Roundtable: Getting Through The Economic Downturn

During volatile economic times, top financial executives have faced a myriad of challenges and changes as more is required from them to help move their companies forward. Nilo Ramos, CFO for J.D. Power and Associates, a global marketing information services firm; Peter Resnick, COO and CFO for St. John Companies, Inc. a privately held manufacturer and distributor of consumable medical supplies; and Phillip Motherspaw, director of finance for Valley Village, a nonprofit that provides services for the developmentally disabled, got together with Business Journal Reporter Andrea Alegria to shed some light on what it’s like to be a chief financial officer in today’s environment. Question: From your experience, how has the role of the CFO changed over the years? Nilo Ramos: I think it’s become less about the numbers and more about growth and planning for future growth. Obviously getting the books right and the reporting correct is important and that’s a big part of the job but really when you’re talking about adding value, it’s really the partnership between the president or CEO and his or her management team and its about taking a longer view and planning for growth. Peter Resnick: Certainly it’s a big part of our day to put the numbers together and report on them but more and more we get asked by the different departments within the business, whether it’s senior people or middle management people, on how to analyze a new opportunity they’re looking at. You find so many people that are not in finance just don’t understand the basic concepts so they may not understand the repercussions of the decisions they are going to make. So I think it’s definitely true that we are more involved with the day-to-day operations. Motherspaw: We’re not the traditional bean counters anymore; we’re more involved in operations. I think we’ve become more of a social creature because we have to interact with all the directors, all the managers, and kind of raise their level of awareness with regards to how can they contribute to reducing costs, or what costs do they have control over so they can be a contributing part of the company as a whole. I don’t think in the past controllers or CFO’s had that much control, now we’re the driving force on how the company is going to grow or where can we reduce costs or what kinds of opportunities we have. We’re the right hand men or women of the executive directors. They look to us for the guidance. Q: How important are communication skills to the role of a CFO today? Ramos: I think its important frankly for a CFO to be approachable to be involved and not to be seen necessarily as a check on what people want to do, not behaving more like the police but more like a partner, a strategic and operational partner. Helping people understand and think about the bigger picture. You can have someone who’s trying to explain something to a business person and launch into GAAP speak and completely lose their audience, so it’s a matter of being able to take those financial concepts and ground them in a practical context. Resnick: It was interesting, I learned that lesson about 12 years ago, I got hired to be the controller for a public company and my boss asked me, ‘do you know why you got hired?’ and I said, ‘because I’m a really good finance guy’, and he goes ‘no, you have really good interpersonal skills’ (I had to take one of those all day personality tests). He said, ‘We have lots of really good finance people but we don’t have many really good finance people who know how to communicate with the rest of the business’. And I think it really hit home because I never thought of myself as a good communicator, so from that point on I learned that it was a really valuable asset as a finance person to be able to communicate the message to everybody else. I realized it was something I had to leverage and it was something that other people wanted from the finance group. I think it’s a really valuable tool and if you want to be successful at the higher level in finance. Motherspaw: To grow on what he just said, we need to be partners with the rest of the management team because we need to be able to define what the key indicators are in the company, what drives the company and what different managers and directors have control over and by being able to partner with them rather than pointing the finger saying this is what your are doing right, this is what you are doing wrong, to be a supportive individual and a partner, that’s where they look for our guidance. Q: What has been the single most challenging obstacle you’ve overcome in the past two years? Motherspaw: Controlling labor costs and how people report their time and how they do their staffing. Our biggest costs are labor and benefits and for all of us going forward in the next five years, we are going to have to deal with this healthcare bill issue. What we’ve tried to do is control our whole benefits package structuring our insurance plans trying to get the most bang for your buck without taking away benefits from the employees. Ramos: Our business model is one that relies heavily on people too, we do survey based research but its people who have to tabulate those results, and do the analysis and write the reports and present the conclusion to our clients. So I think the biggest challenge from the past two years has been dealing with the economic downturn and what that’s done to our clients in the markets that we serve and more specifically in automotive. The challenge was maintaining relationships with clients, continuing that position as a market leader in terms of customer satisfaction, research and quality while at the same time acknowledging that we do have a responsibility to the shareholders to protect the bottom line. The economy is down, business is down for obvious reasons, so how do you respond to that on the cost side?. You can turn the levers that you can turn but you have to do it in a very intelligent way and that’s where the challenge is. The initial reaction of most CFO’s is take advantage of the chaos of the down economy to strip costs out of the business but you have to do that very, very carefully because you could hamper the ability for the company to recover when times get better. Resnick: I’m not sure it’s the most difficult thing I’ve had to do in my career. We sell consumable medical supplies and our business was actually strong, but we operated under sort of the absence of knowing what the down economy would do to our business, so we thought we had to be prudent and start to fairly aggressively manage expenses. And so we put salary freezes on, we cut discretionary spending, the idea was ‘what can we do to preserve having to lay anybody off?’ So we had to go to our staff and we decided we’d be proactive and sit down and we’d talk to them and tell them what was going on. The difficult part is we had few segments in our business that were really growing and so we continued to hire in certain segments of the business while we told everybody that they weren’t getting salary increases. We thought the right thing to do was tell everybody what we were doing and we gave them the quote: ‘in the absence of any knowledge of what’s going to happen we’re going to manage the business very aggressively’ and then we met with them throughout the year and we told them how we were doing. We said if the year turns out OK, we’ll give everybody retroactive raises, which is what ended up happening. But the challenge was looking everybody in the eye, from factory workers all the way up to senior managers, and saying ‘you’re not getting an increase this year, but we’re still going to be hiring other people’ and wondering how they were going to respond to that. And it’s interesting, they all responded very favorably. Q: How important was building and maintaining relationships with banks during the down economy, was that a challenge? Resnick: I think the key with maintaining a banking relationship is just to be open and honest, they don’t like surprises, ever. I think the key is if your business is going to turn down, you’ve got to be having constant conversations with the bankers, let them know what is going on so they can think about it. It can’t be a call on a Tuesday that says tomorrow we’re going to report for the quarter and we’re going to blow our debt covenants, that’s a bad call to make. But it’s really saying ‘our business is going to be down, if our business is down we expect in 6 months to a year we could have problems with our covenants’ and I think most bankers are willing to work with you if they’ve got six months to nine months to think about it, and that’s been my experience. We have a banking relationship and we have a loan and so an element of my job is managing that relationship and making sure we have sufficient capital, that means it’s a quarterly or twice a quarter call to the bankers and they come see me or I’ll go talk to them and it’s managing their expectations, letting them know what we see into the business. Ramos: Luckily for me I don’t have to worry about that particular aspect of my job anymore being that we are owned by a large corporate parent (McGraw-Hill). I don’t have to worry about making payroll or any kind of cash issues; it’s kind of transparent to me…. Motherspaw: We don’t have bank covenants because we don’t have that many loans sitting out there, we have sufficient cash balances to be able to carry us through but we have challenges in trying to be proactive to increase our credit lines, once again being open, letting them know ahead of time, and banks will usually work with you. But we’re in a very fortunate situation. During a difficult time we’re funded primarily 99 percent by the government, knock on wood we are doing very, very well at this time. Q: How do you balance that role of being the reality check at a business without squelching enthusiasm, and how do you manage expectations? Resnick: I think the trick to that is a lot of times you just have to present the facts in a really straight-forward manner so that even someone who is a laymen in financial terms can understand the data and be able to come to their own conclusion. Sometimes we have to say ‘No’ but you try not to say ‘No’ too often, but sometimes if you can just provide the information in a clear concise manner and you give it to someone who’s a non-finance person, they can look at it and go, ‘this doesn’t make any sense at all’ and it’s always better that they come to that conclusion on their own, than you having to be the one that says no all the time, because people kind of get tired of that. Motherspaw: It’s about managing expectations and when we’re in the position where we’re managing the numbers, there are things we can do. I have to manage board members and the finance committee and I always manage the numbers because people in the finance committee, their emotions rise if you give them bad news, and the best thing to do is to manage their emotions and their expectations. Call it a cushion or whatever you want to call it, during the good times you sock a little bit away just like a savings account for the next quarter that’s maybe not as good, and that way you manage a business. Ramos: I was going to use the word signaling. I try very hard to make sure nobody is caught by surprise, me first of all. So it’s having those conversations, an ongoing dialogue. Managing expectations is really about making sure nobody gets caught by surprise. Q: Did managing expectations become easier or harder during the down economy? Resnick: It was easier, whether it was bankers or owners or a corporate parent, there was this expectation that the business would be down. When you made the phone call where you started to signal, or to telegraph, they were saying, ‘well I was wondering when this call was going to come?’ So I think it made it a little bit easier when you had to make that call or if you didn’t – we didn’t have to make that call, but I think it would have been much easier. Q: What would be your one sage piece of advice to CEOs in general? Ramos: Hire people smarter than you are and then trust them. I think that in rising to the level of CEO of any meaningful organization there’s a bit of ego involved and there’s some personal drive that sometimes doesn’t allow you to realize that you’re not necessarily the smartest guy in the room, so I think a healthy attitude for any CEO is to recognize his limitations and again hire bright talented people. It’s OK to hire people smarter than you because they’ll keep you out of trouble. Resnick: I think the challenge I face sometimes is that sometimes a really senior person gets so excited about the prospects of the business and starts talking about how it’s going to be a great year, it’s going to be a great quarter, and it’s all fantastic but sometimes they haven’t had the opportunity to ask us to kind of push things through and see what the business is going to look like in six months or nine months or 12 months, so they don’t have a complete picture. They’re seeing maybe all that’s in the pipeline, and so they see all the opportunity, but they may not consider all the costs that are involved or all the capital that’s going to be needed or all the hiring of human capital that’s going to be needed to support that growth, which may not translate to the bottom line right away. So they’re so enthusiastic sometimes that they don’t stop to listen. Let’s just talk this over before they tell everybody how great we’re going to be doing. Motherspaw: For me the challenge is to be the prognosticator or the forecaster. Each one of us as CFOs we’re living in the past when we’re dealing with the prior year’s audit. We’re dealing with the present when we’re dealing with current earnings but my most important job is to be able to tell my executive director this is where we’re going to be in a year. Q: How important is technology to your job as CFO today? What challenges do you see in that area? Motherspaw: We have to invest a lot in servers and stuff like that. Right now we have three different servers. We have one server that drives our accounting system, we have another server which drives our e-mail, and then we have another server which drives our operating system. It costs us about $15,000 to replace a new server that has like a five-six year life. I can save the company probably $30,000 by going with the new technology now called the virtual server, and we’re going to be doing that in October. Resnick: There are lots of elements of technology that are important and it’s a cliché but we do have to do a lot more with less every year. So we’re seeing our customers pushing us towards EDI (electronic data interchange). Three years ago we never got any orders through electronic data interchange; today 35 percent of our business comes from electronic data interchange. Now we have less customer service representatives, less accounting people, and the business can grow without adding people, so that’s one element of technology. Also, we buy a lot of capital equipment and what we’re seeing is as technology advances our capital equipment gets more sophisticated and the cost of the equipment gets more expensive. So an operations person may come to us with a piece of equipment that may be ten times more expensive than what we’ve spent before and they show you what a great return it will have and what a quick payback, but inherent in that ten times more expensive piece of equipment there’s a lot of risk. So I think one thing a CFO can do is help evaluate the risk, whether it’s helping them through a due diligence process, helping them call other companies that have implemented that technology to understand that technology or the risks, how long does it take to roll out. Ramos: Technology is a very big area of expenditure for us, it’s a very information intensive business model, it’s a lot of statistical analysis that requires a lot of data crunching and number crunching so I look at every decision around technology in terms of ROI, and before we spend a dollar on servers, on PCs or anything, I look at what’s the potential return on this investment. Some of it is obviously maintenance, things fall out of warranty, laptops break, PCs crash etc. servers need to be replaced, but in terms of new systems there always needs to be a financial case for why we are doing it. Q: How would you recap your CFO experience during the difficult economy? Motherspaw: A paradigm shift, and what that means is basically thinking outside the box. Each one of us is basically thinking outside the box, we’ve been in business for a long time, this is how we’ve run the business but it’s completely different now and you can’t be managing the business from a financial perspective the same way you always had. You have to step outside the box and view everything differently; you have to have the foresight to think about what’s happening in your particular industry, in the economy, so that you can position yourself in a favorable light. Resnick: We were very fortunate, we were in healthcare and we were gaining market share and our business actually performed really well and so I think the thing I learned as I watched friends and colleagues in other businesses struggle and people lose jobs, is just learning to really be modest, and when people asked ‘how’s your business doing’ say ‘well, we’re doing ok’ because I didn’t really experience what a lot of people did experience. Just being modest and sympathizing with people, keeping my mouth shut and just empathizing with other people, because we didn’t experience that. We prepared for it, but it just didn’t come for us fortunately. Ramos: I guess I’m at an age where I haven’t lived through something as drastic as what we went through in the fourth quarter of 2008 and over the past couple of years. The personal challenge for me was, ‘how do I help the business respond to this new reality, to what became the new normal?’ The challenge to the soundness of the very large clients that we service, and not only how do we respond internally in terms of what does this do to our business, but also how can we turn this into an opportunity to help them get through it.