How do you trim finance costs when you’re one of the biggest hospitality companies in the world, you’ve had years of explosive growth, and your operations range from retail outlets to restaurants to casinos to massive, multihotel developments? It can be done. Rick Arpin, senior vice president/corporate controller at MGM Resorts International, tells the story.
Steve Player: Could you provide some background on MGM Resorts?
Rick Arpin: We’re one of the largest gaming companies in the world, operating casino resorts in Las Vegas primarily, but also in Reno, Nevada; Biloxi, Mississippi; Tunica, Mississippi; and Detroit, Michigan. We also have investments in other gaming resorts in Macau, New Jersey, and Illinois. In total, we generate about $6 billion in revenue and have about 60,000 employees.
SP: We’re currently going through a rough patch in the economy. A lot of people have shifted their discretionary spending. How has this impacted the gaming industry?
Arpin: This industry has been relatively hard hit. The hospitality industry in general has struggled, but gaming, in particular, seems to have been at the center of the recession. We’re subject to leisure discretionary spending as well as business discretionary spending. This is unlike the last major recession; even with 9/11, that was more of a blip. Back then, we were much more focused on the leisure side, but over the past 10 years Las Vegas, in particular, has become very dependent on the business side. This was good when people were traveling for business, having conventions and meetings, and business was growing. But it almost screeched to a halt with the depth of the recession. Businesses really turned that spigot off pretty fast.
On the leisure side, we’ve asked when those folks are going to start spending again, or if they already have started spending in certain segments. It seems as though some of the luxury retailers are starting to see a little bit of life, and even some of the hospitality companies are seeing some light. We’re certainly seeing people travel more this year than, say, last year. But spending is still a bit of a challenge.
SP: You have gorgeous integrated properties here in Las Vegas. Does MGM own the whole shooting match — the rooms, restaurants, retail stores, etc. — or are those leased out to other companies?
Arpin: Basically, we own and operate all of our own hotels. We started to look internationally at more of a management model, like the typical hospitality company, but we do very little of that. We’re looking to expand that. But here in the U.S., with the casino resorts, we own and operate the resort itself.
SP: I’m amazed by the diversity of businesses — the hotels, the health spas, the clubs. You’re the landlord of real estate, but you are often also the tenant and operator …
Arpin: When people ask me how complex finance is for us, I say, “Well, we’re one of the largest hotel companies in the world. We’re the largest casino company in the world. We’re one of the largest restaurant companies in the world. We’re one of the largest entertainment companies in the world.”
This combination can get into some strange business transactions. We own half of CityCenter, which at $9 billion is the largest privately funded construction project in U.S. history; it’s a 68-acre development featuring four resort hotels, multiple restaurants, and retail. The mall there leases space to us as MGM Resorts for a restaurant. So we’re paying ourselves, in a way. And we then have someone manage that restaurant for us on our behalf!
SP: It’s kind of mind-boggling. As corporate controller, how do you keep up with all of that diversity?
Arpin: In the industry in general, there’s some complexity on the business side. One piece of it is that in those multiple lines of business, you’ve got multiple systems. Unlike a single-line-of-business company, where maybe they’re fortunate enough to have an ERP system that runs the whole thing, we’ve got a lot of different source systems. We have to accumulate that information for the back-end accounting and do something with it. So what you end up seeing are a lot of bolt-on tools for those systems to help us get data pulled out and put into a usable format.
The systems may be very different for, say, food and beverage analytics — which are extremely important these days, when you’re trying to scrape every percentage of margin that you can — versus the hotel side, where a yield management system is needed to make sure that you’re doing that right.
The one offsetting factor for us is that the general industry accounting isn’t terribly complex. Compared to some financial institutions, for example, where they’ve got derivatives and all those crazy business models that really challenge the back-end accounting systems, ours is pretty much debits and credits. It’s just that there are a whole lot of them, and they’re from multiple sources.
SP: Recently, you moved to a shared services model. What was the strategic emphasis behind that?
Arpin: About 7 or 8 years ago, our company realized that we, and probably companies in our industry in general, were behind the times when it came to certain back-of-house operations. One of the catalysts for us was that we have grown through acquisition. In 2000, MGM Grand and Mirage Resorts merged, and then in 2005 we purchased the Mandalay Resort Group. So what was at one point one company with really one property, the MGM Grand, is a much bigger organization today with 15 properties.
Over time, we’ve realized that there are better ways to do some of the back-of-house functions, including finance and accounting. Having said that, we’re a little bit conservative in terms of taking on new initiatives, particularly because our industry is unique. Even in an area like accounts payable — which was our first foray into shared services accounting and, generally speaking, is relatively homogenous from industry to industry — there were unique factors. With all of the regulations, the multiple lines of business, and some system issues, we certainly had challenges.
Management took the approach of saying, “Ninety percent of the Fortune 500 companies are doing this. It’s got to be okay to do it. Let’s try it.” And I think that this was a good entry for us to start thinking about shared services.
This was around 2003. It took us a quite a while, probably until last year, to formulate what shared services really means to us. It’s about changing the way we do business and getting transactions to be merely that — transactions. It’s about having some people process transactions and then letting others deal with customers and focus on core activities. How do you provide these services in the most cost-effective manner with the highest quality? How do you improve the data that’s available to the business units? And ultimately — though we haven’t done a lot of this — how do you source those processes? Our shared services have grown from this start in accounts payable.
Around 2007, we began to grow this area. There was a group of us in the company who said, “There’s got to be a better way for us to do finance in this company. We’re spending too much money on finance. We’ve got to figure out a more efficient way to do accounting. It just can’t be this hard.”
SP: What led the group to this conclusion?
Arpin: One intangible was the feeling that ever since the 2000 merger of MGM and Mirage, we hadn’t fully leveraged some areas, and one of them was clearly finance and accounting. As the company got bigger, people in corporate F&A were feeling some pain because instead of asking three or four people for information every quarter — being able to call them on the phone or e mail them, accumulate the data, type it into Excel, and voilà, there’s your report — all of a sudden you’re calling 15 people and realizing, “This is getting ridiculous. Why do I have to call 15 people to get this one number?”
We went through a formal benchmarking exercise. We were spending 1.2 percent of revenue on finance, and we knew that the benchmarks for best practices were definitely lower than that. Of course, where we can get to versus best practice is a little different for us, given our industry’s special factors, but we knew that we could do better.
SP: How hard was it to merge the cultures?
Arpin: Well, we do a lot of change management in our world! We’ve got some pretty strong executive support, which definitely helps. It comes from our executive management, from our CEO to our CFO, and some of our operations folks have also provided strong support. We do it with a lot of education in our business.
One thing that we’ve tried to emphasize with our business units is that there was lots of pressure on them to cut costs in 2007, 2008, and 2009. A lot of it was, to some extent, not very organized. It was: “Hey, cut 10 percent! Cut 20 percent!” With shared services, we were offering them a much more programmatic approach to cutting 10, or 20, or 30 percent of their costs. We had a program in place: “Here’s where we are; here’s where we want to be.” It’s much more systematic than some of the directives that have been handed down in terms of cost.
SP: You said that you started out at about 1.2 percent of revenue. Do you have a feel for what you’ve been able to achieve?
Arpin: We’re now at 1 percent of revenue; that’s about a 17 percent improvement, which is even more impressive considering that revenues are down about 15 percent since 2007. The key there is the things we’ve done since we did accounts payable. Both payroll and the nongaming revenue are great examples of areas that were almost entirely manual until about a year and a half ago and are now largely automated. It’s just enormous, the difference in the way we process transactions.
Can we make any additional improvements? Absolutely. There’s more to do, but getting from everyone working literally in paper and, if they were lucky, Excel workbooks to actually having systems take on the first chunk of our transaction processing was a huge, huge step for us.
SP: What’s been the reaction in the field?
Arpin: Well, at first it was almost like the seven stages of loss! There’s denial, there’s anger, etc. But my charge is to articulate the vision, to explain what our purpose is and why we’re here, and to educate them about the big picture of what this means to us.
There’s a life cycle to it. Everyone in the company pretty much thinks that our AP process works just fine. Seven years ago, that wasn’t the case. We did nongaming revenue as a company in 2008, and just in the last few months we’ve gotten to where people are feeling comfortable with the information coming out of that group and the end results in terms of revenue reporting.
SP: What are some examples of better insight?
Arpin: Here are a couple. One is in accounts receivable, looking for a working capital benefit that we haven’t realized yet; we’re still working toward it. When we look at what we go through to get a bill out, resolve any disputes, and collect on it, it’s a process that’s quite a bit more extensive than what we see others in the hospitality space doing. We think that there’s significant room for improvement there.
The other one is a kind of operational impasse. When we started doing this — processing transactions in a consistent manner, in an automated fashion, from one location — we realized that some of the hindrances had nothing to do with accounting. They had to do with the upstream processes that were feeding the information.
Now, it can be a challenge to standardize in a very customer-driven environment where there are unique things that happen because customers want to be very unique. But we’re trying to get consistent information in a consistent format. We’ve started to push enhancements back up to operations, and we work with them to get the entire end-to-end process — from the time a customer walks in the door — to be more efficient.
An example of this would be in restaurants and retail spaces where employees have cash banks and they’ve got to use a register. This process was essentially different in almost every property we owned. Here on the Las Vegas Strip we have 10 properties, which can mean essentially 10 different processes of how to issue those banks, how to get them back, how to count them, how to record them. At the back end, seeing it 10 different ways, we weren’t able to process it in a standard manner.
One of the responsibilities that our revenue accounting group has is to give information back to the operators about those cash banks. Was someone over or short? What happened with those banks? But it was a case of garbage in, garbage out. Here’s an operator trying to make a decision — literally, it could be about hiring or firing someone because of their bank status — and they don’t have the information to do it.
So we loop back around and say, “Well, here’s the root cause of why that is. You know, we could work with you to get the process in place. We now have that.” When they started getting into it, they realized that they’d have better information.
SP: How do you do planning today?
Arpin: We have one system that we use for planning, and we deploy it relatively consistently across the enterprise. But the way the plans are developed is up to each business unit. They all have their own preferential quirks, although ultimately there’s that squeezing where you say, “Here’s the corporate model you need to relate to.”
The biggest problem with planning is simply that no one ever seems to trust the plans that other people make. Corporate doesn’t seem to trust the plans that the properties make, and vice versa. The other thing is corporate finance’s sense that, “Gee, we always thought that we were not really that good at forecasting,” and boy, the last few years have certainly proved it! I don’t think that anyone could have forecast this economy.
But we’re really thinking about what can we do as a company to say, “You know what? Forget even trying. If forecasting’s going to be that hard anyway, why spend that much time on it? Let’s just pick a few key things at corporate that we think are important and use them as drivers and just get the budget out in that way.”
SP: How long does your typical planning process take?
Arpin: From an annual budget perspective, it’s usually somewhere between 60 and 90 days for 95 percent of the process to be done. We’re calendar year. There’s about 2 months after we’re done with the process before the board will actually approve it. What goes on in between there is not a lot of work, so I’ll discount that. But the process is usually August, September, October — a 90-day-max process.
We look at some key drivers around, for instance, visitation, and key stats around conventions. And in the meantime the properties have been working on their own specific models. They generally will do some strategic planning–type process that hopefully drives some of the individual assumptions they make in the actual budget, and they also do a capital budget at the same time. Then corporate will take their hatchet to the capital budget, and there will be the comments, and the budget will be done in October.
SP: How many times do you go back and forth?
Arpin: Usually just once or twice. And then reforecasting can happen as frequently as monthly. The last couple of years, it’s been pretty frequent — not every month, but there can be analysis happening twice a quarter. Formally, we’ll try to reforecast once a quarter.
SP: How far out does that go?
Arpin: It’s usually looking at some near-term period. Let’s say we’re in March, and we’re about to do an earnings call. We’d like to have some sense of what the second quarter looks like. We’ll be looking at that quarter. The spreadsheet will have the full year on it, but we probably haven’t done a lot of work on what the back half looks like at that point.
The operation doesn’t lend itself to great visibility in the operating environment. The average booking window these days for a leisure traveler, for Vegas, is something like 3 weeks. It’s shortened because of the recession, but even in good times it’s maybe a little over a month. It’s not a long window to forecast.
SP: The perception is, “I can always get a room in Vegas.”
Arpin: It’s a destination resort, but there are some destinations where you’ll plan it 6 or 7 months out: “Oh, I’ve got that Hawaii trip in December.” In Vegas, it’s more like: “Oh, let’s go to Vegas next weekend.”
SP: Have you ever considered eliminating the budget?
Arpin: I’ve thrown it out as an idea, but I don’t know if we have ever seriously thought about it. I know that our corporate CFO and our corporate COO have both in this last couple of years focused on two things: one, the lack of accuracy in a budget, what that means for us, and two, the need to more regularly reforecast. They’re thinking, “Well, if we want to continue to do that, we ought to have a better process in place to do it. That basically means a rolling forecast.” They get the concept, and they understand why that would be useful.
And they would see that as saying, “Well, why would I need a annual budget?” Because even when times were good, almost invariably by February or March we were all complaining about how the budget was obsolete.
SP: Give us a little background on how you got to this position of senior vice president and corporate controller. You started your career at Arthur Andersen as an auditor?
Arpin: Yes. I started as an auditor and was there about 7 years before moving over as a manager. The Las Vegas office of Andersen had pretty dominant market share. We had a lot of the big gaming clients. We were also able to do some more consulting-type work on the process side of businesses, as well as the corporate finance side. So for me, it was a perfect jumping-off point into this company because I had exposure to those areas versus just that narrow audit view into a company.
SP: Did you come into the shared services responsibility at that point?
Arpin: No, I came into the accounting and corporate finance areas. With my background in public accounting and dealing with processes, I was involved at the outer fringes of what was going on with our accounts payable.
SP: How did you end up leading MGM’s shared services efforts?
Arpin: I mentioned that we brought AP into the shared services environment in 2003; between 2006 and 2009 was when we brought in payroll, general accounting, and nongaming accounting. We started to realize that this organization was going to get big fast, and there was no reason that it should report to two or three different places. It needed to have a unified vision of finance.
The question was to whom it was going to report. We ultimately decided that it made sense to put it in the accounting space, so the person I report to is our chief accounting officer, and he reports directly to our CEO. I was given ownership of it — not that I had any shared services background or skills, but I think mostly from the standpoint of having lived through 7 or 8 years of trying to improve finance. I was glad to take it on. It’s not my specialty, although I’ve learned a lot in the last 9 or 10 months about what shared services really means and how to implement it correctly, and I’ve tried to take all of these lessons and start applying them.
SP: What advice would you have for young people starting out in finance today?
Arpin: Well, I would say get as broad an experience as you can. If you’re an accounting graduate, you should get your CPA. I always encourage this because I’m a CPA. But I would say get exposed to as much as possible, whether this means spending a year in audit and then asking for a transfer to tax, or getting in on consulting assignments.
For anyone who’s outside the accounting area, I always encourage them to talk to accountants and hang out around accounting because it’s good to have that language and that skill set.
The way things are going in the world, you’ve got to understand something about systems, whether you’re a technical person or not. I’m not a technical person, but you have to understand how the systems work so that you can figure out how they’re going to get you the information you need.
SP: What do the next couple of years look like for you and MGM?
Arpin: Well, we’ve got general challenges still with the economy; we’ve got to continue to work through that. I think that this challenge has morphed into one of motivation. If this were some kind of novel, we would come out of this recession and everything would be great, we could all get our 401(k) match back and get big bonuses and hire a few more people. And we could all just take a breath. Unfortunately, we haven’t been able to take a breath, and yet we’ve got to somehow find a way to keep people pushing forward.
For us in finance, the challenge is to continue to find ways to improve against that backdrop of not being able to spend millions of dollars on systems or hire a bunch of consultants. And in shared services’ case, it’s the need to expand, to take the lessons we’ve learned and apply them to the areas we don’t do yet.
