Chief Operating Officer's review

Our world is changing rapidly. By 2050, it has been predicted that the combined economies of China and India will be four times the size of the United States economy. Indeed, the global GDP will have increased fivefold from today’s US$73 trillion to US$378 trillion. By 2050, the GDP of Indonesia is expected to match the combined GDPs of Britain, France, Germany and Italy.

By the middle of this century, our global energy requirements will have increased by 40%, our need for food will have risen by 50% and the world’s water needs will have risen by 30%. Other resources will also be in demand; we will consume more copper, aluminium and steel in the next 25 years than we have in the course of human history.

The information age continues apace with technology, and maximising the potential and management of data now dominating every client agenda. The volume of global information is doubling every two years. By 2020, the world will generate 50 times the amount of information we do today. The world has never been more connected. In three years’ time, 91% of the world’s population will own a mobile phone.

This rapid change increases complexity and brings great uncertainty, as well as many challenges for our clients. Yet it is also a period of tremendous opportunity. We at KPMG embrace this positive outlook and are focused on the attributes necessary to help ensure our clients succeed and maximise their potential.

Our high-performing people mobilise around our clients, using our expertise and insight to cut through complexity and deliver informed perspectives and clear solutions that our clients and stakeholders value. Our client focus, our commitment to excellence, our global mindset and consistent delivery build trusted relationships, which are at the core of our business and reputation.

In 2011 KPMG International completed a major refresh of its global strategy, ensuring that it is fit for today’s rapidly changing world. It gathered substantial client feedback that has highlighted the attributes clients see from KPMG when our people are performing at their best. The five attributes — expert, global mindset, forward thinking, value adding and passionate — are now embedded in how we think about client service and how we go to market.

Our client feedback in 2011 tells us that we are already demonstrating these attributes and delighting our clients. However, we strive to do even better by making sure that all of our people demonstrate all of these attributes consistently.

It is vital to our overall strategy that the attributes become part of our DNA in the same way that the KPMG Values have been integrated in to the firm’s overall ethos globally.

To support this we have embedded the attributes into a number of key metrics:

• Our Client Insights programme, which we use to gather client feedback across ELLP firms, has been radically refreshed so we now receive direct feedback on these specific attributes;
• The attributes are core to our performance development framework, including goal setting, for all our partners and people across ELLP firms.

There are five building blocks of our business, which are the cornerstone of how we deliver against our strategy:

• Our clients
• Our expertise
• Our partners and our people
• Our organisation
• Our communities

Our focus is on ensuring client satisfaction and client success. We strive to understand our clients’ needs, to exceed those needs and to consistently add value whilst doing so.

In 2011 we have strengthened our client approach to be more sector-based and relevant for our largest global clients. This sector investment has been aligned to those sectors where we believe there will be strong growth: Energy & Natural Resources (ENR), Financial Services (FS), Public Sector, Healthcare, Communications & Media as well as Emerging Markets.

As well as investing in sector expertise we are investing in account teams for major global organisations. We recognise that these large global businesses need deep sector specialists with a wide array of expertise to help them with their most complex challenges.

By prioritising investment in large global accounts we also see tremendous value for our national markets clients, which remain the backbone of KPMG Europe LLP’s business. As we build deep technical understanding, this insight enables us to develop the right propositions for the national markets.

Head of Markets, Graeme Ross, discusses ‘Our clients’ in greater detail here

In difficult economic conditions where the financial markets are still very much focused on European debt concerns, our business has performed creditably and achieved revenue growth of 13% overall. This reflects particularly strong growth in the CIS, Spain and Turkey and our geographic expansion. Our underlying growth was 5%.

We have invested significantly in our business to make sure we have the right expertise to meet the demands of our clients and this has had an impact on our profits available for members, which have declined by 3%.

The trading environment has been particularly difficult for our Audit and Transactions & Restructuring businesses but the remaining three of our five functions have achieved strong sales growth. The strongest performer has been Risk Consulting where Financial Risk Management and IT Advisory have been the key drivers of growth. Management Consulting sales have benefited both from an expansion in Financial Services work and also from the acquisition of EquaTerra earlier in the year whilst Tax has achieved growth consistently across all our geographies.

The function heads discuss performance in more detail in ‘Our expertise’ here.

KPMG Europe LLP comprises 18 countries and is organised to optimise our understanding of our clients and enable our people to provide them with the expertise they need. We operate our business in a matrix structure — comprising market sectors, functions and countries — and have made significant investments in our business during the year. Most visible has been the expansion of our expertise in technical, function-specific areas where we see increased demand from our clients.

Geographic expansion

We are delighted that earlier this year the Norwegian practice joined KPMG Europe LLP. Integration has been under way for six months and we have already achieved some large-scale wins at major global clients based in Norway. This success has been achieved by combining the existing expertise of our ELLP firms with our Norwegian expertise and relationships. Many of these wins have been in our priority ENR sector, and we expect this trend to continue. We are also confident of success in other sectors, such as Communications & Media and Healthcare.

This year we also formed our Gulf Holdings group, which now includes Saudi Arabia, Jordan* and Kuwait. The size of the opportunity in the Gulf is significant, especially in the Communications & Media and Public Sector, ENR, Healthcare, and Chemicals & Pharmaceuticals sectors.

Business acquisitions

We have acquired a number of businesses in the year, in each case making a step change in our ability to meet client needs. These include EquaTerra, a market-leading advisory business in sourcing; Plexus, a specialist healthcare consultancy business based predominately in the Netherlands; Xantus**, an IT consulting firm based mainly in the UK; and integrated the personnel of several legal boutique practices in Spain.

We have also established Portfolio Solutions Group, which is a marketleading global loan portfolio business providing advice to major global financial institutions looking to restructure through sale or acquisition of loan portfolios.

Centres of Excellence

As well as targeted acquisitions, we continue to invest in Centres of Excellence. We have established Centres in London for FS, Moscow for ENR and Amsterdam for Climate Change and Sustainability (CCS). These investments mean that we don’t replicate resources across all geographies and that we can offer even deeper specialist expertise, with a global mindset, to our clients. A particular focus has been the growth of our CCS team following the appointment of Yvo de Boer as Global Special Adviser on Climate Change and Sustainability in July 2010.

Organic expansion

We continue to grow organically. We hired a new Head of Tax in the CIS practice in 2010 who has rapidly expanded our capability across that region, so that we now have 450 tax professionals in the region, a growth of 30% in the last 12 months. Across the business in 2011, we recruited 93 new partners and promoted 101 partners from within ELLP firms.

Innovation

We must be innovative with our delivery model to bring the best expertise from around the world together in a costeffective way for the benefit of our clients.

We have therefore continued to grow our India-based business, KPMG Global Services Private Limited (KGS) and KPMG Resource Centre Private Limited (KRC), where we have increased our headcount by 66% to 714 in the year. Jointly owned by KPMG in the UK and other member firms, KGS and KRC perform a range of important Advisory and Audit services respectively. This enables us to reduce costs whilst maintaining the highest standards of quality.

Head of Finance & Infrastructure, Jaap van Everdingen, discusses ‘Our organisation’ in greater detail here.

Our aim is to create a High Performance Culture — a virtuous circle in which the opportunity to help our clients overcome their most complex challenges motivates and develops our talented people. This is why, in 2011, we have invested heavily in recruitment and on-boarding senior external talent, developing career paths to give a clearer structure to our people’s careers, and a new KPMG Business School.

This year we have also agreed, across ELLP firms, to the greater sharing of economic interests which allows the KPMG Europe LLP leadership to reward positive partner performance regardless of the geography (or geographies) that directly profits from that performance. This is a hugely positive step in our ELLP journey, as it removes potential geographical obstacles to getting the best expertise for our clients. We can now more positively reward geography-agnostic, client-centric partner behaviour.

In a period of economic turbulence, we have worked hard collectively as a multi-country and multi-disciplinary firm to move our people from areas where demand has been slow, for example Public Sector, to where there is strong client demand. Here we have invested in reskilling our people and providing them with the prerequisite sector knowledge. How we have managed our expertise positively, and in line with our values and client needs, is reminiscent of our pioneering and award-winning flexible futures programme from 2008 (a KPMG first).

Head of People, Tim Payne, discusses ‘Our partners and our people’ in greater detail here.

We believe that our success is inextricably linked to the success of our clients and our communities and that, by continually pushing the boundaries of what we think we can achieve, we truly make ourselves a more sustainable business.

In these challenging economic times, we are very proud that our people across ELLP firms have again demonstrated a record commitment to our communities in all sorts of innovative ways. It is our people’s passion which makes them stand out to our clients and to the community organisations with which we work. I am constantly impressed by the generosity of our people all across our ELLP firms and we have again been awarded The Business in the Community Platinum Plus for KPMG Europe LLP, one of only 15 organisations who have received this recognition.

But where we make the biggest impact is when our people use their expertise and their core skills. This year we launched BRIGHT: KPMG using BRIGHT minds to help create a BRIGHTer world. Having seen first hand the difference our people made at one of our partner organisations in Uganda, I am hugely proud of this initiative and what we have been able to achieve in the first year. Read more about BRIGHT and other community-focused initiatives from page 43.

We are also conscious of our own environmental impacts; we take this seriously by setting ourselves targets and then publicly reporting against them. Between 2007 and 2010, KPMG Europe LLP reduced carbon emissions from the energy we need to run our buildings and IT and the travel we undertake by 50%. We have ambitious aims for the future: by 2015, we are committed to a further cut of 15% in our CO2 emissions on the same basis.

‘Our communities’ is discussed in greater detail here.

Looking forward to the 2012 financial year, the outlook continues to be uncertain. No imminent recovery is anticipated in the Mergers & Acquisitions (M&A) and IPO markets and our plans are built around an expectation of continuing volatility in the financial markets and limited Government spending. However, we do expect our Risk Consulting and Management Consulting businesses to continue to capitalise on the market opportunities across all sectors together with realising the benefits of the acquisitions made during the year.

We anticipate that both Audit and Transactions & Restructuring will continue to face a tough market but that these functions should be able to drive more efficiency in delivery and, with Audit having completed the implementation of eAudIT, our global electronic audit tool, be ideally placed to release excess capacity to investment areas in other parts of the business.

We remain committed to investing in our growth areas and priority sectors whilst focusing on improving profitability. This will be achieved through greater efficiency of resourcing for our business whilst driving key transformational efficiencies within our central support teams, particularly within finance and people operations.

I make no apology for again referring to one of our core attributes: ‘forward thinking’. It is crucial that we look ahead to ensure continued success for our clients, our people and our communities. We also have a responsibility to do so as one of the world’s largest professional services firms and given our important role in the global economy.

We have a track record of doing things first, of shaping the future, for example bringing KPMG member firms together under KPMG Europe LLP and our UK school leavers’ programme which launched in 2011.

We are working hard to shape the future again.

Earlier this financial year a group of partners from across ELLP firms spent several months working with climatologists, futurologists, engineers and other leading scientists and industry experts. Their brief was to understand what the world would look like in 2020 and what the implications would be for our clients, people and communities. The findings then formed a core component of our ELLP Board Strategy Day and the subsequent business plan.

The vision of the future presented was compelling. Seeing the combined implications of some of the statistics quoted at the start of this narrative clearly merits immediate action to meet the challenges ahead. However, I believe that this rapid change and complexity brings exciting opportunities for our clients, our people and our communities. We are positive about the future and are determined to demonstrate the attributes that we know our clients love.

I would like to close by thanking every one of our 32,800 people for their commitment to our attributes, living our values and bringing success to our clients, our people and our communities. Our people make this organisation great.