CFO as Strategic Business Partner

SC!email: [email protected] Dubai: +971 50 331 4583 Skype: SomersConsult

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Improving Profitability

Transforming Finance

Functions

Trouble-shooting

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Presenta)on!to!MECA!CFO!Alliance!Conference!Dubai,!19!August!2015!!

The$Strategic$CFO$

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Transforming Finance Functions

©Fintan'Somers'2015'2

This'presenta5on'is'a'combined'summary'of'the'text'and'slides'presented'at'the'MECA'CFO'Alliance'Conference,'Dubai,'19th'August'2015.'''''

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SC!email.: [email protected] Dubai: +971 50 331 4583 Skype: SomersConsult ©Fintan'Somers'2015'

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SC!email.: [email protected] Dubai: +971 50 331 4583 Skype: SomersConsult

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The CFO as a Strategic Partner

Good!morning!everybody.!And!welcome!to!the!session!en)tled!!!“The'CFO'as'Strategic'Partner”''!!!My!name!is!Fintan$Somers$and!I!specialize!in!suppor)ng!businesses!to!deliver!business!performance!improvement.!

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The$context$

“How'do'we'respond'to'a'slowMburn'loss'of'marketMshare'or'profitability?'Or,!!'

“Help!'The'business'is'in'crisis*or*underperforming.'What'are'the'prac5cal'op5ons'for'fixing'this'or,'at'least,'limi5ng'the'damage?”''

Some)mes!the!business!requires!an!answer!to!a!posi)ve$ques)on:!!!!!“How'can'we'make'more*money,'sustainably?”!or!!'

“How'do'we'execute'the'changes'required'to'achieve'the'strategy'or'business'plan'we'have'agreed?”''!!

….But,!unfortunately…!!

...oOen,!I!have!had!to!deal!with!a!very$nega)ve$set$of$circumstances:!For!example,!!

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The'purpose*of'this'session'is'to'share'with'you'my'experience'of'

being'a'Strategic'Partner,'as'CFO,' to'the'businesses' I’ve'served'

over'the'past'20'years,'providing'solu5ons' in'both'posi5ve'and'

nega5ve'circumstances.''

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Bad!Business!

Bad!Finance!Func,on!

Bad!Business!


!Let’s!start!with!a!ques)on:!!'“Does'a'Bad'Business'make'a'Bad*Finance'Func5on…'''

''…or…''

''…does'a'Bad'Finance'Func5on'make'for…''

'…a'Bad*Business?”''

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Interna'onal*Assignments*completed*

I!have!served!in!a!variety!of!interna)onal!CFO!roles!with!!$

•  Standard$Chartered$Bank$$

•  Lloyds$Bank$

!and,!most!recently,!!

•  Commercial$Bank$of$Qatar$

!!

All!of!my!assignments!have!involved!improving!business!profitability$and!many!have!necessitated!transforming!finance!func)ons$into!a!more!effec)ve!support!tool!for!the!business.!!

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Strategy!Execu-on!

Debt!&!Equity!Financing!

Acquisi-ons!&!Disposals!

Business!Reposi-oning!

Finance'Func)on'Transforma)on'

I!have!been!very!fortunate!as!CFO!to!have!had!leadership!roles!in!business!projects!involving:!!•  Strategy!Execu)on!!

•  Business!Reposi)oning!

•  Debt!and!Equity!Financing,!!

•  Acquisi)ons!and!Disposals…!!!

…and,!of!course,!Finance$Func=on$Transforma=on!has!featured!prominently.!!

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Having! developed! and! executed! several! finance! func)on! transforma)ons! across! a! range! of!businesses!and!interna)onal!loca)ons,!I!have!been!struck!by!the!similarity!of!the!challenges!faced!by!underYperforming!finance!func)ons!and,!for!that!maZer,!underYperforming!businesses.!!

I! have! also! found! that! the! opera)ng! model! for! an! effec)ve! finance! func)on! is!pre?y$standard.!I!have!transformed!several!finance!func)ons!using!a!fairly!simple!opera)ng!model.!!

Whenever!I!join!the!execu)ve!team!of!a!business!as!CFO,!whether!it!is!a!high!performing!business!or!not,!I!am!very!aware!that!I!have!a!brief!honeymoon!period!during!which!I!need!to!evaluate!where!my!func)on!can!add!most!value!and!develop!a!compelling!program!that!makes!a!posi)ve!difference!to!the!business.!Then!the!pressure!is!on!to!deliver.!!!!

Some)mes!the!agenda! is!thrust!upon!you!Y! for!example,!a!local,! regional! or! global! economic! crisis,! or! stress,! has!put!profitability!or!growth!under!pressure!or!crisis.!!

Whether!based!in!the!Middle!East,!the!UK,!the!US,!La)n!America!or!Europe,!I!have!found!that!under4performers*share*many*of*the*same*or*similar*characteris7cs.!!!!

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A!good!example!of!this!was!when,!as!CFO,!I!supported!Lloyds$Bank!in!limi=ng!the!impact!of!the!Argen)na!debt!crisis…!!

…Financial!markets!forced!an!80%!devalua)on!of!Argen)na’s!1!to!1!exchange!rate!with!the!USD…!!!…Argen)na!defaulted!on!its!foreign!USDYdenominated!debt.!

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80%$devalua+on$of$Peso$

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40%!loss!of!Peso!deposits!from!Banking!system!before!withdrawal!restric;ons!imposed!!

Argen)na’s!dualYcurrency!banking!system!went!into!meltYdown…!!!

Lloyds!Banking!Group!had!a!fullYservice!retail!and!commercial!bank!in!the!country.!

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It!is!a!good!example!of!what!might!have!been!in!store!for!Greece!had!it!exited!the!Euro…!!

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…bank!runs…!

…civil!unrest…!$

…extreme!financial!vola)lity…!!

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…appalling!financial!losses!for!savers,!investors!and!businesses…!

…and!a!very$large!propor)on!of!the!popula)on!reduced!to!poverty.!!!!Nearly!15!years!aOer!the!event!Argen)na!is!s)ll!pre?yAwell$excluded!from!borrowing!interna)onally.!!

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50%$increase$in$$

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Developing!strategic!op)ons!in!the!midst!of!this!carnage!was!difficult.!But!having!stabilised$the!business,!in!this!case,!the!strategic!op)ons!we!developed!were:!Invest,!Close!or!Sell.!!

But!we!managed!to!execute!a!sale!and!transfer!to!a!local!bank!cleanly!and!successfully.!!

Gebng!buyYin!to!execu)ng!the!“Sell”$op=on!was!not!an!easy!task:!the!situa)on!was,!understandably,!extremely$emo=ve,!and!many!of!the!staff!faced!bleak!futures,!in!an!economy!that!was!likely!to!be!extremely!compromised.!!!

The!challenge!as!CFO!was!to!develop!the!financials!around!the!three!scenarios,!get!the!local$management$team!and!the!Group!acquainted!with!the!cost/benefit!associated!with!the!various!op)ons…!!

…so!they!could!understand$and$support!the!best!op)on!for!the!Group…!!!!

…which!was!to!Sell!(something!that!would!have!been!difficult!to!do!without!the!support$of!the!local!management!team!and!staff).!!

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Another!couple!of!examples!are!the!work!I!performed!as!CFO!in!suppor)ng!the!resolu)on!of!Standard!Chartered’s!problems!with!a!UK!recession!(the!business!was!running!losses!of!over!£100!million!while!I!was!CFO)…!

…and!in!containing!the!impact!of!the!Asian!economic!crisis!on!its!business!in!La)n!America.!!

I!guess!one!lesson!I!have!learned!is!that!the!dynamics!of!the!external!environment!need!to!be!a!big!focus!for!the!CFO!and!I’m!not!talking!about!the!immediate!market:!!

the'World'is'now'very'interconnected.!

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Whatever!the!business!or!environment!you!are!dealing!with,!it!is!the!responsibility!of!the!CFO!to!shine!a!light!on!and!put!measurement!around!the!material!opportuni)es,!risks,!weaknesses!or!strengths!that!the!management!team!should!be!focused!on…!

So,$Crisis!Management!is!one$circumstance!that!the!Strategic!CFO!has!to!deal!with.$$$

…No!business!is!ever!“just!fine”!and!this!is!proved!when!you!look!at!the!lack!of!robustness!of!some!businesses!that!look!great!in!the!good!)mes,!but!struggle!in!bad!)mes.!!!

But!some)mes!the!agenda!for!the!CFO!is!less$obvious,!for!example,!when!the!business!appears!to!be!doing!well!but!it!is!losing!rela)ve!profitability,!posi)on!or!compe))veness.!OOen!this!situa)on!coincides!with!many!on!the!management!team!thinking!that!things!are!“just!fine”.!!!!

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For!example,!when!I!supported!the!reposi)oning!of!an!Interna)onal!Private!Banking!business…!

To!be!fair,!this!was!true!for!much!of!the!industry.!!

If'a'business'is'weak'in'the'good'5mes,'it'makes'surviving'the'bad'5mes'very'problema5c.!In!this!instance,!business!volumes!contracted!substan)ally!globally,!as!did!margins,!and!in!a!subYscale!business!with!a!high!fixed!cost!base!this!was!a!lethal!combina)on.!!

The!number!of!foreignYowned!banks!in!Switzerland!peaked!at!169!in!2009,!but!had!fallen!to!122!by!2015!!

…it!was!very!apparent!that!the!nega)ve!impact!on!the!business!of!the!2008!Global!Economic!crisis!was!considerably!amplified!by!the!fact!that!the!business!had!had!indifferent!performance!in!the!good!)mes.!!

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Businesses!need!to!an)cipate!and!have!the!flexibility!to!react!to!suddenYshock!or!slowYburn!changes:!the!businesses!that!lose$out!are!oOen!the!ones!that!can’t$or$won’t!develop!an!opera=ng$model!that!supports!this!goal.!!!!

Of!course,!on!a!more!posi=ve!note,!some)mes!the!CFO’s!challenge!may!be!suppor)ng!a!business!with!a!material!investYtoYgrow!program.!In!some!respects!this!can!be!more!challenging!than!a!businessYasYusual!business.!The!CFO!needs!to!be!everAvigilant!in!avoiding!“GroupAThink”,!maintaining!a!construc)ve!challenge!on!the!assump)ons!and!opera)ng!models!suppor)ng!the!investment!cases!and!developing!MI!to!assure!that!plans!are!tracking!to!the!investment!case,!the!financing!plan!and!the!strategy.!!!!!

And!of!course,!if!the!external!World!changes,!then!it!can!be!challenging!to!get!the!team!to!pull!back!on!an!investment!program.!In!addi)on!to!dealing!with!a!management!team!that!is!very$emo=onally$

engaged!in!comple)ng!what!they!started,!you!also!have!to!deal!with!the!possibility!of!accoun=ng$or$actual$losses!if!you!cancel!or!cut!back.!!

Even!if!the!Present!Values!work!the!accoun)ng!losses!s)ll!s)ng!and!can!be!difficult!to!communicate.!This!can!par)cularly!be!the!case!when!nego)a)ng!an!acquisi)on:!it!can!very$hard!to!walk!away!!!

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The need for an effective Enterprise Financial

Management Culture

So!what!has!my!experience!taught!me?!!What!goes!wrong?!!What!do!we!need!to!do!to!get!it!right?!!!!

The!crea=on$of!an!Enterprise!Financial!Management!Culture!needs!business!ownership!and!leadership.!Of!course!the!CFO!can!facilitate!and!support!its!development.!!!

In!my!experience,!poorly$performing$businesses$and$

management$teams$do$not$support!and!are$not$supported!by!an!effec)ve!Enterprise!Financial!Management!Culture.!!!!

But!unless!the!leaders!in!the!business!really$get$behind$it!and!push$for$it$to$happen,!it!won’t!happen.!!

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Owns!Executes!

An-cipates!

Manages!

Influences!

Performs!

Effec-ve!financial!management!culture!You!can!recognise!an!effec)ve!Enterprise!Financial!Management!Culture!when!everybody!from!topYtoYboZom!of!the!organisa)on:!!!

•  is!focused!on$influencing$and!communica)ng$key$performance$indicators$that!demonstrate!trac)on!on!the!things!that!maZer!

•  understands!the!linkage$between!financial!performance$and$pay$(and!this!linkage!must!be!effec=ve)!

!!

•  understands$and$owns$the!overall!financial!targets!and!their!role!in!reaching!those!targets!

!•  understands$and$executes$the!things!that!

need!to!happen!to!reach!the!targets!!•  is$looking$forward,!an)cipa)ng$problems!

and!opportuni)es!that!might!affect!financial!performance,!taking$ac=on!to!fix!or!mi)gate!problems!and!exploit!opportuni)es!

!!•  communicates$and$manages$problems!

and!issues!before!they!hit!the!reported!results!and!opportuni)es!before!they!are!missed!

!

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Owns!Executes!

An-cipates!

Manages!

Influences!

Performs!

Effec-ve!financial!management!culture!

I!can!preZy!well!guarantee!that!if!you!see!a!poorly!performing!business,!one!or!more!of!these!factors!needs!improvement.!!!

If!they!fail$on,!or!deAemphasise,!one!or!more!of!these!factors!then!it!is!likely!that!this!fail!or!deYemphasis!replicates!all!the!way!down!the!organisa)on.!!

And,!of!course,!it!starts$with!the!leadership!team.!!

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The!leadership!challenge!of!crea)ng!an!effec)ve!Enterprise!Financial!Management!Culture!is!a!journey$rather$than$a$des=na=on.!!One!reason!for!this!is!that!it!has!human!complexity.!

Irrespec)ve!of!the!tools!you!introduce,!the!human$dimension!of!developing!and!maintaining!a!strong!Enterprise!Financial!Management!Culture!can!be!the!most$challenging!!

Many!of!the!problem!or!underYperforming!businesses!that!I!have!been!involved!in!have!had!weak!financial!management!cultures!characterised!by!lack!of!proper!KPIs,!very!basic!financial$modelling,!limited!compe=tor$analysis,!confused!execu=ve$accountability!and!weak!businessAperformanceAreview$disciplines.!!

How!many!)mes!have!I!been!in!the!situa)on!where!target!sebng!is!unrealis=c,!performance!metrics!don’t$add$up,!performance!management!is!anecdotal!rather!than!factual…!!

And,!of!course,!I!have!oOen!found!that!management!informa)on!does!not!align!very!well!with!the!strategy!of!the!business.!!

Y!not!least,!the!risk!that!a!lack$of$transparency!about!financial!performance!and!accountability!suits!some!people!very!nicely!(and!this!can!include!some!preZy!senior!people!).!!

Suits&some&people&

…the!en)re!focus!is!backward$looking,!with!poor$understanding!in!the!Execu)ve!Team!of!why!the!numbers!are!the!way!they!are?!!

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In!many!businesses,!par)cularly!the!ones!that!!*•  think'that!they!are!doing!well!!•  where!life!is!good!and!!•  genera)ng!profits!appears!to!be!easy!!!…you!find!that!focus!on!compara)ve!performance!and!compe)tor!benchmarking!is!deYemphasised!as!is!performance!analy)cs.!!!AOer!all,!what’s!the!point!of!analysing!performance!if!you!are!doing!so!well?!!

It'came'as'a'big'surprise'to'the'leadership'team'of'one'problem'business,'which'I'joined'as'CFO,'when'I'compared'the'business'to'a'strong'compe5tor'and'discovered'that:''''•  Our'current'staff*produc7vity'

was'around'half'the'compe5tor’s;'

•  Our'penetra7on*of*a*key*product'in'our'product'mix'was'around'half'of'the'compe5tor’s;''

•  Our'staff*were*being*paid'only'10%'less'than'the'compe5tor'despite'our'much'poorer'profitability'and'produc5vity:'either'the'compe5tor'was'paying'their'staff'poorly'for'good'performance,'or'we'were'paying'our'staff'well'for'poor'performance!''

•  Our'mul74site*opera7ng*model'was'expensive'and'complex'for'our'current'and'projected'business'volume.'Even'if'we'doubled'volume'we'would's5ll'be'behind'the'compe5tor’s'volume'per'manufacturing'centre;'

Suits&some&people&

None'of'this'was'new.''*Sure,'some'of'the'metrics'were'made'worse'as'a'result'of'the'2008'crisis.'But'the'fact'of'the'maèr'was'that'the'crisis'just'magnified'pre4exis7ng'performance'issues.''''Unfortunately,'the'business'was'beyond'saving'at'a'cost'and'5mescale'that'was'acceptable'to'the'owner.'So'it'was'sold.''

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A!second!reason!for!a!weak!financial!management!culture!is!that!it!depends!on!the!level$of$maturity!you!start!from.!A!business!that!has!been!managed!for!years!with!a!weak$culture$is!unlikely!to!mature!to!be!bestYinYclass!any!)me!soon.!!

And!it!can!be!a!challenge!to!convince$the!incumbent!management!that!significant!change!is!required.!This!is!oOen!the!case!where!the!growth$of$the$business!has!not!been!matched!by!growth$in$the$quality!of!financial!management.!!

Maturity(

One'business'where'I'was'CFO'actually'had'Board'and'Exco'members'who'were'hos5le'to'any'changes'in'the'formats'of'the'Board'reports'on'the'basis'that'“this'company'has'been'managed'for'years'with'the'old'formats.'Why'change?”…''…'which,'of'course,'ignored'the'fact'that'the'business'was'much'bigger,'more'complex'and'there'had'been'several'changes'in'the'market'and'regulatory'environment'that'needed'to'be'incorporated'into'Board'briefings.'It'wasn’t'a'maèr'of'format,'it'was'substance*they'were'missing.'

As'another'example,'I'joined'a'Chief'Execu5ve'who'had'been'appointed'to'turn'around'a'poorly'performing'business'as'his'new'CFO'and'he'said,'in'frustra5on'at'the'lack'of'forward'looking'informa5on:'''“It’s*like*driving*a*car*whilst*looking*in*the*rear4view*mirror!”**'Needless'to'men5on,'that'set'my'immediate'objec5ves'right'there!'But'the'serious'point'he'was'making'is'that'you'cannot'run'a'business'using'historical'financial'statements.''

You'need'to'have'a'clear*model*of'the'drivers'of'financial'outcomes,'a'clear*understanding*of'what'needs'to'happen'in'the'future'for'the'financial'outcomes'you'require'and'the*means*to*an7cipate*and'manage'these'future'condi5ons.''

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One'business'where'I'implemented'a'Finance'Func5on'Transforma5on'found'it'extremely*difficult'to'adjust'to'the'new'level'of'transparency'in'planning*and*performance*metrics.'It'was'not'so'much'the'existence'of'the'new'informa5on'that'was'a'challenge'for'them.'In'fact'most'people'bought*into*it,'agreed*it'and'even'appreciated*it.''''

Maturity(

I!have!also!observed!that!businesses!with!deficient!Enterprise!Financial!Management!Culture!can!oOen!make!a$lot$of$noise!about!the!inadequacies!of!the!Finance!Func)on,!the!IT!Func)on,!the!HR!Func)on,!indeed!every!func)on!except!the!parts!of!the!business!responsible!for!making!money.!!!!Some)mes!this!is!jus=fied,!but,!more!oOen!than!not,!you!can!find!that!the!people!making!the!most!noise!are!the!people!most$unwilling!to!accept!their!leadership!responsibility!to!create!the!culture!and!that!to$be$successful$you$need$to$invest!in!those!func)ons.!!!!

The'problem'was'that'for'the'organisa5on'to'perform'consistently,'and'sustainably,'under'the'new'transparency'in'business'planning'and'management'informa5on,'changes'in'management*style,*opera7ng*model*and*human*resources*were'required'that'many'people'were'unwilling'or'unable'to'accept'or'to'implement.''''It'became'clear'that'many*members'of'the'senior'leadership'team'wanted'to'go'back'to'the'old'days'and'were'unwilling*to'make'the'changes'required'to'introduce'a'first'class'Financial'Management'Culture.'''So,'there'can'be'a'high'poli5cal'quo5ent'associated'with'the'CFO'job.'Change*is*not*easy.''

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…and!the!noisiest!businesses!are!oOen!the!ones!where!leadership$alignment!needs!work.!Good$team$members$don’t$make$noise$about$one$another.!!!Great!teams!are!not!noisy…!

Leadership*

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1.!Goals:!what!we!should!do!or!need!to!do!

2.!Roles:!how!we!organise!ourselves!to!do!it!

3.!Processes:!how!we!achieve!our!goals!and!how!we!ensure!that!if!the!plan!isn’t!working!we!change-the-plan-

4.!Rela?onships:!the!behaviours-and-values-that!keep!us!together!and!focused!

Team!effec?veness!

Goals!

Roles!

Rela?onC!ships!Processes!

To!assess!whether!the!leadership!team!of!a!business!is!performing!well!or!not,!I!ask!four!ques)ons:!!!1.  Are!we!clear!on!the!financial$outcomes!we!

are!to!deliver?!And!are!these!appropriate?!

2.  Are!we!clear!on!the!accountability!for!the!various!components!and!prerequisites!for!delivering!the!financial!outcomes?!!

!

3.  Do!we!all!understand!what!needs!to!happen!for!the!financial!outcomes!to!be!achieved?!And!I’m!not!talking!about!“move'this'number'by'10%”,!or!whatever.!The!ques)on!is!“what'drivers*of*performance'need'to'move'for'this'10%”,!or!whatever,!“to'happen?”'

!

4.  Finally:!What!are!the!rela=onships$like!in!the!top!team?!I!know!one!thing!for!certain:!unless!the!top!team!acts!effec)vely!as!a!team!we!will!not!deliver!topYclass!financial!performance.!

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Several$)mes!in!my!career!I!have!joined!management!teams!where!you!could!not!unequivocally!answer,!“Yes”!to!the!four!ques)ons!around!quality!of!!!

•  Goal!defini)on!•  Role!defini)on!•  Process!design!•  Rela=onships$$

But,!“Aaah”,!I!hear!some!of!you!say…!''

“…surely'it'is'the'job'of'the'CEO'rather'than'the'CFO'to'enter'into'this'par5cular'minefield?”!!!!To!which!I!reply…!A'cri5cal'part'of'the'CFO’s'role'is'to'advise'and'support'the'CEO'on'the'maèr'of'securing*financial*outcomes*so'that'CEO'and'the'team’s'performance'is'acceptable'to'key'stakeholders.!!!To'do'this'effec5vely'you'need'to'walk*in*the*CEO’s*shoes*and,'as'one'of'the'very'few'members'of'the'leadership'team'with'the'breadth*of*view*of*the*CEO*we'are'ocen'the'bestMplaced'resource'to'suggest'improvements'to'leadership'team'alignment'where*financial*outcomes*are*concerned.!

Leadership*

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But!even!if!you!get!the!top!team!aligned,!Communica)on,!par)cularly!in!larger!organisa)ons,!poses!one!of!the!biggest$challenges$in!ensuring!that!the!vast!majority!of!people!in!the!organisa)on!understand$the$part$they$play$in!financial!outcomes.!!!!

Recently'I'was'speaking'to'a'Chief'Execu5ve'in'the'Oil'&'Gas'services'industry.'With'the'fall'in'oil'prices'many'parts'of'this'industry'have'got'surplus*capacity'and'this'is'likely'to'be'the'case'for'the'foreseeable'future.'''Rather'than'reappraising*the'medium'term'plans'and'op5ons'available,'he'sees'many'businesses'in'the'industry'chasing'ever4diminishing'pricing'into'ever4riskier*markets*and*clients.'''Clearly'not'everyone'in'the'industry'who'does'this'can'win'and'many'of'these'businesses'should,'perhaps,'consider'taking'a'hit'now'to'avoid'even'bigger'losses'in'the'future.'But'nobody'likes'taking'the'hits'now,'do'they?''

.!!

I!have!been!surprised!by!how!oOen!I!have!come!across!people,!and!even!quite$senior$people,!who!have!worked!for!years!for!a!business!who!have!liZle!knowledge!about!how!the!business!actually!makes!money!!!

Commun&'ica+on'

Here’s!the!thing:!in!the!absence!of!informa)on!about!the!overview!of!how!the!business!or!their!sec=on$of$the$business!makes!money,!most!people!working!in!the!business!will!say,!“I’ll's5ck'to'what'I’m'being'paid'to'do.”!!!!Even!if!what!they!have!been!“paid'to'do”!is!unprofitable!and!needs!reAappraisal$and$adjustment!for!some!reason.!!

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!I!believe!that!Finance!has!the!responsibility!to!share$insight!with!the!business!on!how$we!make!money,!how!we!can!make!more!money!and!how$we!can!avoid!future!losses!by!taking!ac)on!now.!And!this!is!not$just!restricted!to!the!leadership!team.!!!Finance!needs!to!work$with$the$business!to!ensure!that!the!financial!outcomes!expected!of!the!Chief!Execu)ve!and!the!leadership!team!are!translated!into!goals,$roles,$processes$and$rela=onships!right!down!through!the!organisa)on!so!you!get!the!bigger!team!alignment$and$delivery.$

!

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Bad!Business!


Bad!Business!


!So,!back!to!our!ques)on:!!'“Does'a'Bad'Business'make'a'Bad*Finance'Func5on…'''

''…or…''

''…does'a'Bad'Finance'Func5on'make'for…''


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Well!what!is!absolutely!certain!is!that…!

I!have!seen,!many$=mes,!how!underYinvestment!in!or!poor!leadership!of!the!Finance!Func)on!and!other!support!func)ons!has!been!a!big!contributor!to!poor!business!performance.!!

…you!cannot$create!an!effec)ve!Enterprise!Financial!Management!Culture!if!you!do!not$have!an!effec)ve!Finance!Team!and!other!support!func)ons.!!!!

Failure(to(invest(

Failure(to(implement(

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Suits!some!people!

Maturity!

Leadership!Commun5!ica7on!

Failure!to!invest!

Failure!to!implement!

Weak!financial!management!culture!So,!let’s!summarise!some!of!the!reasons!for!Weak$

Financial!Management!Culture:!!!!1.  Some)mes,!it!suits!people,!par)cularly!poorly!

performing!individuals!or!teams,!to!have!a!lack$of$transparency!on!financial!performance.!

2.  Some)mes,!it!is!the!level!of!maturity!of!the!business…!for!example!growing!businesses!whose!financial!management!culture!does$not$evolve$as!they!grow!–!very!dangerous.!!

3.  Some)mes!you!can!have!an$absence!of!leadership!team!alignment!about!what!is!needed!and!who!is!responsible,!etc.!I!have!seen!how!difficult!it!can!be!for!Chief!Execu)ves!to!get!alignment!of!the!team:!powerful!people!some)mes!have!powerful!opinions.!!

4.  OOen,!it!is!compromised!by!poor!communica)on!down!through!the!organisa)on.!!

5.  And!a!big!contributor!can!be!failure!by!the!business!to!invest:!you!get!what!you!pay!for.!I!think!many!of!you!will!recognise!the!situa)on!where!Finance!and!other!func)ons!are!cri)cised!about!inefficiency,!lack!of!management!informa)on,!etc.,!but!no$money!is!made!available!to!fix!anything!un)l!a!crisis!happens!and!then,!of!course,!it!can!be!too!late.!!

6.  Worse!s)ll,!I!have!seen!cases!where!money!has!been!made!available!to!transform!the!Finance!Func)on!but!despite!considerable!investment!the!transforma)on!has!not!happened.!On!more!than!one!occasion!I!have!inherited!the!situa)on!where!the!CEO!and!business!leadership!has!lost!complete!faith!in!the!Finance!Func)on!because!of!this.!Big$spend!has!happened,!generally!on!IT,!with!li?le!or!no!improvement.!!

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The!star)ng!point!for!developing!an!effec)ve!Finance!Func)on!is!to!look!at!objec)ves:!I!can’t!overYemphasise!the!importance!of!this!step.!!!

All!leaders,!including!CFO’s,!need!to!spend$a$lot$of$=me!on!developing!objec)ves,!communica)ng!these!to!the!team!and!gebng!buyYin!from!the!team.!If!you!don’t!tell!the!team!what!they!need!to!achieve!or!if!they!don’t!agree!to!do!it,!then!don’t!be!surprised!if!you!don’t!achieve!it.!!!

And!the!problem,!of!course,!is!that!it!is!not!simply!a!ques)on!of!communica)ng!the!overall!objec)ve!and!expec)ng!the!team!to!get!on!with!it.!!

To!be!successful!in!the!overall!objec)ve,!you!need!to!translate!it!into!a!range!of!subYobjec)ves,!organisa)on,!processes!and!behaviours!so!that!you,!as!the!leader,!and!the!team,!have!a!reasonable!probability!of!success.!!

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1.!Goals:!what!we!should!do!or!need!to!do!

2.!Roles:!how!we!organise!ourselves!to!do!it!

3.!Processes:!how!we!achieve!our!goals!and!how!we!ensure!that!if!the!plan!isn’t!working!we!change-the-plan-

4.!Rela?onships:!the!behaviours-and-values-that!keep!us!together!and!focused!

Team!effec?veness!

Goals!

Roles!

Rela?onC!ships!Processes!

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Being!a!CFO:!Core!Objec)ves…!

The!first$step!in!developing!an!effec)ve!Finance!Func)on!is!to!get!back!to!first!principles:!what!is!the!point$of!it!all?!What!are!the!objec=ves$of!the!CFO?!!$ Clearly$communicated,!these!objec)ves!will!form!the!basis!for!much$of!what!the!

finance!team!does.!They!also,!to!some!extent,!dictate!the!personality!of!the!team!(and!the!business$for!that!maZer…!remember!our!earlier!examina)on!of!Financial!Management!Culture).!!

The!objec)ve!I!use!is:!!

This!statement!emphasises!three!important!levels!of!focus!for!the!CFO!and!the!team:!!!

1.  We!are!in!the!rela)onships!business,!suppor)ng!the!senior!management!team.!

2.  We!are!in!the!building$profitability!business:!we!are!not!just!scorekeepers,!we!influence!outcomes.!

3.  We!are!in!the!lineAofAdefense!business!against!unsustainable!or!nonYcompliant!plans!or!ac)ons.!Again,!we!influence!outcomes.!

Support'the'CEO'and'the'Execu2ve'Team…''''''''''''''

…in'building'a'sustainable'and'

profitable'business…'

…in'a'manner'compliant'with'the'policies'and'interests'

of'the'business.''

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Let!me!expand!a!liZle!on!the!core!objec)ve:!!!!

Partnership!implies!some!form!of!equality!in!terms!of!genera)ng!outcomes.!I!have!been!on!the!receiving!end!of!enough!abuse!from!poorly$performing!business!heads!to!understand!the!difference!between!our!respec)ve!roles.!The!Business!is!the!Business;!Finance!is!Finance;!they!deliver;!we!support.!It!is!important!to!be!clear!on!this!dis)nc)on.!!!

Clearly!the!Finance!Staff!that!conspire!to!overstate!profits!in!the!seemingly!neverYending!string!of!reported!accoun)ng!frauds!took!their!“Business!Partnering”!jobs!a!li?le$too$seriously!(as!did,!some)mes,!their!regulators!and!the!partners!in!their!audit!firms).!!

However!Strategic$Partnering!is!a!different!maZer:!here!the!CFO!works!with!the!leadership!team!to!contextualise!performance!given!the!market!and!compe))on;!to!define!the!financial!models!and!the!drivers!of!financial!performance;!and!to!work!closely!with!the!business!to!constantly!improve!insight,!resource!alloca)on!and!decisionYmaking!to!op)mise!financial!outcomes.!!

Support'the'CEO'and'the'Execu2ve'Team…''''''''''''''

“Support”9'careful'with'“Partnership”'

Note!that!my!objec)ve!says!that!the!Finance!Func)on$supports$the!CEO!and!Execu)ve!Team.!Now!you!will!hear!the!expression!“Business$Partnering”!used!a!lot!as!a!target!objec)ve!for!the!CFO!and!Finance!Func)on.!In!my!opinion!we!need!to!be!very!careful!in!the!use!of!this!term.!

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Building(a(sustainable(and(

profitable(business…(

Sustainable(=((Shareholder(value(

My!objec)ve!also!states!that!it!is!not$good$enough$to!develop!a$Profitable$Business.$$$

The$profitability$needs!to!be$sustainable:!

Many$business!leaders,!including!some!of!the!most!successful,$effec=ve!and!ethical!leaders!I!have!worked!with,!have!been!prepared!or!tempted!to!cash!in!some!future!profit!to!look!good!in!the!present.!This!is!a!par)cular!tempta)on!when!financial!performance!is!under!pressure.!!

This!is!not!an!easy!task;!life!and!business!decisions!and!outcomes!are!not!always!a!simple!maZer!of!“Yes”!or!“No”.!Business,!like!life,!is!a!nego)a)on.!But!it’s!a!difficult!nego)a)on.!And!some)mes!Finance!makes!the!wrong!call…!

And!it!is!also!an!unfortunate!consequence!of!quarterly!repor)ng!by!Public!Companies:!the!market!seems!to!expect!a!smooth!quarterly!growth!path!and!gets!spooked!if!this!doesn’t!happen.!!

And!this!despite!the!fact!that!most!sensible!people!know!that!quarterly!earnings!generally!involve!a!bit!of!a!random!walk!and!if!you!do!have!a!consistently!smooth!paZern,!something!is!wrong.!!

The!CFO!and!the!Finance!team!have!a!clear!responsibility!to!set!the!“moral!tone”!surrounding!the!sebng!and!achievement!of!financial!outcomes!so!that!profitability!is!sustainable.!!

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I'nego5ated'one'of'the'last'subMprime'asset'sales'to'Lehman'Brothers'before'they'crashed'in'2008.'''

Building(a(sustainable(and(

profitable(business…(

Sustainable(=((Shareholder(value(

“Investment'banker'magic”'soMtoMspeak.'

When'I'analysed'the'sale'for'the'Board'report,'I'could'not'understand'why'Lehman'had'paid'so'much'for'the'porholio.'Because'even'though'I'made'a'book'loss'on'the'sale,'the'throughMtheMcycle'loss'from'the'porholio'was'several'5mes'the'book'loss.''

I'concluded'at'the'5me'that'Lehman'must'have'had'the'means'for'elimina5ng'this'risk'from'their'balance'sheet.'Acer'all,'no'sensible'person,'holding'the'porholio'to'maturity,'would'have'paid'what'they'had'paid.'!

Where'was'their'finance'and'risk'direc5on'while'all'this'was'happening?''

Of'course'there'was'no'magic.'!

It'subsequently'transpired'that'Lehman'had'been'accumula5ng'illiquid'and'overMvalued'assets'on'its'Balance'Sheet'for'years'(including'my'li`le'porholio)'and'that'it'was'a'Ponzi'scheme'of'sorts,'supported'by'poor'accoun5ng'standards'and'poor'regula5on.'!

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…in$a$manner$compliant$with$the$policies$and$interests$

of$the$business.$$

Use$common$sense;$avoid$group:think$

I’m!also!saying!that!the!CFO!has!a$responsibility$to!assure!that!the!way!that!the!business!makes$money$is!compliant!with!the!policies!and!interests!of!the!business:!

I!have!seen!Finance!people!back$away!from!engaging!with!and!influencing!policy!decisions!in!the!business!Y!on!the!basis!that!no$laws$were$being$broken!Y!but!which!decisions!were!clearly!worthy!of!debate.!!!!

This!is!not!just!about!legal!and!regulatory!compliance;!it!is!also!about!the!spirit!of!what!is!right!for!the!shareholder.!!

For!example:!what*were'some'Bri5sh'banks'thinking'when'they'made'the'policy'decision'to'go'big'on'Payment*Protec7on*Insurance?'Any'right4thinking'person'could'have'seen'that'this'was'a'disastrous'course'to'take.'''

For'example,'this'decision'has'cost'Lloyds'Bank'over*£13*billion'in'financial'recompense'and'penal5es,'and'an'incalculable'amount'of'lost'shareholder'value'in'the'form'of'destruc5on'of'customer'trust,'brand,'and'regulator'and'government'rela5onships.''

To'put'the'£13'billion'in'perspec5ve:'in'2006'before'the'crisis'hit,'the'Retail'Division'of'Lloyds'generated'a'profit'contribu5on'of'just'£1.5'billion'and'the'overall'profit'of'the'Group'was'£4.2'billion.''

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So,!in$summary,!the!topYlevel!objec)ve!of!the!strategic!CFO!means!that!he!or!she!is:!!•  in!the!rela)onship!management!business,!!

•  in!the!building!profits!business!and!!

•  is!a!key!line!of!defence!for!shareholders!to!ensure!that!the!future!is!not!cashed!in!to!make!the!present!look!good.!!

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Being&a&CFO:&Core&Objec1ves…&

Support!the!CEO!and!the!Execu2ve!Team…!!!!!!!!!!!!!!

…in!building!a!sustainable!and!

profitable!business…!

…in!a!manner!compliant!with!the!policies!and!interests!

of!the!business.!!

“Support”B!careful!with!“Partnership”!

Sustainable!=!!Shareholder!value!

Use!common!sense;!avoid!groupBthink!

Unfortunately,!as!recent!history!has!shown,!many!CFOs!either!do!not!engage!in,!or!lose,!the!sustainability!debate!with!their!CEO!and!leadership!team!colleagues.!!!!

For!shareholder!value!is!about!sustainability!not!the!quick!buck.!!!

All!of!which!illustrates!just!how!difficult!the!job!is!!

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Bad!Business!


Bad!Business!


So,!back!to!our!ques)on:!!'“Does'a'Bad'Business'make'a'Bad*Finance'Func5on…'''

…or…'''…does'a'Bad'Finance'Func5on'make'for…''


OK:'''•  I'do'not'believe'that'all'businesses'that'run'

into'trouble'have'had'bad'Finance'Func5ons.'Just'as…''

•  …I*do*believe*that'if'you'do'not*have'an'effec5ve'Finance'Func5on,'you'do'have'a'much*higher*risk'of'running'into'difficul5es,''

''par5cularly'if'the'World'changes'(which'it'does'all'the'5me).''

•  …I'do'not'believe'that'all*businesses'that'are'doing'well'have'excellent'Finance'Func5ons.'But…''

'

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If!I!had!one!message!from!my!experience!it!is!this:!

Only'the'paranoid'survive'and'a'big'part'of'the'job'is'to'be'paranoid'(within'reason).''

Success&breeds&complacency&

Complacency&breeds&failure&

Only&the&paranoid&survive&

Andrew'Grove'(Intel'CEO)'

Leadership & Management

CFO as Strategic Business Partner