Archive

Archive for June, 2009

Avoiding a System Conversion Gone Bad….

June 19th, 2009 Comments off

                We all have our horror stories about system conversions gone bad.  I’ve worked under a CFO who had to deal with an absolute nightmare, and I’m hearing from colleagues about the completely botched conversion currently happening with a previous employer.  The one commonality among all the poor conversions I have seen is that the conversion, if gone bad, can mean a serious blow to the momentum of a career, or worse, the loss of a position.  It’s a rhetorical statement to say how critical the systems are to the decision-making process, reporting process, and every other lifeline for the company, but it never seems that it’s taken in that serious a tone when being planned for. The approach is usually like any other project, with the underlying and maybe unstated belief, that any shortfalls can be addressed once we go live. I’ve seen it in $35 million companies and I’m seeing it in a $6 billion multi-national organization.

                At my current company, we are in the planning stages for a system conversion and anticipate finalizing the bid inside of the next 2-3 weeks.  We plan on going live at the beginning of Q4-09. The primary drivers for us is to replace a system that has been “customized” to the level that it can’t appropriately support the company, as well as put a new system in place that can accommodate multiple currencies.  Funny enough, an absent feature for a company that does 30% of it’s business internationally. Is this a Finance-driven project as far as the management, coordination of demos, bid submissions, and defining the scope of services –Yes. Will the final decision on what platform is chosen by made by Finance – NO!

                From my perspective, working in a smaller entity, I can work with any of the platforms that are on the table for consideration. They all have the tools for me to conduct my monthly reporting, develop detailed forecasts, and be able to maintain a platform that will be approved for any audit or review. What I am ensuring in the beginning of this process is that our Sales and Logistics groups fully endorse the product that we are considering.  That we have a platform that will track all the necessary data for our customers, can drill down into the data at a region or customer type level, and that we can plan marketing strategies based on easily polled information. I want to ensure that we have full visibility on incoming product, standard costs and the ability to track all variances, ease of entry/change for purchase orders…the list goes on and on. If we don’t have a platform that sufficiently supports the Sales and Inventory Logistic functions then I have nothing to report on.

                The key in the process is to ensure that all the necessary parties are brought to the table, have a forum to hear their concerns about current functionality, and that the majority of their concerns will be addressed in the upgrade. It’s not about finding the latest and greatest Finance bells & whistles and making everything else accommodate…it’s about having a full endorsement by the team and choosing a platform that all parties embrace. A platform where the team sees a quantum change in the functionality, embraces the change, and actually uses the functionality on a day:day basis. If you want a system conversion to go bad, work the process in a silo, exclude key users from the process, and then announce to everyone what they will be using after Date X. Worse yet, keep the silo effect in play during the needs assessment, ignore the major processes in your business, and worse yet, the needs of your customer. To simple an overview?  No. Go with the latter and you’ll have a whole new project – Career Transition.

Thanks for Reading . . . .

Jeffrey Ishmael

Discipline #4: CFO as a Warrior of Waste

June 17th, 2009 Comments off

            In the last segment on “Reinventing the CFO”, I covered the CFO role as the Architect of Adaptive Management.  The 4th discipline in Jeremy Hope’s book is CFO; Warrior of Waste. In this segment, Hope addresses that topic of deploying the economic resources of the firm and tabling the question of whether all those resources are creating the necessary return/value for the firm. He doesn’t so much address the absolute dollars that are being spent, so much as measuring the return on the resources deployed. One of the key quotes in the chapter, which summarizes the views of the 19th century Italian economist Vilfredo Pareto “economic results are directly proportionate to revenue, while costs are directly proportionate to transactions and activities.” In short, Pareto was the primary source behind the “80/20” rule that so many now enjoy referencing.

 

            The challenge, as discussed by Hope, and referencing the work of Peter Drucker, is identifying the specific costs that are deployed in support of the 20% that generate 80% of the results. While it might be possible for a moderate level of expenses, or projects, it’s just not feasible since a large percentage of a firm’s operating expenses go towards supporting the entire entity. Hope discusses some key points, which have been adopted by leading global organizations, which contribute to their position as market-leading brands.

  • Dismantle head office bureaucracy
  • Manage processes and flow rather than functions and activities
  • Manage fixed costs through directional goals and ratios than cost budgets
  • Make central services responsive to internal customers
  • Match capacity to current demand
  • Ensure that all projects are necessary and add value

I certainly can’t say that I’ve had success in achieving the first point above, since I have always been part of a larger finance consortium and not in the position to make that large an effect on a global organization. However, on the processes and flow, I have been able to realize some significant results through this discipline. I spent the better part of 9-months leading an EBIT-improvement project in which we placed a laser focus on key processes in the organization. Within 20-months, we moved from EBIT levels of approximately 8%, identifying processes to target, implementing changes, to achieved EBIT levels of 12%.  These were achieved not through headcount reductions, but through refining processes and the flow of resources through our firm.

 

In addressing the issue of matching capacity to current demand, I led the effort to implement a previously non-existent measuring of work hours related to field service personnel for the same company mentioned above. There was an implementation of a new web-based payroll system, new activity codes to track field activities, productivity classifications of those work codes, and the reporting of results by region. We were then able to effectively monitor hourly cost rates, ensure our billing rates were appropriate, and shift unused resources to territories that were encountering heavy service demands.

 

This section of Hope’s book is probably one of the more difficult to measure and put into play on a daily basis since it involves more than just a view of the P&L and making a judgment call that a “cost is too high”. It means really understanding how your firm operates and whether the resources you are approving are going to help you achieve your targeted financial results. It means that most evaluations will move beyond the typical “Invest in A, Sell at B price, and achieve X profit. It may very well mean that you need to develop and implement a new level of reporting to better understand the business in order to make the appropriate decisions.

 

Thanks for reading . . . .

 

Jeffrey Ishmael

Small Company Structure vs. Internal Controls….

June 11th, 2009 Comments off

     During one of my prior engagements I was challenged with a situation in which we had a serious possibility of fraudulent accounting activities. The source was one of our foreign offices, which had only a small operating staff, and even worse, only a few accounting folks. There was not a broad enough staff to implement all the necessary levels of control to have a strong level of comfort to say all was operating perfectly. What triggered the entire situation was the combination of operating expenses that continued to exceed Budget in a very material way, as well as the delay, or cancellation of payments for shipments into their country. What was even more amusing was the fact that the country entity even passed a corporate audit after improprieties were suspected. After I was given the green light for a surprise audit, as a inter-country supplier, we effectively blew the lid off what was happening within that country. I’m actually quite proud of the work that was done on that situation.

     There real question though is how do you put effective controls in place to prevent fraud or other improprieties? In my current engagement, I find myself with a company that has a Finance staff that is much leaner than normal for a company of this size. Fortunately I have a GREAT staff that I am able push hard and we have implemented new documentation, new control procedures, and a level of financial reporting that is consistent with GAAP and fully supported with all the necessary documentation. So what’s the big deal? Try reaching this level with a small entity, where habits are long-lived, and financial disciplines are an afterthought.  To the Company’s credit, we also have great Management team that is both open, and supportive, of the change. They’re also seeing the benefits of the improved financial reporting on their ability to run the business and make informed decision. Great, so we now have solid reporting. What next?

     Next is the task of putting a more rigid control structure in place and implementing regular audit procedures that will prevent the temptation or likelihood that fraud will be perpetrated against the Company. But how do you do this when you don’t have the resources to add additional headcount, engage external resources, or implement new software platforms?  It comes through the diligence and integrity of the existing staff and cross-testing the existing resources. In the most elemental spirits of internal audit and Sarbanes-Oxley, it comes from having an effective control environment, appropriate risk assessments, as well as the necessary monitoring to determine that all controls are effective and that any necessary correction actions are undertaken. 

But our Company doesn’t have it’s financials audited?

-But our Company does not have an Audit Committee?

     Doesn’t matter…create the necessary level of communication with the Shareholders and Executive Team and keep them informed as to how the resources of the company are being protected. Ultimately, the inattention to these areas, will at a minimum, result in funds being diverted from the Company, or worse, could lead to the demise of the Company.  In a positive outcome, the actions taken will lead to a significantly higher level of trust in the financials and a higher valuation as it might relate to any acquisition activities your Company may find itself in. What is your commitment to ensuring that the proper controls are in place?

Thanks for reading . . . .

Jeffrey Ishmael

Knocking on the door of Shared Services….increased scrutiny?

June 9th, 2009 Comments off

     There’s an interesting article this morning on CFO.com, which outlines recent court rulings and the issue of “Cost Sharing” pacts.  I am not going to go into the details of the case, which involves Xilinx and their treatment of ESO expenses, since this is a very unique area and I am not qualified to address it. However, it does raise a very interesting question regarding Shared Services arrangements, particularly those that are international in nature. Specifically, I worked with a France-based company, that implemented, what we believed in North America was a very agressive Shared Services structure.

     During the almost 4-years that I was with the company, we were constantly being “reminded” that our EBIT results were not on par with our France counterparts. It wasn’t until the beginning of my 3rd year that we chose to conduct an EBIT improvement project and bridge the differences between our performance in North America and France. I spent weeks onsite in Grenoble reviewing operations, cost structures, and the operating expenses for the respective organizations. In the end, there was never a silver bullet that could be identified. The primary differences were in the product mix being offered within the respective markets and the consolidated operating expenses, which I will explain further. For the product mix, we were heavily focused on closed bid, large projects, aimed at the financial services and government sectors. Our counterparts were higher margin offerings aimed at consumer and small business. However, where were argued and differed in our view was in the consolidated operating expenses.

     The France and U.S. markets, as a percentage of global sales, were extremely high. If I recall correctly, well over 50%. The strategy adopted by the corporate office was that corporate overhead would be allocated to the entity level according to their respective percentage of global revenues. This was not a situation of allocation according to actual usage or needs. In fact, where we argued, was that our North American entity was entirely self-sufficient in every aspect. The only areas that we could say that there was a true “sharing” of services was in the areas of service providers such as insurance and auditing. That was all. We had an entirely self-sufficient R&D, Engineering, QA, Finance, and Marketing organization. If we had the ability to spin-off as a separate company we could have easily done so and not miss a beat. We did receive some parts from the Grenoble facility, but any overheads would have also been addressed through our Transfer Pricing Policy. When we asked where we could better utilize corporate resources and perhaps cut some expenses on our side in North America, there were no options available. So essentially, we received a 7-figure corporate allocation and received nothing in return.

     In the end, I certainly didn’t mind the allocation, as long as the published results weren’t viewed as an accurate picture of what our financial productivity meant for the global results. I am not a tax expert so if our tax experts at the global level determined that this was the best strategy for the company then I was willing to participate within that structure. However, don’t taint our performance through gamesmanship.  Bring this single example back full-circle to the recent ruling against Xilinx and there is potentially serious consequences for firms that may be participating in a Shared Services structure for which there is no basis. It’s an interesting discussion to have, especially when it comes to accurately measuring contribution margins at the entity level and the development of tax strategies.

Thanks for reading . . . .

Jeffrey Ishmael

Book Review: Lencioni’s Four Obsessions . . . .

June 8th, 2009 Comments off

     Over the weekend I was able to finish up another one of Patrick Lencioni’s books, who also happens to be one of my favorite authors. The latest book I chose was “The Four Obsessions of an Extraordinary Executive”.  The premise of the book is the parallel profile of two classmates who subsequently started their own consulting firms after college and different levels of success both had achieved. The book detailed the different approaches that each CEO had taken in the management of their company, which ranged from the evaluation of M&A opportunities to the hiring of new talent within their respective firms. The story really started to evolve when one of the CEO’s stepped back from his standard involvement and allowed his staff the final decision making authority on a new HR candidate, Jamie Bender.

fourobsessions-full

      For those that have a true disdain for politics and less than forthright daily dealings, it’s very easy to despise Jamie Bender’s character. Not sure how often, but I lost count of how many times I wanted to have his character taken out. He was exactly the type of colleague I cannot tolerate working with.  However, without spoiling the end, I will say that his character “get’s his” in the end and there’s a conclusion that brings the story full-circle, when at times it seems to be going nowhere. In fact, when the book launches into a discussion of what exactly the four obsessions are it’s easy to reach the conclusion that the appropriate title might be The Four Obsessions of an Ordinary Executive.  Although I believe it was a worthwhile read, I have gotten more out of some of Lencioni’s other books such as Death by Meeting and Five Dysfunctions of a Team. Regardless of whether I enjoyed this as much as some of those mentioned reads, Patrick Lencioni is an author that is worth committing time to his books.

Thanks for reading. . . .

Jeffrey Ishmael

Moss-Adams conference recap; “Back in Black”

June 3rd, 2009 Comments off

     Today I was given an invite to attend the Moss-Adams conference, “Back in Black – Paving a Path to Profitability”. It was their first in what they hope is an annual event. The conference opened with a number of comments by key Moss-Adams personnel, was followed by three breakout sessions, and ended with a lunch and closing remarks by Pat Haden of Riordan, Lewis, and Haden. RLH was a prime participant in the conference, taking part in a number of the panel discussions.

     Interestingly enough, the previous CEO of Moss-Adams, Bob Bunting, delivered the opening remarks through a pre-taped video. What was worthy of note is that Bunting is currently in Dublin attending an IFAC summit regarding IFRS. Bunting spent quite a bit of time discussing the pending adoption of IFRS and the various considerations. As a bit of validation to some of my recent posts, he directly discussed the lack of training that is currently happening and the absence of an IFRS presence at the University level. As he discussed the specific rollout dates for each country it became apparent to thos in attendance that this is a legitimate issue. In an electroninc poll conducted w/ attendees through the room at the close of the video opening, 84% of attendees believe that IFRS will be mandated in the U.S.. However, Bunting was also quick to comment in his video that the adoption of IFRS was not going to be the result of actions taken by the SEC, but through overall Market pressures that would force the U.S. to adopt the new standards.

     I would like to say that the breakout discussions were incredibly informative, but there seemed to be little new information that was discussed or presented that isn’t already being actively covered daily by the media. Unfortunate for what could have been some very interesting topics. However there were a number of other polls taken in the morning that were interesting.

–  Attendees believed that Domestic opportunities would provide the highest area for growth, with a 54% weighting versus International at 46%.

-Attendees were still somewhat pessimistic when it came to growth in the second half of 2009. Approximately 63% of attendees believed business would be flat to negative 3-8%. Of this number, 29% believed they would encounter declines of greater than 8%.  Only 37% believe that business might improve. Of the optimists, 19% believed business would increase 3-8% and 18% believed business would increase greater than 8%.

-When asked what the biggest key to success would be in 2010, 48% responded it would be “Improved General Economic Conditions”. Of the remainder, 18% mentioned Access to Capital, 16% mentioned Production Improvements, 3% mentioned Competitive Pricing, and the remaining 15% mentioned Internal Efficiencies. What’s worthy to note is the 3% that mentioned competitive pricing. I find tremendous value in the statistic that companies are not looking to improve their situation by engaging in price wars. They are looking to improve operating and production efficiencies.

Thanks for reading . . . .

Jeffrey Ishmael

Discipline #3: CFO as the Architect of Adaptive Management

June 2nd, 2009 Comments off

            In the last segment on “Reinventing the CFO”, I covered the CFO role as the Analyst and Advisor, which mainly dealt with the CFO creating a high-performance team that uses the highest level of information available to support the executive team in their decision making efforts. In a slight continuation of this theme we move into the 3rd discipline for the CFO; Architect of Adaptive Management. In Jeremy Hope’s book he discusses the need for the CFO to move away from rigid reporting structures, static sources of information, and to begin adopting new approaches to viewing market information and to try and anticipate negative market forces.

 

            As an “Architect of Adaptive Management” there are 6-key points that Hope believes needs to be in place to effectively master this area. Specifically:

  • Design adaptive systems from the customer’s perspective
  • Manage through continuous planning cycles
  • Make rolling forecasts the primary management tool
  • Report key metrics daily and weekly
  • Enable fast access to resources
  • Focus accountability on the relative improvement of teams

 

            While these might seem pretty remedial in nature, my most recent experience has reminded me how much of a challenge these points can be if the systems in place will not effectively support the generation of these data points. Although the data available has supported basic budgeting and forecasting efforts, the data/systems are not robust enough to support the daily delivery of key metrics or provide fast access to accurate information. The information has to be continually reviewed to ensure consistency with prior reporting. The management of the information is a continual struggle, which is why we’re headed towards a Q4 system upgrade. With the above factors in mind, it makes it difficult to drive accountability when the reporting that is being distributed has an inherent level of doubt that takes 3-times as much work auditing than to actually prep and export.

 

            However, when the systems are trusted and the data has a history of accuracy and integrity, the impact on the team is immeasurable. Towards the end of my tenure with MGE we had a high volume of reporting being requested during our merger with APC. We were operating on an older AS-400 platform while our partners were operating on a new Oracle system. We had years of passing audits with PwC, Mazars, and Moss Adams without a qualified letter. All we heard from the other side were excuses on why data couldn’t be pulled. We were achieving above industry results in Sales and EBIT. Our partners were never quite sure of their results.

 

            Although I was only responsible for the North American operations prior to the merger, we enjoyed a very collaborative approach with our HQ staff in France.  Through an efficient management of data resources, as well as systems that supported our end strategies, we were able to effectively execute on Hope’s 6-points. While not always executed at a perfect level, they were nonetheless strived for and often executed well. Accountability was driven from the Boardroom to the customer’s site through our Field Engineers. It was balance and execution that I look back on and appreciate.  What was achieved at MGE keeps me motivated to achieve at the companies that I now call home and strive to deliver the same excellence.  A single summary page does not do justice to Hope’s view of the CFO as the Architect of Adaptive Management, which is why it’s highly recommended reading.

 

Thanks for reading . . . .

 

Jeffrey Ishmael