A recession and global uncertainty have forced companies to look inward as they head into 2002. Finance executives are leading this organizational self-analysis by revisiting strategic plans, expanding cost controls, examining risk management activities and strengthening internal communication.
December is usually a time for finance executives to gaze into the future to forecast and quantify expectations. In light of the troubling economy and global uncertainties accompanying the battle against terrorism, many CFOs have set aside their crystal balls in favor of mirrors. Organizations are taking a good, hard look at themselves, and finance executives are playing a critical role in focusing the inward analysis on cost management, strategic planning, risk management and internal communication.
"As the corporate world begins to focus inward on operations, finance grows in priority," says Bruce Bishop, vice president of finance for Changepoint Corp., a business process automation software provider based in Toronto. "In the not-so-distant past, the emphasis was on sales and marketing. But as the economic conditions turn, the finance department grows in importance because we drive the business toward hitting its targets, in part by providing good information."
Tactical vs. Strategic Cuts
Many enterprises, particularly those bruised by the dot-com bust, began attacking costs earlier this year. "Many companies are going through retrenchment," says Mike McKeon, vice president with management consulting firm Booz-Allen & Hamilton in New York City. "As a result, they're focused on tactical, P&L management with an extreme focus on cost management and right-sizing their businesses. In the manufacturing sector, for example, I would think they're trying to manage their inventory levels and their raw materials very carefully."
But an exclusively tactical approach to cost management has its limitations. Of the three areas of cost management McKeon identifies the businesses a company pursues, how the company organizes its businesses and how well those businesses perform he says that most organizations give short shrift to the first two. "Most of the CFO's attention focuses on how well the business is doing, which is the easy stuff to deal with, quite frankly. A lot of the cost-cutting is simply the process of looking at productivity statistics and cutting heads, cutting branches or cutting products," he says.
Instead, McKeon suggests that CFOs and their fellow executive team members analyze the businesses their company is pursuing and how those businesses are organized. Then they can determine whether each venture will be at a competitive advantage when the economy recovers. "If not," he adds, "you need to decide whether to invest more in those businesses or to pull back. You made the easy cost cuts, now sit down with the CEO and figure out whether you're in the right businesses and how you're organized to do those businesses."
Technology, which most companies still have a difficult time tracking and managing, presents an additional challenge when it appears in the cost-management crosshairs. "Some of the belt-tightening has resulted in deferrals on spending in the IT area," says Mike McCracken, president and co-founder of Tatum CFO Partners LLP, an Atlanta-based company that provides permanent and interim CFOs and CIOs to organizations. The company's 250-plus CFOs regularly exchange e-mails to help resolve difficult problems at client companies. Most of those collaborative conversations, McCracken reports, center on alternatives to financing and IT management, which he expects to remain a compelling topic for finance executives in 2002.
As a percentage of total expenditures, IT costs rose sharply in the past decade because enterprises were establishing vibrant technology infrastructures. Yet many organizations fail to maximize the intelligence contained in their IT systems, instead focusing on the more immediate benefits of process automation. Don Schulman, partner and global leader in the financial management services practice at PricewaterhouseCoopers Consulting in New York City, says companies' IT systems can provide information that drives profit improvement. "Which products should you keep? Which product should you get rid of?" he asks. "Let's transform the business to drive cost out and actually take huge chunks of work away from the business. People say, 'Well, isn't that process reengineering?' But what we're doing is letting technology give us information to fundamentally change the strategy of what business we're in."
Plan Your Position
The strategic approach to cost management that McKeon and Schulman recommend naturally leads to revisiting the organization's long-term plan. This analysis should answer one underlying question: How are we positioning ourselves to achieve competitive advantage when economic conditions improve?
"Make the right bets and appreciate the business cycle your company is in, and determine whether the business cycle of your company is consistent with the economic cycle," says McKeon. "Figure out which stage your business is in [entrepreneurial, growth, maturity or decline] and how the current economic conditions affect that stage, and then take action accordingly," he adds. "There is going to be some fallout in certain industries. So think more strategically while all of your competitors are reeling from the retrenchment. It's all about positioning yourself for the recovery."
McCracken agrees, noting that most companies remain focused on tactical belt-tightening. "Smart CFOs are revisiting the strategic plan," he says. "They're reviewing the economic model the entity is operating under and determining if that's an appropriate model or if it has to be modified because of ensuing market conditions."
Enterprise Risk Management
One of the most gripping market realities underscored by the Sept. 11 terrorist attacks is the need for sound risk management processes. Much of the past few months' risk-management discussion has centered on technology exposures, but organizations are also recognizing that some interdependencies the attacks revealed signal the need for a more expansive approach in preparing for disasters.
Christopher J. Leach, a partner with accounting firm Grant Thornton in Chicago, suggests that CFOs hone in on three broad areas of technology risk management in 2002: business continuity planning, network security and privacy. Due to the terrorist attacks, Leach says, senior managers now want to know if business continuity or disaster recovery plans exist. "We had plans in place already," says Changepoint's Bishop. "The attacks motivated us to make sure we could execute the plans and to ensure that we have the backups necessary to continue the ongoing development of products and support of our customers."
The importance of network security, which has been rising on the corporate radar screen since the advent of hacking and viruses, should further increase in 2002. "There's also increased awareness that we're at risk, to a certain degree, of cyberterrorism," says Leach. "Will that be the next wave? I've been asked that question several times. I don't have a crystal ball, but certainly we have some exposure there."
On the privacy front, recently enacted legislation in the United States, such as the Gramm-Leach-Bliley Act and the Health Insurance Portability and Accountability Act (HIPAA), will have specific compliance impacts in certain industries (financial services and health care, respectively) and broader implications for other businesses as customer information becomes more closely linked to company performance.
Beyond these technology risks, finance executives see a greater need to orchestrate risk management strategy across and, increasingly, beyond the organization. "That's one of the things Sept. 11 did," says John A. McCarthy, senior manager, information risk management practice, at KPMG LLP in Washington, D.C. "We saw interdependencies that no one anticipated."
These unexpected exposures indicate the benefits of a holistic approach that McCarthy refers to as enterprise risk management. His division of KPMG analyzes risk across four categories of resources: people, processes (including facilities), technology and information. "You map the company in those four areas against the risks," he notes. "When you add up the risks in these vectors, you get a sense of where the organization needs to place more emphasis in terms of its business continuity planning and where it needs to invest more resources."
Most companies can identify and control the exposures they face day to day. "What we cannot control is when the external environment becomes chaotic, for whatever reason whether it be a major hurricane that wipes out three states in the South or a major regional power outage in California or something like the World Trade Center attacks," says McCarthy. "So the issue becomes 'How do I stabilize my people, processes, technology, data within that context and keep my business moving forward? Or if I can't keep it moving forward because it's so chaotic out there, how do I begin to stabilize my internal environment so I can bring my processes back online when the time is right?' " Answering those questions requires consideration of possible losses, such as missing employees and survivors dealing with the shock of lost co-workers, that don't exist in most contingency plans.
Of the four resource categories McCarthy identifies, people and processes need the most attention, he says, because those areas are most likely to contain interdependencies, including many that stretch outside the company to other parts of the value chain. "If Sept. 11 didn't happen, I think we'd still be making half steps in risk management," he adds. "Now we have an opportunity to jump ahead three steps. CFOs and CIOs have a keen understanding of what risk management is about, and they are going to have to be the leaders and the catalysts in their organizations to help the CEO make the right choices in terms of what those next three steps can be."
Tell It Like It Is
CFOs and other finance executives might not feel comfortable in the role of communicator, yet internal communication goes hand in hand with reducing costs, rethinking strategic plans and broadening risk management activities. "I think we're seeing CFOs emphasizing the importance of communications and keeping individuals within the company informed," says McCracken.
"For example, one company reduced management and employee salaries across the board. But they told them that a) we believe this is a short-term change; b) we have a great product; and c) we have a great company, so this is just a matter of going through a short-term belt-tightening. Keeping employees informed can help improve retention programs," McCracken says.
Better communication can also improve an organization's likelihood of hitting its numbers and help it cut costs. "We now hold a weekly management meeting where we give the team a look at the quarter-to-date spending each week," says Changepoint's Bishop. "That gives them a forecast of where they'll be on each line of expenses for the quarter during the quarter. So they're able to make timely decisions that have a direct impact on our spending."
Schulman identifies communication as one of the CFO's top three priorities for 2002. The most immediate opportunity in this arena is managing distance. "Can you use e-learning or videoconferencing to manage distance in a way that enables fewer employees to get on a plane and in the rental car?" he asks. "The other hot topic is portal management. Everyone is putting up CFO portals, but how do you get down to one kind of infrastructure on your enterprise portal to eliminate duplication and drive out costs? It's about leveraging the Net to communicate with each other."
If executed successfully, each of today's top corporate priorities cost management, strategic retrenchment, risk management and communication serves the immediate benefit of reducing costs and the longer-term benefit of sowing the seeds of future competitive advantage. Finance executives who hold up a mirror to their organization and direct the focus of the inward analysis will help their company prosper in 2002.
Where are leading finance executives concentrating their brainpower in
the next several months? Business Finance readers weighed in on the most compelling topics in a third-quarter survey. Here's how their priorities stack up:
1. Budgeting/financial reporting
2. (tie)Corporate finance
4. Earnings management
5. (tie)Accounting software/technology
9. (tie)Career management
Customer relationship management