Wednesday, October 27, 2010

Day 2 CFO Rising notes

Day 2 notes - CFO Rising West
Breakfast roundtable sessions

My first roundtable session was how to control IT costs.  The flavor that I got from my first session is that CFOs repeatedly said they didn't really understand IT guys requests, and didn't feel that IT did a good job of deciding on ROI and considering multiple options when deciding.  I got the feeling that those CFOs that didn't "get" the CIO had hired up their CIO from inside, rather than hiring a business person who also understood IT.  The presenters assumption was that outsourcing everything will result in the least cost, but in my opinion a blended approach is still justified.  Moving to outsource means you can't capitalize the investments, and you don't have control over the back-end data to the extent that you do if you move to an outsourced solution.  This was later confirmed by Susan Kamm who said that the very best Smart IT companies insourced everything but commodity products like email.

In our next roundtable we talked about mobile workers - both traveling and from home.  The gist of the discussion with the CFOs resolved around the idea that allowing mobile workforces increased flexibility but changed the culture and protecting internal culture and treatment of mobile workers vs in-house workers could represent some risk.  There were even stories about workers suing for the "right" to work from home.

Tom Jones of Citibank
First general session speaker is the former CFO of Citibank Tom Jones talking about the new accounting standards and why they are needed.  He holds that US GAP accounting standards are the cause of a tremendous amount of additional work, education, and problems because they are not compatible with international standards board accounting practices used by the rest of the world, created by the IASB.  Equity markets are now global and international standards are required.  GAP accounting is too complex to understand globally (at over 17,000 pages).  IASB is only 3000 pages.  Another advantage is that the IASB standards have a "smaller" version for privately owned companies - the Small medium Enterprise standard weighs in at only 275 pages.

IASB Rules myths debunked:
  • The standards must be worse because they are shorter - actually no - several studies have shown that they are both equally accurate
  • The international standards are shorter because they're new - actually in 10 years it hasn't changed at all, and is adopted in over 60 countries
  • Many countries don't implement the whole standard, they're picking and choosing the standards they like - not true this rumor came from a set of French banks that didn't like the hedging rules (11 paragraphs out of several thousand pages).
  • There is more fraud under IASB than under GAP - untrue, there is actually more fraud in GAP accounting than in IASB
  • There are rules for everything (rather than principles as in IASB) so it must be better - actually the more rules there are the more opportunities for loopholes and complexity being limited helps companies comply.  Most judges in a principles based lawsuits look at whether the company really did due diligence - even if they were wrong in their final conclusion.  Principles based means you have to put information in that you have done due diligence on including outside consultants - not that you can put anything you want in there.
Kim Wallin - Controller, State of Nevada

Up next was Kim Wallin, Chief Controller for the state of Nevada to talk about using business process improvements in government.  In Nevada they are increasing the state's savings and revenues by applying aggressive accounting practices including putting a property tax cap in place, doing operational audits to identify "supervisor heavy" organizations for cost reduction, Use of data mining to identify overbilling in Medicaid BEFORE paying out claims, moving to better debt collection (they currently have debt that is between 400 and 3000 days old) and they only collect about 20% of the debt owed to them.  They've increased that to 28% by checking debtors vs vendors, and hiring competing debt collection agencies to collect the owed debt.  Their final goal is over 60%.

Nevada has implemented XBRL to eliminate spreadsheets and to decrease or eliminate data entry errors, eliminate thousands of spreadsheets, and allow them to use data cross-database.  The second phase of their project will allow them to import data from their systems directly rather than manual entry into the XBRL database.  They are spending only $500,000 for the system, and estimate savings will return quickly based on better debt collection alone.  The XBRL system will also allow them to process grant reporting in a day rather than 2 weeks, and be more accurate in the process.

Panel Discussion - Mastering the new fundamentals

The next discussion was a panel discussion with Julia Homer (EVP of CFO magazine), Don Jordan, CFO of Pelican Products and Robert Lloyd (who has the best job in the world) as CFO of Gamestop.  The panel discussed Mastering the New Fundamentals to measure and encourage growth.  Gamestop challenges recently have included the move to online distribution, entry of other players in the used game market, and competition from non-retail channels.  They've responded by moving to more unique content tied to the product distributed through their channel, move into online distribution and a new customer loyalty program. 

Pelican products makes ruggedized cases, specialty flashlights, and remote lighting products.  They make everything from iPOD cases to cases to carry missiles.  Their sales have grown 20%  YOY with growing EBITDA over the last few years.  But last year in October the bottom dropped out of sales, and they were in the middle of an acquisition that would have doubled them - the banks were pulling out left and right.  But they pulled it through with Mezzanine financing - they got debt at 14.5% fixed with pre-payment penalties as the only money the banks would give him - but they did it anyway and it's now economically feasible to spend the debt down.  Meanwhile their company has doubled in sales and market share due to the strategic buyout.  They hired a consultant to review both companies, and then created a synergistic cost saving of $25,000,000 in cost savings.  Pelican is down in revenues 7% but EBITDA is up 15%. They are back to their 2008 levels in sales.

Lloyd says that to convert from a retail only business to a retail plus technology business, they have had a culture clash, and the same with doubling their size when they bought their biggest competitor.  Pelican says the labor component of their product is 10-15% and the freight is more than the difference in labor rates so they've retained manufacturing in California.    Gamestop has invested a 30% increase in CAPex to their technology initiatives, but cut CAPex on retail stores.

Managing Risk
The next panel is Gordon Bodnar, Professor of international finance at John Hopkins, Phung Ngo-Burns VP of Finance and CFO for Expressjet, Rob Schimek CFO of Chartis, and is managed by Scott Leibs editor in chief of CFO Magazine.  Since 9/11 companies have created a more rigorous risk planning environment.  Rob says that the it's the risks you don't plan for that are most likely to create a "killer" event.

Each company should create a risk appetite profile documenting their willingness to take risk in the following categories:
  • Impact on income
  • Impact on capital assets
  • Impact on need to go to the capital market for funding
  • Insolvency risk
Bodnar says that large companies are using derivative instruments as a hedge on risk rather than a trading investment.  Rob says that they use the rating agencies as a way to measure risk, as will the investor community.

Mid-term election update from MSNBC
The next speaker was Joe Scarborough, commentator for MSNBC presented about the effect of mid-term elections on the business climate.  Joe predicts that moderation will come to Washington because people are unhappy but the political process will gridlock.  Joe predicts that the Republican victory will be so strong that some of the policies passed in the last 2 years will be changed, including increased taxes by at least 5%. Scarborough believes that if we don't find a way for Republicans and Democrats to work together to solve our problems we may be doomed.  We have to figure out a plan to go back to a balanced budget, and reform the entitlement programs of social security and medicaid, as they are unsustainable.

Scarborough went on to say that when social security started the average age of death was 62 and you couldn't collect until 65.  Right now instead of 10 people per one person on social security, we have 3 people - it's unsustainable.  We need to reexamine the idea of resuming capital gains taxes in this environment.  If we don't move to the center on business issues we'll be facing 15% unemployment through the next 2 years.  He says that the biggest fight over the next 2 years will be the fight over taxes on individuals and corporations.  He hopes that Republicans will actually ACT conservatively (rather than what they did during the Bush years).  The POTUS doesn't have any close advisers that have ever run a business - and that is a requirement for a president as an advisor.  Romney will be against Barack Obama in 2012,  Bloomberg may try to get into the race which could change the dynamics if he runs under a 3rd party.  If the economy turns around - the money is on Barack Obama.  Crazy people get elected in off-year elections because people want change and don't care how they get there.  90% of Americans want the government to back off of our private lives, and the economy and let them be decided at the state level.  The 2 party system will blow apart soon because there is no party that is liberal socially and conservative fiscally.

How Microsoft Technology enables Finance reporting

Next up is Chris Suh GM of Finance for small and mid-market solutions and partners discussing how technology empowers finance at Microsoft.  Microsoft wants to both be smart and invest in innovation at the same time.  The approach Microsoft has is to hire talented employees, balance investments, innovate in the right areas, product flow and their future bet on the cloud. Microsoft Finance strategic performance plan:
  • Nov/Dec is strategic planning month
  • Jan/Feb is the midyear review
  • Mar is target setting
  • Apr/Jun is budgeting
In 2008 implemented CORE finance - Integrated reporting, data quality measurements, and policy/governance which is published on Sharepoint using a MS BI Portal.  The portal delivers reporting, scorecards, has an insight portal that can be accessed by all business users to generate all kinds of reports for internal use, and supports budgets and P&L performance measurements.  Microsoft has created a sharepoint environment that uses Microsoft PowerPivot to create a graphical environment to "play" with and sort/compare the data in a tremendous number of ways and formats.  This gives them the ability to easily look at the data in a digestible format for comparison of data.  Powerpivot is part of Excel 2010 in the full Office 2010 professional as a product.  Pivotviewer is a sharepoint add-in that allows you to view the Powerpivot sheets.

Panel - Audits unveiled

Next up is a panel on "Audits Unveiled" talking about audit fees and how to control them, as well as manage your auditor relationship.  Due in part to information developed by CFO Magazine to allow businesses to compare audit fees many companies have reduced their audit fees.  IDT was paying $4.3M for audit fees in 2008, by shopping their business they moved to a company that charged them a little more than 1/2 that the next year.  Turner is concerned that as fees go down, independent audits may become less accurate.  Turner says that the CFO should NOT control which audit company to use - the audit committee should be the primary controller of the audit process.  Peer review process is not a substitute for a good audit in the first place by an audit company that understands your business.  The peer review/PCAOB process only looks at about 3% of audits.

8 reasons we hate IT and how to make IT your partner

Susan Kramm, author of ValueDance spoke about how to make IT a full partner instead of a hated cost center.  She insists that IT Smart companies incorporate the specific business impact of a project into all phases of a project form specification to implementation.

IT Smart vs IT Dumb companies:
  • In IT dumb companies don't require their business cases to be valued vs the project results
  • In IT smart companies companies iterate projects over 3-6 month iterations using a process of Inception -> Elaboration -> Construction -> Transition
Money and time are the death of projects.  The longer they go and the more expensive they are the less successful they will be.  The solution to this is to move to an iterative project that can be cancelled or changed early.

Most successful projects come in at $750,000 or less, 3-6 months, and no more than 12 people. The probability of a $5M-$10M project will be completed on time and in budget is zero. However, Plan/Build/Run mentality dies hard.  It's more difficult to plan and architect projects in chunks, the process of development projects feels longer when chunked up but with an increased chance of success it's worth it, consultants/vendors like the "big bang" so you may be fighting vendors, technologists are optimists and business users don't believe future phases will be funded.  All these need to be combated to change the culture.  In addition, IT should concentrate on driving Keep the Lights On savings down by as much as 50%.  Finally they should look at the fact that 20-25% of the work IT people do are tasks that the rest of the organization can and should do.  The best companies who are IT Smart don't outsource on a wholesale manner, however outsourcing is a wonderful resource and allows you to scale easily for specific projects.  Should be sure that if you outsource development that you are working with a partner that allows innovation, and keep that innovative outsource process managed internally.

Social Media for the CFO

The final speaker of the day was Steve Sorbello, the CFO of LinkedIn. He pointed out the difference between the 3 social products.  He said that Twitter is a soapbox, LinkedIn is the office and Facebook is the bar.  Their primary risk considerations are privacy concerns and scalability concerns.  Steve was formerly a CFO at Tivo and AskJeeves, and said that LinkedIn was unique from those in terms of their revenue model.  They have an all-company meeting every other week with 900 employees.  Steve said he doesn't eat his own dogfood - he drinks his own champagne.  He indicated that LinkedIn is about owning your own web identity - and having only a partial profile damages your ability to do that.

And that concludes day 2 - watch for day 3 tomorrow morning.