For the past three weeks, CFO Innovation has been running a three-part article on courses of action a CFO can take in response to the economic crisis based on the income statement, balance sheet and other finance functions, including decision support. These articles were culled from the PricewaterhouseCoopers publication, “Managing in a Downturn: The CFO Survival Guide.”
CFO Innovation’s Cesar Bacani spoke to Edmund Lee, Partner, Advisory Services, at the audit firm, on what companies in Asia are doing and what they should consider doing in response to the global recession. Below are edited excerpts:
What are you seeing on the ground among corporates in Asia?
Generally I think people are optimistic, but still very cautious, especially around discretionary spending. If they spend money for consultants or support, it’s got to be for something that they can realise the benefits from in the short term. Spending on longer term initiatives is being pushed to the back burner.
Is spending on software upgrades and other IT areas considered short term or is that something that can be put aside for a while?
It depends on the purpose of the upgrade. The business may need certain functions that are available only in certain versions. Other reasons could be licensing and support issues. For example, the current software version may no longer be supported, so you are forced to upgrade. There are some situations where you upgrade because it provides a better migration path for the future; those upgrades might be delayed. But there are a few projects we’re seeing where the client says, OK, let’s just do it now, because it will reduce head count, or make a process more efficient, or because prices have come down in the short term.
Cost-cutting remains the major issue?
CFOs today are leading the charge around cost management and I think the main reason is that they’re well-positioned in the organisation. They’re at the centre in terms of data availability and because of their role, they touch every part of the organisation. Basically, they would be in the middle of everything. They are also able to work with different parts of the organisation to come up with what I call sustainable cost reduction approach.
For example, some companies have stopped authorising flights on business class and are requiring everybody to fly economy class. That’s fine, but it’s just a short term measure. When times are good, everybody will fly business class again. We’re looking for a more sustainable type of cost reduction, where you re-think the policy. For example, flight of less than eight hours, it’s economy class across the board. For longer travel, you fly business. Alternatively, finance can help develop a business case for investment in video conferencing equipment.
So the aim is to come up with a permanent set of cost-management policies that will become part of the company’s DNA, not just something that’s in force temporarily?
You change the way you operate, therefore you need to change your underlying processes. And they can be about real simple things.
To give you an example, some companies are still using desktop laser printers to print their day-to-day documents. Actually, it’s more cost effective to use photocopiers as printers because the cost per sheet is a lot cheaper. I’ve seen some statistics and the savings can be more than 50% per page.
There will be some initial upfront costs because you will have to buy or lease the photocopiers and other accessories. However, there are some innovative arrangements with the large copier companies where they can ‘buy out’ all your existing printers on that basis you lease the copiers from them.
Are you seeing acceleration in outsourcing transactions for cash management, payables and receivables and the like?
Probably more in the Western world, where companies are looking to play the labour arbitrage in shared services and offshoring. They want to move out costs from the US or Australia or some of the more developed countries and move them [to Asia]. In places like China, the objectives for shared services are often different. It’s not really around cost containment or reduction; it’s more around scale, control and standardisation. It’s about building a function that supports future growth.
In terms of treasury and cash management, companies are focusing on better cash pooling, especially those working around the region. In Asia, you’re looking at 15- 20 countries, and the issues generally fall around foreign exchange controls, withholding taxes, moving cash around. It’s not easy, especially in China, which is a key growth area for a lot of companies.
How do you move cash around within China? How do you get cash out of China cost effectively, especially for companies where head office immediately needs the cash in the U.S. or somewhere in Europe? That’s a major headache for many companies.
Asia had gone through the 1997 financial crisis. You’d think the companies in the region would have already retooled their underlying processes and put in place the cost-containment policies you are advocating.
My gut feel is that a lot of companies have had fantastic growth in the last five years, and not just in Asia. People tend to be easier on the purse strings when times are good.
But that’s human nature. When times are good, cost cutting goes out the window. Everybody flies first class and business class.
There is the tendency for things to happen that way. Hopefully, when revenue growth comes back, you won’t see the same level in the growth of costs. What a recession does is it makes people a little bit more innovative. How can I do more with less budget?
So a lot will depend on the finance function. Do you see finance management changing post-recession as companies respond to a new business environment?
From a CFO standpoint, absolutely. Several things are going to be key. There will be even more emphasis around efficiency. There will be more emphasis on compliance and control, around tracking costs and making sure expenditures are proper and comply with the rules.
The third part is around insight, around better and faster management reporting. In this crisis, there’s been a lot of emphasis around liquidity and cash management and understanding the balance sheet. So what people are looking for is faster and better information in finance. The expectations are a lot higher in finance for business partnering and better management information.
The third leg around insight, that’s already standard among multinationals like GE and Microsoft, right?
I think some of the MNCs, particularly the progressive American and European companies, in general are in better shape in terms of having a robust FP&A [financial planning and analysis] function, separate from the transaction processing side of the organisation, and some of more established functions and processes especially around treasury, i.e., liquidity and cash management.
Will the CFOs of local Asian companies be under pressure to provide these insights as well?
I think everybody has that pressure. I wouldn’t differentiate between Asian companies and multinationals. Everybody has to do it.
Many companies in Asia are owned by families and are not listed. Insight is often based on what the founder and other family members think. Will they be at a disadvantage in the post-crisis business world?
Often they [the founder and family members] have a good gauge of the business by looking at the number of sales orders, for example. They have a good feeling of what the company should do [and make decisions based on available information]. I’ve seen that.
But I think as businesses get bigger, it’s more and more difficult to [operate in that way]. If you’re running a corner store, you’d probably look at how much cash is in the till and you get a feel of where things are going. As you get bigger I don’t think you can actually rely on that model.
You mentioned compliance and control. Is that something that CFOs will be required to focus on more strongly post-recession, given expectations of more regulations in the financial industry and perhaps regulators requiring stronger risk management systems for all companies?
There are always going to be more and more regulations and requirements. The question for the CFO is how do you increase compliance and control in the organisation without increasing costs? How will you be able to support the organisation in that area without adding to headcount? How can your systems and processes better drive efficiency?
You spoke of three things -- efficiency, compliance and control, and insight. But how can you cut costs, for example, when you need to spend to hire analysts and install software to gain insight? Won’t you need to sacrifice one for the other?
We put it in a triangle format: efficiency on one side, compliance and control on another, and insight on the third. Before the crisis, every country [in Asia] was coming out with Sarbanes-Oxley type of control and regulations. In some ways, that has distracted the finance function from the other two areas. What was supposed to be an equilateral triangle has been skewed towards control at the expense of efficiency and insight.
Our drive [at PricewaterhouseCoopers] is to help companies balance [these three areas]. How do you re-engineer [the finance function] to get more insight and efficiency? Maybe the answer is to change the processes. Or maybe it is to look at automation for help with some of that.
What are some of the solutions that you have come up with to re-balance this triangle?
In my view, it’s really a lot of process first. How do you rethink the underlying processes in order to reduce the number of controls without weakening accountability? What are the benchmarks on efficiency that need to be established? Think process, think how you can drive as much efficiency out of that as possible. Focus on standardisation and levels of control. Then use the extra time created to focus on providing insight.
You might create extra time, but wouldn’t you run into the problem of talent and capability? People in finance will need to stretch their comfort zone, from numbers crunching to more analytics and business support.
Ten, 15 years ago, everybody was talking about ERP. In the last few years, everybody was talking about process standardisation. I think everybody will now have a new agenda around their people. The new push for shared-services centres, in particular, is putting more pressure on the finance function to think about their people.
The idea is to pull out all the transaction processing, all the reconciliation, all those processes and move them into one place. So theoretically, all you’re left with in the business unit are people that will be focused around local business partnering or more analysis or reporting or revenue analysis, customer margins and so on.
But not everybody is cut out for that. Some people will embrace the new role. Others like doing reconciliation and closing the books. The struggle is then how to upgrade the skills of your people [to take on new responsibilities]. You will need to devise a program for them around technical training, around leadership and all the soft skills.
And the responsibility for this finance talent management lies with the CFO?
Very much within finance. People say, well, it’s an HR thing. In my view, you need someone within finance to drive that whole programme.
Do companies in Asia actually recognise this need and are doing something about it?
In China, finance talent management is also around retention and talent development. Every MNC is looking for a Chinese accountant who knows US GAAP, who speaks and writes in really good English, who understands what you’re thinking. So everybody will be fighting to hire that person.
How do you maintain the attention of those individuals within the organisation? You can use money, but others will also put in money. You need to have some type of programme where these individuals feel that you’re going to come in and help develop them.
You join the finance function not primarily because the company pays well, but because it will develop you into a leader tomorrow. It will put you through all the right technical training. It will put you through all the right leadership training, communication, responsibility, presentation skills.
But that means you need to spend on these training programs. There goes your cost-containment drive.
Yes, but you cannot ignore it [finance talent development], especially in China. There’s a cost in having a high turnover too. You pay a recruitment agency to hire people and the costs add up.
Do you expect to see new taxes in Asia?
There haven’t yet been any new taxes. The key thing is that government income has fallen because tax revenues have dropped, so government has to make up the shortfall somewhere. What we’re seeing is government looking at people taking deductions and at areas that probably they haven’t really looked at before. They might be a bit tougher now than they were.
But it’s almost certain that there will be tax hikes in the U.S. and Europe, just because government finances are shot to pieces there?
Potentially. I think transfer pricing is still a big thing at the back of the mind of CFOs [in Asia]. Most companies in Hong Kong have cross border issues, where they procure overseas and they sell overseas. Countries with higher tax rates are being more aggressive and looking more into your tax sheets. What they don’t want is for companies to shift profits to countries with lower tax rates. They want their fair share of taxes because of a drop in their revenues.
Given what looks like a change in the drivers of growth in Asia and China, where domestic consumption is increasingly seen as equally important as exports, does the CFO need to change the way he approaches financial management?
The finance strategy needs to be modelled around the business strategy, so if the focus is on the domestic consumer, there will need to be some changes in finance. The CFO will still need to [to deliver on] efficiency, compliance and controls, and insight. But if you change from selling overseas to selling locally, you might have to change in certain ways. The type of metrics you want to measure yourself against will be different.