—and he pledged to complete it within 100 days of signing the contract or the battery would be free. Pen met paper with South Australia and French utility Neoen in September. As of press time in November, construction was underway.

For South Australia, the Tesla deal offers an easy and secure way to store renewable energy. Tesla’s 129 MWh battery will be the most powerful battery system in the world by 60% once completed, according to Gizmodo. The battery, which is stationed at a wind farm, will cover temporary drops in wind power and kick in to help conventional gas and coal plants balance generation with demand across the network. South Australian citizens and politicians largely support the project, which Tesla claims will be able to power 30,000 homes.

Until Musk made his bold promise, batteries did not figure much in renewable energy networks, mostly because they just aren’t that good. They have limited charges, are difficult to build, and are difficult to manage. Utilities also worry about relying on the same lithium-ion battery technology as cellphone makers like Samsung, whose Galaxy Note 7 had to be recalled in 2016 after some defective batteries burst into flames, according to CNET.

However, when made right, the batteries are safe. It’s just that they’ve traditionally been too expensive for large-scale uses such as renewable power storage. But battery innovations such as Tesla’s could radically change how we power the economy. According to a study that appeared this year in Nature, the continued drop in the cost of battery storage has made renewable energy price-competitive with traditional fossil fuels.

This is a massive shift. Or, as David Roberts of news site Vox puts it, “Batteries are soon going to disrupt power markets at all scales.” Furthermore, if the cost of batteries continues to drop, supply chains could experience radical energy cost savings. This could disrupt energy utilities, manufacturing, transportation, and construction, to name just a few, and create many opportunities while changing established business models. (For more on how renewable energy will affect business, read the feature “Tick Tock” in this issue.)

Battery research and development has become big business. Thanks to electric cars and powerful smartphones, there has been incredible pressure to make more powerful batteries that last longer between charges.

The proof of this is in the R&D funding pudding. A Brookings Institution report notes that both the Chinese and U.S. governments offer generous subsidies for lithium-ion battery advancement. Automakers such as Daimler and BMW have established divisions marketing residential and commercial energy storage products. Boeing, Airbus, Rolls-Royce, and General Electric are all experimenting with various electric propulsion systems for aircraft—which means that hybrid airplanes are also a possibility.

Meanwhile, governments around the world are accelerating battery research investment by banning internal combustion vehicles. Britain, France, India, and Norway are seeking to go all electric as early as 2025 and by 2040 at the latest.

In the meantime, expect huge investment and new battery innovation from interested parties across industries that all share a stake in the outcome. This past September, for example, Volkswagen announced a €50 billion research investment in batteries to help bring 300 electric vehicle models to market by 2030.

At first, it sounds like a narrative device from a science fiction novel or a particularly bad urban legend.

Powerful cameras in several Chinese cities capture photographs of jaywalkers as they cross the street and, several minutes later, display their photograph, name, and home address on a large screen posted at the intersection. Several days later, a summons appears in the offender’s mailbox demanding payment of a fine or fulfillment of community service.

As Orwellian as it seems, this technology is very real for residents of Jinan and several other Chinese cities. According to a Xinhua interview with Li Yong of the Jinan traffic police, “Since the new technology has been adopted, the cases of jaywalking have been reduced from 200 to 20 each day at the major intersection of Jingshi and Shungeng roads.”

The sophisticated cameras and facial recognition systems already used in China—and their near–real-time public shaming—are an example of how machine learning, mobile phone surveillance, and internet activity tracking are being used to censor and control populations. Most worryingly, the prospect of real-time surveillance makes running surveillance states such as the former East Germany and current North Korea much more financially efficient.

According to a 2015 discussion paper by the Institute for the Study of Labor, a German research center, by the 1980s almost 0.5% of the East German population was directly employed by the Stasi, the country’s state security service and secret police—1 for every 166 citizens. An additional 1.1% of the population (1 for every 66 citizens) were working as unofficial informers, which represented a massive economic drain. Automated, real-time, algorithm-driven monitoring could potentially drive the cost of controlling the population down substantially in police states—and elsewhere.

We could see a radical new era of censorship that is much more manipulative than anything that has come before. Previously, dissidents were identified when investigators manually combed through photos, read writings, or listened in on phone calls. Real-time algorithmic monitoring means that acts of perceived defiance can be identified and deleted in the moment and their perpetrators marked for swift judgment before they can make an impression on others.

Businesses need to be aware of the wider trend toward real-time, automated censorship and how it might be used in both commercial and governmental settings. These tools can easily be used in countries with unstable political dynamics and could become a real concern for businesses that operate across borders. Businesses must learn to educate and protect employees when technology can censor and punish in real time.

Indeed, the technologies used for this kind of repression could be easily adapted from those that have already been developed for businesses. For instance, both Facebook and Google use near–real-time facial identification algorithms that automatically identify people in images uploaded by users—which helps the companies build out their social graphs and target users with profitable advertisements. Automated algorithms also flag Facebook posts that potentially violate the company’s terms of service.

China is already using these technologies to control its own people in ways that are largely hidden to outsiders.

According to a report by the University of Toronto’s Citizen Lab, the popular Chinese social network WeChat operates under a policy its authors call “One App, Two Systems.” Users with Chinese phone numbers are subjected to dynamic keyword censorship that changes depending on current events and whether a user is in a private chat or in a group. Depending on the political winds, users are blocked from accessing a range of websites that report critically on China through WeChat’s internal browser. Non-Chinese users, however, are not subject to any of these restrictions.

The censorship is also designed to be invisible. Messages are blocked without any user notification, and China has intermittently blocked WhatsApp and other foreign social networks. As a result, Chinese users are steered toward national social networks, which are more compliant with government pressure.

China’s policies play into a larger global trend: the nationalization of the internet. China, Russia, the European Union, and the United States have all adopted different approaches to censorship, user privacy, and surveillance. Although there are social networks such as WeChat or Russia’s VKontakte that are popular in primarily one country, nationalizing the internet challenges users of multinational services such as Facebook and YouTube. These different approaches, which impact everything from data safe harbor laws to legal consequences for posting inflammatory material, have implications for businesses working in multiple countries, as well.

For instance, Twitter is legally obligated to hide Nazi and neo-fascist imagery and some tweets in Germany and France—but not elsewhere. YouTube was officially banned in Turkey for two years because of videos a Turkish court deemed “insulting to the memory of Mustafa Kemal Atatürk,” father of modern Turkey. In Russia, Google must keep Russian users’ personal data on servers located inside Russia to comply with government policy.

While China is a pioneer in the field of instant censorship, tech companies in the United States are matching China’s progress, which could potentially have a chilling effect on democracy. In 2016, Apple applied for a patent on technology that censors audio streams in real time—automating the previously manual process of censoring curse words in streaming audio.

In March, after U.S. President Donald Trump told Fox News, “I think maybe I wouldn’t be [president] if it wasn’t for Twitter,” Twitter founder Evan “Ev” Williams did something highly unusual for the creator of a massive social network.

He apologized.

Speaking with David Streitfeld of The New York Times, Williams said, “It’s a very bad thing, Twitter’s role in that. If it’s true that he wouldn’t be president if it weren’t for Twitter, then yeah, I’m sorry.”

Entrepreneurs tend to be very proud of their innovations. Williams, however, offers a far more ambivalent response to his creation’s success. Much of the 2016 presidential election’s rancor was fueled by Twitter, and the instant gratification of Twitter attracts trolls, bullies, and bigots just as easily as it attracts politicians, celebrities, comedians, and sports fans.

Services such as Twitter, Facebook, YouTube, and Instagram are designed through a mix of look and feel, algorithmic wizardry, and psychological techniques to hang on to users for as long as possible—which helps the services sell more advertisements and make more money. Toxic political discourse and online harassment are unintended side effects of the economic-driven urge to keep users engaged no matter what.

Keeping users’ eyeballs on their screens requires endless hours of multivariate testing, user research, and algorithm refinement. For instance, Casey Newton of tech publication The Verge notes that Google Brain, Google’s AI division, plays a key part in generating YouTube’s video recommendations.

According to Jim McFadden, the technical lead for YouTube recommendations, “Before, if I watch this video from a comedian, our recommendations were pretty good at saying, here’s another one just like it,” he told Newton. “But the Google Brain model figures out other comedians who are similar but not exactly the same—even more adjacent relationships. It’s able to see patterns that are less obvious.”

A never-ending flow of content that is interesting without being repetitive is harder to resist. With users glued to online services, addiction and other behavioral problems occur to an unhealthy degree. According to a 2016 poll by nonprofit research company Common Sense Media, 50% of American teenagers believe they are addicted to their smartphones.

This pattern is extending into the workplace. Seventy-five percent of companies told research company Harris Poll in 2016 that two or more hours a day are lost in productivity because employees are distracted. The number one reason? Cellphones and texting, according to 55% of those companies surveyed. Another 41% pointed to the internet.

Tristan Harris, a former design ethicist at Google, argues that many product designers for online services try to exploit psychological vulnerabilities in a bid to keep users engaged for longer periods. Harris refers to an iPhone as “a slot machine in my pocket” and argues that user interface (UI) and user experience (UX) designers need to adopt something akin to a Hippocratic Oath to stop exploiting users’ psychological vulnerabilities.

In fact, there is an entire school of study devoted to “dark UX”—small design tweaks to increase profits. These can be as innocuous as a “Buy Now” button in a visually pleasing color or as controversial as when Facebook tweaked its algorithm in 2012 to show a randomly selected group of almost 700,000 users (who had not given their permission) newsfeeds that skewed more positive to some users and more negative to others to gauge the impact on their respective emotional states, according to an article in Wired.

As computers, smartphones, and televisions come ever closer to convergence, these issues matter increasingly to businesses. Some of the universal side effects of addiction are lost productivity at work and poor health. Businesses should offer training and help for employees who can’t stop checking their smartphones.

Mindfulness-centered mobile apps such as Headspace, Calm, and Forest offer one way to break the habit. Users can also choose to break internet addiction by going for a walk, turning their computers off, or using tools like StayFocusd or Freedom to block addictive websites or apps.

Most importantly, companies in the business of creating tech products need to design software and hardware that discourages addictive behavior. This means avoiding bad designs that emphasize engagement metrics over human health. A world of advertising preroll showing up on smart refrigerator touchscreens at 2 a.m. benefits no one.

According to a 2014 study in Cyberpsychology, Behavior and Social Networking, approximately 6% of the world’s population suffers from internet addiction to one degree or another. As more users in emerging economies gain access to cheap data, smartphones, and laptops, that percentage will only increase. For businesses, getting a head start on stopping internet addiction will make employees happier and more productive. D!


About the Authors

Maurizio Cattaneo is Director, Delivery Execution, Energy, and Natural Resources, at SAP.

David Delaney is Global Vice President and Chief Medical Officer, SAP Health.

Volker Hildebrand is Global Vice President for SAP Hybris solutions.

Neal Ungerleider is a Los Angeles-based technology journalist and consultant.


Read more thought provoking articles in the latest issue of the Digitalist Magazine, Executive Quarterly.

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The “Purpose” Of Data

Timo Elliott

I’ve always been passionate about the ability of data and analytics to transform the world.

It has always seemed to me to be the closest thing we have to modern-day magic, with its ability to conjure up benefits from thin air. Over the last quarter century, I’ve had the honor of working with thousands of “wizards” in organizations around the world, turning information into value in every aspect of our daily lives.

The projects have been as simple as Disney using real-time analytics to move staff from one store to another to keep lines to a minimum: shorter lines led to bigger profits (you’re more likely to buy that Winnie-the-Pooh bear if there’s only one person ahead of you), but also higher customer satisfaction and happier children.

Or they’ve been as complex as the Port of Hamburg: constrained by its urban location, it couldn’t expand to meet the growing volume of traffic. But better use of information meant it was able to dramatically increase throughput – while improving the life of city residents with reduced pollution (less truck idling) and fewer traffic jams (smart lighting that automatically adapts to bridge closures).

I’ve seen analytics used to figure out why cheese was curdling in Wisconsin; count the number of bubbles in Champagne; keep track of excessive fouls in Swiss soccer, track bear sightings in Canada; avoid flooding in Argentina; detect chewing-gum-blocked metro machines in Brussels; uncover networks of tax fraud in Australia; stop trains from being stranded in the middle of the Tuscan countryside; find air travelers exposed to radioactive substances; help abused pets find new homes; find the best people to respond to hurricanes and other disasters; and much, much more.

The reality is that there’s a lot of inefficiency in the world. Most of the time it’s invisible, or we take it for granted. But analytics can help us shine a light on what’s going on, expose the problems, and show us what we can do better – in almost every area of human endeavor.

Data is a powerful weapon. Analytics isn’t just an opportunity to reduce costs and increase profits – it’s an opportunity to make the world a better place.

So to paraphrase a famous world leader, next time you embark on a new project:

“Ask not what you can do with your data, ask what your data can do for the world.”

What are your favorite “magical” examples, where analytics helped create win/win/win situations?

Download our free eBook for more insight on How the Port of Hamburg Doubled Capacity with Digitization.

This article originally appeared on Digital Business & Business Analytics.

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Timo Elliott

About Timo Elliott

Timo Elliott is an Innovation Evangelist for SAP and a passionate advocate of innovation, digital business, analytics, and artificial intelligence. He was the eighth employee of BusinessObjects and for the last 25 years he has worked closely with SAP customers around the world on new technology directions and their impact on real-world organizations. His articles have appeared in publications such as Harvard Business Review, Forbes, ZDNet, The Guardian, and Digitalist Magazine. He has worked in the UK, Hong Kong, New Zealand, and Silicon Valley, and currently lives in Paris, France. He has a degree in Econometrics and a patent in mobile analytics.