Future Profits Lie in Competitive Foresight
Finance managers who want to identify sources of future profit need "competitive foresight" if they are to distinguish anomalies in current markets and operations that could create value for the company, according to Rajan Kamath, an associate professor of strategy in the management department at University of Cincinnatis college of business administration. "Conventional forecasting has its limits because you can be 100 percent right about the variables you use, such as market demand, technological developments and demographics, and still be wrong about the implications for your business design," he says.
By contrast, competitive foresight requires that companies give disciplined consideration to existing trends that lie on the periphery of the business, but may present future opportunities for profit growth.
For example, the management of the Victorias Secret retail chain began hearing that many shoppers were asking about the music being played in the chains shops, indicating the company had unintentionally identified the type of music its shoppers like. Building on that realization, in 1997, the company sold about one million copies a year of each of the five music CDs featuring the music played in its stores. This anomaly was far different from the chains usual products but became a significant source of value creation for the company.
To make competitive foresight relevant to companies, Kamath developed a model of four "non-mainstream" early warning signals that can be developed into successful innovations in business design. "One or more of these variables can create the spark that leads to the revenue trends for the future," says Kamath.
1. Technology. After putting its digital camera design on the back burner because picture quality was not on par with regular cameras, Casio Computer Co. recognized that a small group of users were less concerned about picture quality than the ability to put images on the Internet. Once Casio realized this, the company quickly rolled out its model to capture 80 percent of the initial share of this new market.
2. Market. After rolling out a line of small and mid-size copiers in the Japanese market, Xerox Corp. realized that it was the front-runner of a larger trend of demand among small businesses and individuals for affordable copiers in the United States.
3. Value chain. Convergys Corp., a Cincinnati billing and customer-management service provider, capitalized on the customer information it had gathered in its billing process by offering its largest customer, AT&T Corp., in-depth analysis of customer behavior patterns, including information about which customers were most likely to jump to a competing long-distance carrier and how to keep those customers.
4. Customer relationship. Caterpillar Inc., Peoria, Ill., transformed a pledge to deliver spare parts anywhere in the world into a $200 million a year business delivering other manufacturers parts to customers.
Each of these companies was able to recognize blips on their radar screens that had the potential to develop into major business opportunities and profit engines. In short, future trends already exist somewhere in each company. The key is to identify them, listen to them and allocate resources to develop them. When companies approach this from the right direction, "thinking about the future becomes a companywide activity," says Kamath.
Why New Hires Fail
In todays tight labor market, plugging a new hire into an open job gives companies reason to cheer. But those celebrations are short-lived when new hires quickly become former employees. Eric Cohen, vice president of Romac Executive Solutions, a staffing and recruiting firm specializing in finance and accounting in Vienna, Va., says there are several reasons why corporate finance professionals fail to stick with their new companies:
- Quick hires. Finance departments often feel a sense of urgency when they lose an employee at the functional level. "They need to make a quick hire so they outline the basic needs of the position and get somebody in there," says Cohen. "But that means theyre really not screening people very closely." Cohen says a company in need of a quick fix often describes the position "by telling candidates it needs A, B, C and D." When candidates say they can do A, B, C and D, managers ask them if they can start the next day. But the company soon discovers that the person was not in a position to be, for example, the accounts payable manager.
- Management misfits. At the controller level, new hires frequently lack the necessary managerial capabilities. "You might have a candidate who looks and sounds really good and who has the technical skills," Cohen says. "Yet when you get them in there, you realize they dont have the managerial skills. A lot of people are great technicians and not good managers, but they still want to be managers."
- Cultural clashes. Cohen says that at all levels, culture clashes are the most common result of poor hiring decisions. Companies fail to realize that they need certain kinds of personalities to mesh with their working environments and other employees.
- Unrealistic expectations. Conflicting expectations are the main reason why newly hired CFOs leave, Cohen notes. Either the CFO discovers that the nature of the organization is different than was originally described, or the companys expectations change in a way that was not communicated to the CFO during the hiring process. "If a company brings in a CFO and a year later expects that person to carry it through an initial public offering," Cohen says, "the company better have hired a CFO with IPO experience."
Making New Hires Last
To ensure that new hires dont become casualties, Cohen recommends thorough reference checks, functional skill tests (at the staff level), and complete and accurate job descriptions. He also encourages job candidates to do their homework when considering a position with a new company: Talk to the controller, find out whether the CEO has a clear picture of where the company is going.
Behavioral profiles also can help executives and managers improve their hiring decisions. Daniel A. Kreuter, president of DAK Associates Inc., a firm in Conshohocken, Pa., that performs behavioral profiles on job candidates, says managers can use behavior profiles before extending job offers. "Typically, finance managers can drill down and find out if a candidate is technically competent or not," he says. "Yet, it is really difficult to find out what that persons management style is. This tool might help them drill down a little more behaviorally and give them a better sense of whether or not they have a good fit."
While no behaviors guarantee successful accounts payable managers, controllers or CFOs, certain profiles, or collections of behaviors, are better suited for more functional or transaction-oriented jobs (analytical and conforming) as opposed to management-oriented positions (highly motivated, dominant).
E-Taxes: A Waiting Game, for Now
Youre a California-based company with servers in several states from which clients can download your software products. A customer in Vermont, using a Canadian-based Internet service provider, submits her credit card information through your Web site in exchange for a 20-day trial of one of your products. Is this a taxable transaction? If so, which state (or states or country, for that matter) has the right to tax the deal?
Tax experts on the corporate and regulatory sides of the equation are sharpening their No. 2 pencils to solve e-commerce taxation puzzles like this one. As both traditional companies and start-ups stream on to the Internet, finance departments are grappling with a confusing collection of tax regulations and questions. At this point in the e-business revolution, few companies conducting Web-based retail transactions collect sales and use tax. Although income tax remains a moot point for most revenue-challenged dot-com companies, it could create costly wrangles for bricks-and-mortar organizations that have recently ventured onto the Internet. International tax regulations present another set of hazy risks.
Each of these tax areas create challenges to planners at corporations engaged in Internet activities. Yet, understanding the exact nature of these challenges remains an extremely difficult process for several reasons, says David E. Hardesty, CPA, author of "Electronic Commerce: Taxation and Planning" (Warren, Gorham & Lamont, 1999), a 1,000-plus page guide. First, the creation of federal legislation governing e-commerce taxation is uncertain. The Advisory Commission on Electronic Commerce continues to meet, but whether that body will recommend specific "e-tax" regulations to the U.S. Congress remains unclear. Second, state governments, whose individual and often complex tax codes apply to e-commerce transactions, appear to be taking a wait-and-see approach to potential federal legislation before deciding how to proceed with tax compliance activities.
If Congress refrains from taking action on this issue a real possibility in this election year Hardesty says, "states might say, No more Mr. Nice Guy. And any of the large, consumer-based Web companies might be attacked by 50 different states simultaneously for sales tax. If youre a company and youre not filing a sales tax return in a particular state, there is no statute of limitations on back taxes."
State income tax, on the other hand, is an issue often attached to business-to-business e-commerce. With interstate e-commerce transactions, Hardesty says, its extremely difficult to determine in which states companies should pay income tax. He also notes that it is also difficult to determine how much income tax to pay in some states.
Smaller dot-com companies with relatively small tax staffs, Hardesty notes, face the additional challenge of wading through complex compliance regulations the same rules that were originally designed for large, multinational corporations. Not that the e-commerce taxation environment cuts larger, traditional organizations any slack. "If youre an established company and you move onto the Internet, you really have more issues than the dot-coms because most of those companies only have to worry about sales tax," says Hardesty. "The issue often becomes: How much income tax do we pay in each of these different states or each of these different companies where we are earning income?"
For updates on e-commerce taxation developments, visit www.ecommercetax.com.
Where IT Dollars Will Go in 2000
After wrapping up their Year 2000 adjustments, banks will refocus their attention and resources on deploying Internet-based cash-management systems, according to a report by Meridien Research Inc. in Newton, Mass. So far, many banks have been slow to develop Internet-based systems that simplify their approach to cash-management services. Meridiens report finds that corporate treasurers are pressuring banks to integrate many separate corporate electronic delivery systems into a single browser-based point of entry. While that transition will be difficult (banks must integrate as many as 15 distinct delivery systems) and expensive (some projects will cost as much as $50 million), Meridien predicts that banks will be better positioned to meet the demand within the next two years, as soon as Year 2000 issues have been addressed.
The coming year could prove to be an exciting time for corporations and their information-technology (IT) spending patterns. And, for a change, that excitement will have little to do with Year 2000 issues.
After funneling substantial money and staff expertise into Year 2000 compliance projects during the past year or several years, many companies plan to use their newfound understanding of IT systems to reshape their IT spending strategies. During a teleconference late last year put on by Cap Gemini America Inc., headquartered in Freehold, N.J., several IT executives revealed which business trends they expect to reshape their budgets, provided that the transition to the new year was a smooth one.
For example, Household International, the consumer finance and credit card company based in Prospect Heights, Ill., plans to refocus post-Year 2000 IT resources on its Internet and information-organizing activities. Tom Wilkie Jr., director of Year 2000 compliance for Household, says the growing need for more sophisticated data repositories (to better manage customer relationships and to respond to greater consolidation within Households marketplace) and falling data-storage costs will lead to "significant database, data warehouse and datamart development activity."
In the health care industry, Trigon Blue Cross Blue Shield in Richmond, Va., will join many other companies in enlarging its e-commerce investment. Don Clark, Trigons director of application services, expects his organizations e-commerce projects to drive down some of the administrative costs of providing health care. Clark also expects IT resources to help handle a possible move toward marketing directly to employees (rather than their companies) as theyre faced with a greater number of insurance options and a specific health insurance allocation to invest themselves. That trend creates the need to handle more enrollment activity via the Web and telephone.
St. Louis-based Monsanto expects to allocate IT dollars in response to several trends this year, including decreasing product life cycles, a growing interconnectedness (e-commerce, the Internet, etc.), the increasing speed of discovery and innovation, and ongoing consolidation within the life sciences industry. According to John Ogens, director of global Year 2000 programs for Monsanto, the companys post-Year 2000 IT priorities include: driving business growth through customer relationship management tools, completing enterprise resource planning implementations and, in general, using technology to achieve market and competitive advantage.
Finance: A Bedtime Story
For finance executives, the numbers always tell a story. Whether it is a triumph, tragedy or thriller, the story always reveals itself to finance professionals.
But numbers dont hold the same dramatic allure for those outside the finance department. After all, nobody ever asked their parents to read a pie chart or the latest P&L statement at bedtime. Most nonfinance employees are babes in the woods when it comes to understanding how the numbers translate into a compelling tale of company performance. Yet, finance executives can better inform and motivate nonfinance employees with story-telling techniques.
Effective story telling helps finance executives drive home the benefit of specific business strategies. "A finance executive might say, We should move forward in this particular direction," says Frank Carillo, president of Executive Communications Group Inc. in Englewood, N.J. "Well thats great if employees believe everything that the finance executive says. But thats rare today. People are more likely to buy into your vision if you prove your claim through rhetoric."
That approach appears to work at leading companies. According to a Watson Wyatt Worldwide, Bethesda, Md., study of internal communication, top-performing companies place a strong emphasis on helping employees understand the business and reward managers at all levels for effectively communicating and informing employees about whether the organization is meeting its goals.
By translating the numbers into a story that speaks to nonfinance employees, finance executives show the workforce where it needs to focus its efforts to improve company performance.
Story telling, Carillo asserts, should not intimidate finance people. Performed effectively, it is a short and simple exercise. "Facts, numbers and data dont always speak for themselves," he adds. "They need to be put in context with examples, analogies, metaphors or case studies. Unless we are Mr. Spock, we use those elements to support our emotional disposition to believe something."
After interpreting the numbers, finance executives can use Carillos narrative techniques to help spin effective yarns.
- keep it short. This is especially important for finance executives who are new to story telling. "If you cant tell the story in a minute or two," Carillo says, "its probably too long." For example, if you want to drive home the importance of research and development investments, you might mention how Post-It notes were developed during a search for a new kind of superglue.
- Be relevant. Dont tell jokes or go for laughs. Instead, take advantage of your audiences attention to gain support for your strategy or point.
- Be strategic. When looking for examples or anecdotes, first identify the point you want to drive home, then search out a story that fits the bill. Also keep in mind that personal stories pull in listeners.
- Practice, practice, practice. Look for opportunities with family and friends to share stories that demonstrate a point or reveal how you learned a specific lesson.
Worldwide Accounting Standards: The Ball Is in the SEC's Court
BP Amoco PLC, the London-based petrochemical company, has once again sealed a "largest-yet" deal. This time, the superlative describing the companys $1.1 billion, 10-year deal with PricewaterhouseCoopers (PwC) might read: "Largest Accounting Outsourcing Agreement."
When the outsourcing deal was announced in November, its size caught the attention of headline writers and finance professionals. PricewaterhouseCoopers reported that 1,200 out of 1,276 employees who work in BP Amocos U.S. accounting department (including financial reporting and accounts payable) and back-office operations had accepted offers to transfer to PwC. Despite the scope of this particular business process outsourcing (BPO) agreement, the seeds of the PwC outsourcing deal were sown in August 1998 when British Petroleum Co. PLC and Amoco Corp. first announced their intent to merge. At that time, BP CEO Sir John Browne, who is now the CEO of BP Amoco, said the new company expected to save $2 billion through staff reductions, more focused oil exploration and streamlined business processes. Before the merger, British Petroleum Co. pursued an outsourcing strategy, and Amoco relied upon shared services, which essentially is an internal form of outsourcing. The outsourcing agreement with PricewaterhouseCoopers is a product of blending the two organizations.
PricewaterhouseCoopers had assumed many accounting and back-office functions for BP Amoco in Europe and South America before the U.S. deal was announced, and a similar agreement for the companys Canadian operations is expected to be announced this month.
Finance executives will be watching closely to see how much savings BP Amoco realizes from this arrangement. Clearly, the company considers outsourcing accounting functions an effective outsourcing strategy, and the CEOs buy-in was key to the deal. More important, the deal may make similar business processing outsourcing agreements seem less imposing to finance executives at other companies.
Will the global business community ever have a single set of global accounting standards? If so, which set of accounting standards will be used U.S. GAAP, the standards developed by the International Accounting Standards Commission (IASC) or some other countrys GAAP?
So far, these are important but unanswered questions for U.S. companies. One thing is certain, however. Regardless of what standards are chosen, the U.S. Securities and Exchange Commission (SEC) will have tremendous influence over that decision. The SEC has two choices: (1) It can, essentially, give its stamp of approval to the international accounting standards developed by the London-based IASC (International Accounting Standards Commission) by allowing foreign companies trading in U.S. markets to use IASC standards in their financial statements; or (2) It can reject IASC standards outright and go on requiring that all companies trading in U.S. markets continue the current practice of using either U.S. GAAP in their financial statements or some other accounting method but providing footnotes in financial statements indicating results using U.S. GAAP.
"In either case, the SEC has an enormous amount of influence," says William E. Decker, partner in charge of the global capital markets group at PricewaterhouseCoopers LLP in New York. "If it closes the door to IASC standards, it will encourage the use of U.S. GAAP. If it embraces IASC standards, it will gain influence because it will be the only enforcer of those standards."
Despite this, the SEC has shown no indication of when or if it will take action. "The ball is in the SECs court, and it is sitting on it," according to Dennis Beresford, executive professor of accounting at the University of Georgias Terry College of Business in Athens, Ga. Beresford is also a former director of the Financial Accounting Standards Board (FASB). However, he notes that the general thinking is that the SEC will not issue a blanket "yes" on the use of IASC standards. "There is a general feeling that IASC standards are significantly less disciplined than U.S. standards and produce less good information on financial statements," he says.
Why Do Anything?
The lack of global accounting standards has not deterred foreign companies from entering the U.S. securities markets. Whether looking for capital or the right opportunity for a stock-based acquisition, foreign companies are establishing a presence in U.S. markets at a rapid pace and many more are preparing to enter, says Decker. Clearly, these companies are not waiting for IASC standards to be recognized as the global accounting standards. Instead they are ready to use U.S. GAAP in their financial statements as do U.S. organizations. Or, they are preparing their financials using another standard, such as UK GAAP or German GAAP, and providing a footnote describing the difference between that method and U.S. GAAP, and showing the impact the method has on shareholder equity and the difference between the two, says Decker.
From the U.S. perspective, this status quo is working well. "The general feeling in the U.S. is, why do anything," says Beresford. "We have the best capital markets in the world largely because of our credible financial reporting, so people are very happy with the status quo." Beresford calls significant acceptance of IASC standard in the U.S. a "long shot because there is a feeling that IASC standards are vague, dont provide enough details, and [are] not enforced with discipline," he says. "Consequently, those standards dont have the same degree of credibility as U.S. GAAP."
The Impact on U.S. Companies
For their part, U.S. companies see the debate over global accounting standards as a non-issue. "That is a mistake," says Decker. If the SEC allows foreign companies to use different accounting standards in U.S. markets, "U.S. companies may soon find they are competing for capital against companies that use a different, and possibly more lax, set of accounting standards," he says. "Companies will begin asking, Why cant we do these things? "
The bottom line is that financial executives want to follow only one set of accounting standards to ensure a level playing field in the capital markets. "Companies dont want to compete for capital against other companies that can get away with providing less or different financial information," says Beresford.
No matter what the final outcome of the global accounting standards question, the overall question is part of a broader trend toward the internationalization of accounting. "FASB is already making changes to make U.S. GAAP more like the accounting standards used globally," says Beresford.
Keeping a High-Growth Company on Track
The good news is that Internet-savvy employees are surfing travel-related Web sites for the cheapest available airfares. The bad news is that these Internet discounts can cost companies in the long run.
According to the National Business Travel Association in Alexandria, Va., more than 80 percent of corporations have negotiated airfare discounts with vendors. However, companies often must maintain a specified purchasing volume to continue to receive the discounts. When too many employees purchase their own tickets, they can limit the larger cost-savings potential of discount-airfare programs.
A Runzheimer International survey of 84 corporate travel managers finds that the "use of travel vendors with whom special rates have been negotiated" and "use of lowest, convenient airfares" are the two most important methods used to control travel costs. To prevent these two strategies from conflicting, companies can restrict access to airfare reservation sites on the Internet and ensure that getting tickets through preferred vendors is convenient. Other effective cost-containment methods identified in the survey include "use of charge card exclusively," "use of nonrefundable fares" and "limiting deluxe hotel accommodations."
The problem: Managing a company with a double- or even triple-digit growth rate without experiencing a financial meltdown. The solution: A finance team that works across functional areas to develop financial models and tools that help keep growth within the companys capacity and keeps the company focused on its growth goals. "A business cant grow faster than its infrastructure will allow," says Richard Russakoff, president of Bottom Line Consultants in Richmond, Va. "These companies need good systems in place and a means for managing growth" that their financial executives can provide.
Recognizing both the potential and the pitfalls of a 50 percent annual growth rate, Imports by Four Hands L.P., an importer of high-end furniture based in Austin, Texas, keeps a firm hand on the wheel by using a detailed financial model to analyze each investment it makes. Broad knowledge of the company and its needs enabled Hank Cravey, Four Hands CFO and chief operating officer, to develop an effective model. "I come from an accounting background, but my exposure to operations helped me develop a more integrated model," he says. The model incorporates data from all facets of operations, as well as pertinent financial data, to ensure that all of the companys investments maximize profits. "We use the model to make sure we are growing at the maximum rate the company can handle," he says. Cravey plans to create a model that segments the company and allows him and his colleagues to monitor the companys profit centers and understand how each investment impacts each of those areas.
Cravey recognizes the importance of making the development of such financial tools a collaborative effort. "Other decision-makers sign off on financial models so you have to make sure the models meets their needs," says Cravey. "To utilize their knowledge, you need their input." From a more practical standpoint, getting input from other key players means they are more likely to take ownership in the resultant financial models and tools. "Using these tools has to become a practice on their part so that they run the numbers through the model before they make a final decision," he says. If no one uses them, not even the best financial tools will add much value to the company.