Asia vs Headquarters: The View From the West

It’s not easy being Nick Bray these days. The UK-based CFO of global business software company Micro Focus has helped oversee the acquisition of seven companies in the past four years – five of them in the past 12 months, including Borland Software and Compuware. In the middle of it, CEO Stephen Kelly resigned and a replacement has yet to be named. “I’m wearing two hats,” says Bray. “I’m effectively chief financial officer and executive leader of the team.”

 
Are the acquisitions and the company’s robust growth targets causing friction between the central office and the regions, specifically in Asia? No, says Bray. “We have a planning process where we get together to look at what we think is reasonable for each of our product line in each of our countries and there’s always some conversations around what be done and what can’t be done.”
 
In Singapore recently, Bray spoke with CFO Innovation’s Cesar Bacani about the challenges and rewards of integrating the various acquisitions, his plans for the finance function, the relationship between Asia and headquarters in the UK, and other issues.
 
There's a huge number of things going on at Micro Focus.
You can imagine as a team how busy we have been, not just in getting the deals done. In all five acquisitions [over the past year], we’ve effectively removed the back office function from the acquired company. We’ve closed their systems down, we transferred their data across to Micro Focus.
 
We’ve now reached the stage where we’ve got an internal programme running throughout the entire company, called strengthening the foundations. We’ve seen tremendous growth in both revenues and profits. We have taken the company from US$143 million in revenues four years ago to significantly in excess of US$400 million now. We had profits of US$25 million four years ago; now the market consensus is it would be more than US$160 million. We’ve also taken our margins from mid 20% up to 40%.
 
Now it’s time to just look at the whole company and ask, how do we improve this even further? Because whilst we have individually integrated seven acquisitions, what we’re now doing is look at the whole thing and work out how we improve the whole company once again. It’s always a continual process of continually looking at what we have in the company and working out how do we improve it further.
 
How is the integration process coming along?
We very much look to make sure that, as we go from 400 people to 1,500 people, everyone feels part of the same team, works the same way, has shared principles, shared cultural values. We very much look to get everyone within the Micro Focus culture. When we make an acquisition, we bring all the people into the Micro Focus contracts. We brand the acquired company Micro Focus. We have something internally we call cultural values, which is how we operate. So that’s a very important part of what we do.
 
One of the key things at Micro Focus is our focus on leadership. We find that if you get the right people with the right leadership skills, if you foster and train them in the right leadership skills, if you get the leadership right, typically you’ll get a very good company. So we spend a lot of time and effort and investment on leadership training and cultural values, on what it means to be with Micro Focus. That’s a very important part of what we do as we build a strong company.
  

ASIA VERSUS HQ

Let me ask you about Asia specifically. I’ve heard complaints from Asia Pacific CFOs and controllers about friction with headquarters because of what they see as unrealistic expectations regarding revenue and profit growth in China, India and other places in Asia. The U.S. and Europe are doing badly, so Asia is supposed to make up the slack. You’re the global CFO holding office in the Newbury headquarters. What does the situation look like from your end?
I can completely understand that [happening] in a lot of companies. You have [headquarters] saying we want 20% growth, and the region managers say the best they can do is 10%. You get into the politics of the company.  
 
Thankfully we’re not in a situation where our U.S. and UK markets are going down and we’re having to rely only on growth from China or Asia Pacific. We are seeing growth in most countries, including Asia Pacific, Australia, Singapore, and so on. In our last reported results, our revenues have grown by over 40%, half-year and half-year, and our profits are up by around 30% half-year and half- year.
 
People are looking to reduce their costs and get the most out of what they already got, rather than throwing away their existing systems and buying new systems. That’s really playing to our strengths [as a provider of applications modernisation solutions]. So we are still seeing growth in the vast majority in our countries around the world.
 
Still, we very much look to run the company on an inclusive basis. I spent a week out in Asia Pacific recently. I spent a day in Japan, two days in Australia, a day in Singapore with our team down there, meeting all of the senior leaders, getting their inputs.
 
Those senior leaders are very involved throughout the planning process. They come here to Newbury, they get involved with our planning, with what we’re doing [at headquarters], they attend board meetings. We really try and work as an inclusive team. So rather than just people in corporate saying, hey look, we want growth, so just go and do this. We really do try and understand what’s going on, look at all of the various interactions of the geographies in the regions and make sure we work as a team.
 
In terms of setting targets, is there an edict from Newbury saying this is what you need to do, go ahead and do it, or are there negotiations between the region and headquarters about revenue and profit targets?
It’s neither. I won’t call it an edict or a negotiation. We have a planning process where we get together to look at what we think is reasonable for each of our product line in each of our countries and there’s always some conversations around what be done and what can’t be done. Typically we set ourselves challenging targets. We make sure everyone agrees that whilst challenging, we’ve got a good chance of achieving these targets. And then we make sure that these targets are correctly allocated around the group, and that everyone’s working for the same cause, for the same purpose, to do the very best for the company and the shareholders.
 
Our top leaders, whether they’re based in the UK, in Singapore or in the US or wherever they may be, fully recognise that we run the company on behalf of shareholders, for the likes of Black Rock, Standard Life, Barclays . . . Everyone has to recognise that our shareholders always have a choice, just as we have personal choices to where we invest our own money. They will invest in the company that they think will deliver the greatest shareholder return over time, both in terms of share price increase and in terms of dividend returns.
 
If you look particularly at software, what you tend to find is that software companies of small to medium size that don’t perform, shareholders don’t invest in you. Typically your share price will drop if you’re public company and typically what that leads to is you’d be acquired by someone else who will do it better than you do. So if there’s one thing that always drive the team, it’s that we fully recognise that if we don’t perform, our shareholders may choose not to invest in our company. Ultimately that will lead to a loss of the independence of Micro Focus if it is acquired.
 
It would help if the employees themselves, including those in Asia, are shareholders. Then their interests will be aligned with the company owners.

Yes, many of our employees have share options; they have shares of their own. So clearly we’ve done well for our external investors, but also for our internal employees as well. 

  

FINANCIAL MANAGEMENT
Is financial management done centrally in Newbury?
Four years ago it was all run from the UK. When we were a US$140 million company, we were of that size where the vast majority of things can be run from the UK. As we’ve grown, we are maturing as an organisation so we’re devolving responsibility down to the regions. Rather than just saying you will do this, we work together to make sure we achieve the right results. I think with any company, particularly a company like ourselves, who have gone through such a rapid growth profile, you’ve got to learn and mature along the way to make sure you can deal with different stages of a company’s development. 
 
We have devolved financial responsibility to each of our controllers that’s down at the regions. We’ve got a very strong controller who runs the US operation, France, Germany, UK, and the same now for our Asia Pacific region. We’ve just hired a financial person into Singapore. Borland actually has around 70 people in Singapore, so Singapore is now a major site for Micro Focus.
 
We always recognise that we have to make sure our control environment is made right, that the governance structure is correct, and that we’re achieving growth on very solid foundations. The control side reports directly through to our group financial controller, based here in the UK. We’re always looking to keep the right matrix, the right framework to deliver maximum growth, but at the same time we want to ensure we have the right segregation of duties, the right controls, so that the whole company is always in balance effectively.
 
But we also want the regional team to get much more involved not just in the transaction processing of the region, but also adding the value to the senior management team down there.
 
How big is the finance function?
About 80 people around the world. Our aim would be…if we can continue at the growth trajectory that we’re currently on, let’s say over time, if we can double our revenues from where we are today, what we are looking to do will be to handle that growth in revenues but with only a very small increase in people as we further leverage our system as we improve our processes. We can leverage our back office team.
 

Would you say you have a world-class finance function?

There’s always ways that we can improve. The answer is definitely no. We know we can significantly improve on what we do today. However, in terms of what we’ve done so far, we’re pleased with our performance. The profit-loss result and the shareholder result will show that. But we can always improve.
 
We probably have too much of an emphasis on transaction processing and controls, as opposed to adding value to business functions. So our focus over the next year or so is to work on not loosening our control in any way, but just being more effective on how we do things. So we will be working on improving our systems, improving our processes, and actually using that time we free up to do more added-value things for the business. More in the budget process, more in the analysis, these sorts of things.
 
Is 80 in the finance function the optimum number?
It’s not too many. What we’ve done as a percent of revenues, we have reduced our cost to total revenues. As revenues have grown, we have kept the team at a similar size. What I would like to see is that, as we continue to grow the revenue significantly in the years ahead, we’ll see some but not tremendous growth in the finance team. We’ll be putting a lot more focus into our systems and processes to work on our efficiency and to make sure that the core competencies of the team are as good as they possibly can be. Our time and effort are going into more added-value areas such as strategy and budget and these sorts of things.
  

VALUE-ADDED FINANCE

How difficult is it for your finance people to shift their attention from transactions to strategy and other value-added areas?

You’re actually right, it’s very difficult for somebody who’s working on general ledger or processing to go into or start doing budgeting or value-added analysis. Let’s say you have ten people on the order-process team. What I’d like to happen is, as the revenues grow, those ten people still can cope with the volume. If we can do that, what it means is that we can hire new people for the added-value roles, rather than having to hire more people to do the transaction work, because we’d get that more and more efficient.

 
The aim will be to really improve the efficiency of the control environment and the transaction process work, so the new people that we do hire, we can hire into those value-added roles. But of course, we do have a number of people who we also train up. If some of those [order-process] people can move into those [value-added] roles, then clearly we’d rather have that rather than hire new people. 
 
OUTSOURCING
Would you be looking to outsource some processes? That will free up your transactions teams for more value-added finance work.
The vast majority of things we still do in-house. We will look to outsource certain areas. But it’s one of those things – certainly for a company our size, it’s whether you have critical mass and enough scale to make outsourcing worthwhile.
 
How about shared services in-house?
There is, yes. For example, all of our audit processing happens in two hubs, one in Newbury and one in Rockville in the U.S. We have group shared services all around [audit] processing around HR, legal, these sort of things. What we haven’t done as such is take the next step and outsource any of our back office processes to an outsourcing company in India, for example.  But as we continue to grow, and continue to get more efficient and improve our processes, these are the sort of things we will be looking at.
 
Do you anticipate going forward that perhaps even R&D will be outsourced?
As a company our R&D team is vital. Outside of our people, the key strength of the company is intellectual property and software. So it’s essential that we keep our R&D team strong, motivated and within the company. The real hubs of R&D, it’s Singapore, Sofia [in Bulgaria] and Newbury in the UK, and Detroit and also Rockville in the U.S. 

 

Read more on
M&A

Suggested Articles

Some of you might have already been aware of the news that Questex—with the aim to focus on event business—will shut down permanently all media brands in Asia…

Some advice for transitioning into an advisory role

Global risks are intensifying but the collective will to tackle them appears to be lacking. Check out this report for areas of concern