Joao Almeida, CFO at the Hubs, part of the terminals division of international shipping giant, Maersk, sat down with Rich Feldman, Head of Marketing at enterprise Capex software provider Finario, to discuss some of the current challenges facing leaders in finance, and the role of capital planning in a time of increased uncertainty.
STRATEGIC ROLE OF THE CFO: CREATING A BUSINESS PARTNERSHIP
Having worked in an interesting array of industries, have you found that companies can have grand visions that they write about in their annual reports and advocate their shareholders which don’t match the day-to-day realities experienced in finance?
Not really. It’s not uncommon for there to be a communication gap in organisations between the investor messaging of the CEO and what is happening on the ground, but it’s not exclusive to those in finance. In some organisations, finance has an invitation to join the decision making at the board table where the CFO can influence longer-term discussions. In other organisations, the CEO tends to play a more dominant position in decision making and the CFO is viewed more as a stewardship role.
How, in your view, is a partnership created?
Ultimately, I think it comes back to a few fundamental points:
CEOs that are more strategically oriented and less numbers-oriented tend to want to partner with a CFO who has a strong command of the numbers. When that's not the case, and we have CEOs or leadership teams that are focused on their matrix, it can be challenging for the finance organisation.
It also depends on how finance is viewed within the organisation. Is it viewed primarily as a supporting role … focused on reporting, compliance and risk management? Or is it viewed as a partner to the organisation? CEOs that are visionary and commercially minded tend to be better partners to a finance organisation.
My perspective in working with many Fortune 500 companies is that those which are very siloed tend to have a harder time in the execution of a growth-minded strategy – if, for no other reason, that decisions take so long to “trickle down” from leadership to the frontlines. Also, these companies tend to do a lot of reorgs – constantly chasing a “better way.”
Agreed. I’ve seen a lot of organisations and leadership teams too focused on the boxes – how many layers can we remove – rather than focusing effort on the strategic orientation of the organisation and building a transformation and innovation roadmap. They tend to pivot towards a safer inward focus of the business.
Add to that, we have quarterly results to report, stock market pressure, and incentives all of which forces our hand to deliver short-term results over long-term performance.
CAPITAL PLANNING: FINDING A BALANCE BETWEEN LONG- AND SHORT-TERM PRIORITIES
Taking it one step further, where does capital planning fit into the equation of managing cost-cutting and liquidity with an “adequate” appetite for strategic growth – whether that’s investing in innovation, launching new products, increasing capacity, or M&A?
In my experience, the more “mature,” or disciplined, companies tend to be focused on operational excellence ... particularly focused on taking out cost. And it is the longer-term capital cycle of those companies to aim for more normalised, stabilised cash flow projections – which is in itself a challenge. But in a crisis like the one we’re in, it changes the whole focus to a more short-term bias.
If short term results are taking precedence over longer-term planning, how does a finance team manage that “friction” in your experience?
There always is friction between short-term and long-term priorities. Companies that have a fully integrated, technology-enabled capital planning process have a distinct advantage because they can select and defend strategic growth initiatives with greater clarity and confidence in a projected return on investment. This enables them to move from a short-term cost-cutting bias more easily into a longer-term posture as conditions dictate.
Without it, what can be missing is the link between the proposed pipeline of investments and how that fits the current cash liquidity position of the company as well as the forecasted liquidity of the company. In more siloed environments, there typically isn’t a big-picture view of what’s being proposed, what’s in the hopper, and what’s on hold. So, when there’s a crisis or a downturn or other “event,” it's quite a lengthy process to pull all the data points necessary to make decisions if you’re still operating in Excel, stand-alone systems, or other manual processes.
Capital intensive organisations tend to have the maturity of reviewing standalone project proposals. What they lack is a capital planning view that links the overall cash flow projections of the company's strategic plans to the current liquidity position. At Maersk, we’ve made it a strategic priority to enable that portfolio view.
This is particularly true for companies that are decentralised and have multiple operating units in multiple geographies and disparate product lines. Without the proper tools, they really struggle in creating that portfolio capital planning view to be able to act upon it with clarity.
Right. At the end of the day, the best “weapon” to exert influence and drive performance is data. This is particularly so when there is a “single source of truth” that inspires confidence in that data throughout the enterprise.
NEW MINDSET: EXTRACTING INSIGHTS AND CONTINUOUS LEARNING
What’s key isn’t whether you actually collect data, but what the finance team can do with it. Eliminating manual processes, reducing reporting errors, and enabling faster decisions are important. But what’s most critical is being able to extract insights that will aid in better decision making – whether it's in how you evaluate one project versus another, determining acceptable risk profiles, assessing ROI potential, etc.
What I've found is that there is a process, so there is a journey that you have to be on to build a data foundation. I think that larger, more “mature” organisations often quickly assume that the process landscape is already established to a level of acceptable standardisation. So, as they contemplate their budget constraints, they view initiatives around technology as prohibitive – which can be fatal. They oversimplify or underestimate the impact of what data insights can bring to their companies – getting consumed with the cost and effort of the technology rollout without adequately contemplating the capabilities that will be brought to the table … or how the status leaves them vulnerable to the threat of more nimble, smaller players enabled by technology disintermediating their industry.
Then there’s the issue of doing proper post-completion reviews.
Yes. There can be a tendency to celebrate when an investment gets approved … and more so if the project gets completed faster than expected and is under budget. But – good outcome or bad – without doing the follow-up analysis, all that institutional learning goes out the window. This may not sound like a big deal when it comes to balancing liquidity vs. growth, but it is for the simple reason that you can’t build institutional confidence in taking calculated risks if you don’t have a sound historical perspective to defend the assumptions you’re proposing.
Indeed. It’s clear to us that fewer companies are doing post-completion reviews than should be – particularly when things don’t go the way they were supposed to. At the end of the day, it’s not about assessing blame, it’s about learning and adjusting so that future projects ultimately perform better. And having the data and complete project history available on-demand makes accurate forecasting incredibly easier.
From my experience, most organisations aren’t organised for continuous learning. There is a clear leadership orientation at Maersk to drive a more ownership-based continuous learning mindset, particularly centred around our Lean journey.
Well, unfortunately, there’s also the issue of time and effort. Without the right technology, and lacking proper resources, it can be difficult to institutionalise.
SUCCESS FACTOR: HAVING A LONG-TERM VIEW OF DECISION MAKING
Do you ascribe to the belief that companies that make long term or growth-oriented bets when everybody else is contracting as they were over the past year ultimately will prevail in the long run?
In theory yes, but in practical terms that really depends on business circumstances and the point at which companies sit in their life cycle development. At one of my past companies, we made a big bet on two large acquisitions that involved entering entirely new product categories. Overnight we had a 23% global market share, and we had no related market experience or built capabilities. The organisation, the shareholders, leadership, took a risk in venturing outside our comfort zone and it resulted in significant shareholder value destruction and significant reorganisation changes.
So, it’s not just about timing. Companies need to have a longer-term view of decision making. It’s easier to focus on operational excellence … on taking out costs. But those organisations that are too inwardly focused on cost are vulnerable to other players coming into the market which are more nimble and able to make quicker decisions with perhaps a higher risk profile.
But I've also seen organisations taking unnecessary risks, which materialises afterwards. Nobody has a crystal ball! It’s all about attacking opportunity intelligently equipped with the right insights and enabled by the right cultural DNA.