CFO of the Year: What I Learned in Four Decades
As he prepares to retire on his 65th birthday on 9 February, S Mahalingam is confident he will be handing the financial reins to a safe pair of hands. The CFO of Tata Consultancy Services, one of the world’s largest IT solutions and outsourcing companies. has been grooming Rajesh Gopinathan, who is in his 40s, as his successor for three years now
“He is not a chartered accountant,” notes Mahalingam, who was honoured as CFO of the Year at the CFO Innovation Awards 2012 in Singapore last year. “He is an engineer- MBA. He has been in business as well and he got into interaction with finance initially by working with the chief operating officer’s office in terms of operational controls.”
If there’s anything the CFO has learned in four decades at the Tata group, it is the importance of talent management and succession planning in finance and other areas. Maha (pictured), as he is known, spoke with CFO Innovation’s Cesar Bacani in November. Excerpts:
You’ve been with the Tata group for more than 40 years. That’s a long time.
I’m a chartered accountant by qualification and I’ve been with TCS for 42 years. But in 33 of those 42 years, I was in the business. I used to write programmes, develop systems, do marketing.
I opened the international offices in the UK and the United States. Basically, I have done almost all of the functions. I looked after project delivery management. I looked after HR and training before I moved on as CFO in 2003, when TCS was planning [to list].
I don’t think anyone was called a chief financial officer [when I was doing my CA]. You used to have chief accounting officers. We certainly had controllers at that time. The finance manager and CFO as a distinct role really came in the 1980s, 1990s.
So when I moved into this function, I was a little worried as to whether I would have the capability to do the accounting. And then I realised that the function has moved on far beyond that.
Somebody else will be doing the accounting.
Right, and it’s been automated to a large extent. There is still accounting [in the CFO role] but accounting has moved quite a lot in 30, 40 years because accounting standards have come in a big way. Revenue recognition – many of those issues have become reasonably well-structured.
But our own business has grown far more complex [with 58 subsidiaries in more than 45 countries and revenues of US$10.7 billion in the year to March 2012], so therefore what revenue recognition is and other emerging accounting issues had to be really discussed.
And the CFO is actually expected to do much more than accounting.
You have to really work with the chief executive, to give the relevant drivers for running the business and making sure that you are not only helping in the planning process, but also in measuring [company performance], whether [growth] is organic or inorganic and all that. That became very critical.
Then taxation became far more complex. You not only had domestic taxation; we also have international taxation and transfer pricing, which by itself became a very critical component.
Then we had this whole governance issue, not just corporate governance but also control and compliance issues, have become a big aspect of it. Then the whole thing of inorganic moves, because we have gone inorganic [for growth and] that requires a lot of expertise not just pre-deal but post-deal as well.
In fact, post-merger consolidation is even more important.
Most difficult. How do you keep the measure of that? Sometimes we even remove the entity; the entity vanishes because it had been merged. But you still need to measure whether the deal has been successful, whether one plus one equals three or four or becomes part of one. And then you have to present all these to investors.
Before you became CFO, was somebody else in the role?
It was a chief accounting officer role. We were a division of Tata Sons. Actually the company itself [TCS] did not exist. There were parts of it that were owned by different entities. There were marketing entities that were subsidiaries of the parent company, as the division was, and therefore we had to create this actual entity.
And then we had to do a lot of new things including taxation, which used to be merged with Tata Sons’ taxation. We really had to create the finance function, which earlier was more of an accounting function.
You had to allocate resources . . .
This is a services organisation, so we don’t have the issue of capital allocation to a large extent, unlike in a manufacturing that is a capital-extensive organisation.
But you still have a lot of resources allocation. Manpower becomes a very critical resource, because that’s a capacity which provides the services. Conceptualising the business model . . . and more importantly, once we decided on the business, quickly constructing a financial measurement mechanism.
It was a big advantage, that you actually were in all of the other functions before you became CFO.
To me I would rate that as the biggest part of it. Had I been a backroom person, I think I would not have been able to counsel anyone. I would have reacted to decisions, rather than being a part of it.
In fact my successor [Rajesh Gopinathan ] is also of the same type. He is not a chartered accountant. He is an engineer- MBA. He has been in business as well and he got into interaction with finance initially by working with the chief operating officer’s office in terms of operational controls.
TCS had reorganised into a number of business units, and each business unit had its own business finance managers, really the CFO function in each of those [business units], and those people reported to him. Then I brought him to finance itself. Three years back he moved to finance [while still remaining] in charge of all the business finance functions.
He was in the interface between finance and business, because ultimately if you have to price, how do you price? And then, how do you measure project profitability? What actions do you take to improve the profitability of the unit itself?
It’s very important for him to have a chief accounting officer, somebody who’s actually specialised in the accounting discipline.
My challenge in the last 10 years has been to create this expertise. Accounting is an expertise function. There are all kinds of issues. For example, how do I get into IFRS? Originally we were on Indian GAAP and US GAAP; at the time we listed, we had given an undertaking that we will do this for six years.
Now that IFRS is being adopted in India, we might as well move to IFRS, to ensure that foreign institutional investors and so on are able to read and compare [financial statements with others in the industry]. So this [IFRS] becomes completely a specialist function, so we had to develop that, the same way global taxation is a phenomenally complex function and so we had to construct an organisation for that with specialists and so on.
We outsource internal audit, E&Y does it for us, but there is still a need to plan and coordinate that function. You have to make sure that the broken parts of the organisation are fixed quickly, permanently.
And then if you take treasury, which is currency management, funds management, we have close to over US$2 billion in cash, each of those [functions] requires specialists, and that is what we created. And overall sits the CFO.
These are Centre of Excellence structures?
Yes. For instance, accounting, it would be spread all over the place because each location, you would have an accountant. But everything has to be uniform practice. So corporate finance, which is in headquarters [in India], they are the ones who act as a centre of excellence, guiding people, ensuring that everything [is best practice].
You mentioned the importance of manpower. What are the lessons about recruitment, training, retention and succession that you have learned with regards to finance talent management?
In 2003, as CFO, I had to create the complete organisation. So I went and recruited a lot of senior people. Many of them came from within the group, which is one great advantage. There was a lot of talent, they also wanted to move up, so here was an opportunity for them.
My controller organisation largely came from the group, including my MIS [management and information system] head at that time, I picked him up from a group company. Taxation – we acquired a company and I got a lot of talent coming up as a result of it. So the layer was created by actually recruiting people.
Treasury – I had to recruit from outside. Investor relations, initially I drew from outside; the current head is someone who comes from within the organisation, he came from the consulting organisation.
Now we are in the process of developing a lot more capabilities. The biggest thing we are doing is that we rotate people around. We take chartered accountants, cost accountant, MBAs; we’d be recruiting about 40 people who will come in each year. We have a training and development programme. We place them in branches and then we rotate them to different functions within finance and post them abroad as well.
For instance, the head of Asia Pacific finance [based in Singapore] actually was working as a branch accountant. He came up the ranks in Delhi branch accounting. Then we moved him over to Singapore. We pushed him up. So this kind of continuous rotation itself is critical.
I started an experiment some years back asking chartered accountants in the consulting area, in the software development area, to move to finance for a period of time and I said they can move back. [My thinking is that] they bring in a lot of finance knowledge [as well as operational experience].
The current MIS head is a person who came from consulting. The only problem with him is that he says I don’t want to move back to consultancy.
The finance function has about 480 people spread across the world. What is the attrition rate looking like?
The attrition rate goes about close to 15%, entry level. But once they stay on for about three years, then I have better rate of attrition, at about 8%.
Is the supply of finance talent in India sufficient?
That’s a big problem. Especially if you take chartered accountants, there are lots of global companies who are also recruiting them. There’s a lot of pressure.
TCS would be following the market rate?
That would be the benchmark. But we also go in for differential pay in the sense that if I assign a chartered accountant to some other function, he might get A+ [in compensation] because I need to make ensure there is no attrition. We construct a pay package to make sure that the person will be able to stay and that the outside attraction [will not be strong].
Would TCS be recruiting from outside India – Bangladesh, Pakistan, maybe the Philippines and Malaysia?
At the moment we’re not, because in spite of all the difficulties, we still find talent in the pool [in India]. But when I go out to different countries and I have to create a cadre of finance professionals, they are recruited in those countries.
The challenge I have is how do I give them a corporate-wide experience? How do I do the same rotation that I do [in India]? For instance I have a woman executive in Uruguay; we recruited her as a CFO for Uruguay. Then we posted her to the UK and she did extremely well there. She was in the business finance function.
Now she has gone back to Uruguay to look after the compliance and control of the whole of South America, all the different units . . . You have to create a cadre which will uniformly look at things, but they also need to get a global experience of TCS.
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