Few CFOs have blazed a career path as varied and as rich with experiences as Dave Martin, CFO of Dimensional Fund Advisors. The former CFO of the Janus Capital Group has served earlier tours of duty with Charles Schwab & Co., Interstate Bank of Texas, and Texas Commerce Bank. Here Martin recounts the hard lessons that come only from navigating finance organizations through the ups and downs of economic cycles.

Steve Player: Clearly, you have had a very interesting and rewarding career, Dave. I thought that your early years might be a good place to start in light of how some of the lessons those years offered might be timely for our readers.

Dave Martin: Well, I actually started out in 1981 working for an oil field services company, the Western Company of North America. It was the pinnacle of the oil boom. There were 4,500 rigs operating on shore in the U.S. At Western, we were doing offshore drilling and servicing the onshore rigs with cementing, acidizing, and fracturing services. I was in a job designed to lead into a general management role.

Things changed with a rapid downturn in the oil business in late '81 through early '82. My job shifted and I was coming up with a layoff list by district within our region every other month, and, in fact, I guess I'm probably a fairly rare person in that I recommended my own layoff. I recommended reductions to the regional office in Houston that included my own job. In 14 months, we eliminated 55 percent of the workforce in our region, including me.

SP: That's a management lesson few people get to start with …

Martin: Yes, the real lessons came from seeing how fast things can change, the danger of being in a capital-intensive business when the business turns south, and the dangers of leverage. When you see that kind of a rapid change in a business, it really kind of puts things in perspective. Later on, when you see a downturn, you tend not to get nearly so excited.

SP: How did you bounce out of that, and what did you do when you found yourself on your own layoff list?

Martin: Even though I hadn't been in Houston that long, I looked there first. In a fairly short time, I found a job at Texas Commerce Bank. This was a more of a typical finance job, working right outside of the CFO's office.

SP: Tell us about how Texas Commerce shaped your career …

Martin: I would point out two things about Texas Commerce: One is that I had the great fortune of working for Marc Shapiro, one of the most incredibly perceptive, analytical people I've ever met, and also for David Senior, who showed me what mentorship was all about.

The other thing is that my career became diverted into real estate. I went into corporate real estate as part of running the bank's facilities. The banks in Texas were basically real estate developers. For example, we owned a third of the largest building west of the Mississippi. We had ownership percentages in major projects all over Texas. At that point, I considered staying in real estate long-term as opposed to being in banking or finance.

I went from Texas Commerce to First Interstate Bank, heading up their facilities department and also security and some other things and really building that department for the first time there.

After a total of eight years in real estate, four at Texas Com-merce and four at First Interstate, I went back into a more typical finance role of planning and analysis and then became CFO of the Texas region for First Interstate Bank. Although we were part of a larger banking organization, we still had our own separate books, a separate audit, and a separate board of directors because we were an independent entity. So that was my first real CFO experience.

SP: So you really came into the CFO position from an operating executive role rather than a traditional finance role?

Martin: Yes, I started in finance, jumped out into real estate, and then came back to finance. It clearly wasn't a linear finance background.

SP: I'd like to touch upon what later attracted you to Schwab …

Martin: The person who had been CEO of the Texas bank went out to Schwab as vice chairman and headed up the individual investor division. She approached me to come out there. The issue at Schwab was, while they felt that they had reliable numbers and could get the books closed on time, they didn't really have any analytical approach: “How should we prioritize? How should we be making decisions?”

I wasn't brought in as a CFO. I was the senior vice president of finance for their retail enterprise, which is what most people think of as being Schwab. I had, as you say, numerous responsibilities during my time at the firm. My largest group was an MIS group, which helped me to understand how access to information is so critical to the finance function.

SP: From that start at Schwab, I know that your career advanced in responsibilities up to include managerial reporting. This is where we met when your team was improving customer profitability analysis through a state-of-the-art, time-driven ABC system. Then Schwab made a dramatic shift in its business to respond to competitive pricing pressure. I was amazed at how well you and your team responded to those changes …

Martin: My past had helped to prepare me for what happened when I got to Schwab. There was the downturn in the technology business and in the whole Internet mania, and when that turned south in 2001, I wasn't that rattled by the fact that we had this downsizing.

One of the stories I like to tell is that when I first arrived at Schwab, I was accused of kind of being a pessimist because I wasn't all caught up in the Internet fervor, in the hype and the “new, new deal” environment. I would hear things like, “You just don't get it” and “Remember, we're going to revolutionize, and we're not going to have stores anymore.”

I wasn't quite all caught up in the frenzy. But when things turned down, everybody said that I was an optimist. People sought me out because I saw a brighter future and lots of improvement. What I said was, “I just haven't changed.”

SP: Dave, looking back on your career, what key principles have you used to help advance?

Martin: Well, I think that you have to start with the basic building blocks in a finance transformation. In some cases, finance can waste a lot of the company's resources, so you should first try to eliminate that waste.

Let me tell you what I mean by that. I have seen a tremendous amount of time wasted on imprecise language, on reconciling numbers, or on different versions of profitability. I think that you start with one version of the truth. Start with deciding what your standard profitability report will look like.

I have a strong bias to say that the standard is going to be fully allocated costs. In other words, when you sum across all the divisions, it sums to the P&L of the firm. Then you come up with what I call a nomenclature, or precise language, for all financial terms.

You can make this whatever you want to call it: your operating profit, maybe that's your fully loaded number, and maybe it's everything but taxes at the corporate level. Then if you have whatever it is, a gross margin, or some other kind of an intermediate profit margin, that's fine, but make sure that everybody agrees on what those things are and uses the same terms for each calculated number.

SP: You have one set of definitions that everybody uses, one set of truths to begin with, and everything's got to start there. It sounds like such a basic thing, but there are so many people who have grown through mergers and acquisitions and so forth, and those definitions get lost over time. It's a good point to kind of get that knocked out …

Martin: Yes. You know, another principle is no budgets. This is one thing that I've really come to believe in and adopt over my career. I'm a believer in planning and forecasting on an ongoing basis, but the focus is on planning and forecasting for the future.

The detailed budget, I think, is one of the greatest wastes that finance perpetrates on an organization. You're really trying to say that you have complete knowledge of the future. When somebody in an operating unit asks, “Do you have my conference in August next year budgeted?,” you know that you're doing something wrong, because you know that this kind of an activity can't add any value for the firm.

SP: How have other executives reacted when you have tried to eliminate budgets?

Martin: I think that they are okay once they understand that there is going to be a plan. In other words, they're still going to have “an annual plan.” We're not trying to take away “planning” altogether.

What we are saying is, “We're not going to have a detailed budget with a number in it for every account code because we just can't predict the future.” There are reorganizations, and business conditions change, and going to a low level of detail just doesn't make any sense.

What does make sense is to have something that's much more driver-based, so that you look at the key things that are going to drive revenue and expense. It's going to be new clients, or repeat business, or whatever on the revenue side. On the expense side, it's going to be head count, new facilities, new projects, etc.

Whatever it might be, you decide what your key drivers are and focus by saying, “These are the key assumptions underlying our plan for next year, and with these key assumptions, we think that these are going to drive, say, 95 percent of our revenue, and these are going to drive 95 percent of our expense.” So we focus on how we feel about these assumptions or drivers, however you want to look at it, behind the revenue and behind the expense.

We can ask ourselves, “Are we comfortable with them? Are we comfortable with the bottom line that comes out of this?” If the answer is yes, then we have a plan that we can all work with and move forward, but we also acknowledge that it doesn't make sense to go to any lower level of detail because we can't predict any lower level of detail. It's a classic example of false precision.

And we know that our forecasted results will change as the drivers and assumptions change; we are focused on being adaptable from the start.

SP: Interesting. We have talked about the building blocks: one version of the truth; having the fully allocated costing model and then a precise language; continuous planning and forecasting, but no detailed budgeting; getting people focused toward the future; and using a driver-based planning approach. What else have you learned?

Martin: I've learned a great deal about managing groups. In terms of the group, I think that one of the keys is for each team member to have a personal responsibility. What I mean by this is for people to have the feeling not only that what they do is important, but also that they are uniquely positioned to deliver it.

In other words, the ownership mentality of, “If I'm not here and I don't do my job, something doesn't get done.” Where I've seen classic conflicts or inefficiency is where there hasn't really been great role clarity. So, try to define roles and responsibilities as clearly as possible, and people feel much better about what they do. There's also a lot less wasted time.

SP: What if you inherit a situation and you've got established staff there who are good, and competent, and eager, and diligently working hard, but they're defined by the fact that they manage the budget process?

Martin: Yeah, that's a great point. The reality is that you may have a few too many people, so you may have to go through a restructuring and some jobs may get eliminated. But what you hope is that you find another way in which they can add value to the organization. Maybe the budgeting process goes away, but planning and forecasting and business support remain — you try to turn them into business support analysts.

Instead of having them work like crazy for four months and load the budget, and then do variance analysis throughout the year, maybe instead you say, “Look, you have a real opportunity here to look for opportunities for profit improvement. We're going to try to get the business really focused on the key drivers. How do they improve our business?”

Get these people more forward-looking. Get them focused on the forecast, not the variance explanations. You may have to do a skill transformation. I would say that 95 percent of the time, it's going to go well because the person is going to see that their new role is more valued and maybe more welcome than their old role of focusing on detailed budgets.

Everybody wants to be useful — well, not everybody, but most people. If you show them a way — again, I think that you want them to have personal responsibility, and they want to see that what they're doing is making a difference — if you show them a way to make a difference, they're going to embrace it.

SP: You replace the budgeting with something else that needs to be done in the future, but adds greater value. You don't give a variance explanation on the past, but instead learn from a variance explanation to see what could be done to improve the future …

Martin: Another concept or term that I've coined is what I call the 75/25 rule. I don't think that it applies to every employee, but I think that it works for most. We want people not only to have role clarity and personal responsibility, but also to be challenged. So, we want the employee to feel about 75 percent comfortable and competent in what they're doing, and about 25 percent in new territory.

SP: That's an interesting concept …

Martin: Clearly you can't literally quantify it like that, but the point is that if you get up to where you're 90 to 95 percent confident in what you are doing, and you're doing the same thing every day, day in, day out, throughout the year, it's pretty clear that you would feel good about your ability to perform in your job.

But the fact is that you're not being stretched, you're not learning, and the chances are that your career's not changing much. By definition, maybe you're going to look outside. It may be that you're just not being utilized to your full extent by the organization.

If you go down to what I call the 50/50 zone, that's generally the high-stress area. People can operate in it for a while, and that is 50 percent you know what you're doing, 50 percent you're flying completely seat-of-your-pants, learning on the job. Generally, that will tend to be too stressful and will burn people out.

If you can get people in that range where they're 75 percent “I'm confident, I know what I'm doing” but 25 percent “I'm delivering that new presentation, I'm doing that new analysis, I'm working with that new business head, I'm being stretched,” you're going to feel like you're developing, you're learning. You're probably going to move up in the organization to the extent that you can, and I just think that employees are going to be happier.

Some people don't like any change and so forth, and I understand that there are individual differences. But if you start with the approach that if you look across your people and can't articulate that they are being stretched for that 25 percent, then you shouldn't be surprised if people leave the organization.

SP: In closing, what is it that I have heard you say about “doing the deal”?

Martin: This goes back to Marc Shapiro, who, again, was this very analytical person at Texas Commerce. Marc asked, “Do you know the first rule in finance?”

Of course, we were all thinking that it was something around weighted average cost of capital, or doing all positive Net Present Value projects, or some such thing that you learn.

But he said that the first rule of finance was to “do the deal.” It took me a lot of years to articulate my own idea of what he was really talking about, but at least I think I understand now, which is that the role of finance is to figure out what needs to get done, and knock down the obstacles and make sure that it happens. To free up resources, you also need to figure out which things shouldn't be done and try to stop them. It doesn't mean to do everything, because if you just take it in its simplest form, it means to try to do everything all at once all the time, and that's not the point. It's about taking an active role in prioritization.

I think that you have to take a much more activist role and figure out maybe the one decision or project that really does dominate, or maybe it's one or two that you want to get down to. But you have got to go beyond identifying the risks (which is the typical role of finance) to classifying the criticality of the risks, trying to figure out ways to mitigate those.

You need to go on to that next step in discovery on the project, to help set a framework for moving forward. And if one of your initiatives or projects dominates, you have got to figure out a way to help people make it happen. Again, you need to go back to “do the deal.”

SP: Dave, thanks for sharing your experience with us and giving us these key principles to help create a more activist role for finance.