Insights from Citigroup's CFO -- Making a Function Strategic...

On a recent Charlie Rose, Citigroup's CEO Vikram Pandit, discussed the future of his bank after the government's recent 40B+ infusion. In describing the future for his bank, and the core approach they use, he indicated the global reach of Citi, and the core functions necessary to execute --- a strong risk management function, a strong treasury function, and strong leadership - in particular the CFO and CEO roles. Ultimately, he justified Citi's decision to keep current management in place by saying that each of those functions and roles are solid within Citi today. In referencing the CFO, Vikram was speaking of Gary Crittenden.

Gary was recently interviewed for Business Finance magazine, and he had some really interesting things to say. Some insights that I'd like to share with you here, from this article:
http://businessfinancemag.com/article/serial-cfo-0903

The insights he shared...

On the value of his strategy consulting background:
"...the primary skill is to understand what the levers are that will influence the financial performance..." for a given company --- those levers change based on the type of company you consult for, but the "...finance is common."

On how you move a function into a more strategic role:

• "...the first step is to make sure that the way people spend their time is dedicated toward higher-value activities."
• "...put all the less-value added information together and put it into a few locations" --- this allows one "to do things in a very common way with common processes, where we can measure and control the quality around each of those processes"

The results of those moves are two-fold:

• "...costs go down because you're doing it with lower cost resources, and as a result you're able to do it with fewer people and you can now get scale effects that you didn't have before".
• "The second thing is that the quality goes up at the same time -- because now you are doing things in a controlled environment, with process control measurements."
• He calls it moving to "more of a fact orientation." (I like that).

On the justification and approach:

• You take the dollars you free up and invest a portion of the savings into developing a more "forward-looking organization"
• You move from current state, to anticipating "what's going to happen in the future"

"This is where the real value is, so how do we do a better job of anticipating how the environment is going to change and making sure that the business is properly positioned for how the environment is going to change."

He also mentions pieces that are relevant in terms of managing talent. By essentially, making it a great place to work, facilitating job rotation, and providing opportunities for career progression. Things all entirely consistent with comments recently made by CMO recruiter extraordinaire Greg Welch in a recent BMA speech: http://bmachicago.org/dec3luncheonreport.lasso

Applicability to Marketing

So if you'll allow me a little latitude here, I would say that regardless of the function --- whether it is finance (in this instance) or marketing --- moving a function from tactical to strategic involves the same steps. Essentially, identifying and simplifying process, moving to achieve cost savings via economies of scale, and then migrating roles to higher order activities. And managing talent is foundational...

Ultimately, these steps secure your talent, and free up your team to examine the existing environment, and perform the anticipation that Crittenden mentions -- the type of critical review of circumstances that lead to better decisions, and competitive advantage.

Think like a private equity enterprise...

I ran across a book review I really liked for Lessons from Private Equity that Any Company Can Use: http://online.wsj.com/article/SB120286252780263837-email.html, which is a book written by a couple of current Bain consultants.

As the title implies, the book suggests six "lessons" that organizations can use to improve their performance. These are:

1. Define the full potential of your business through extensive due diligence.
2. Develop a detailed blueprint for how you are going to achieve that potential.
3. Accelerate performance by matching the right people to the right tasks and measuring the right things.
4. Hire the right people by offering the right incentives and recruiting a useful board
5. Make equity "sweat" by loading up on debt and squeezing every last cent from your working capital.
6. Inculcate a "results culture" throughout the firm so that everyone works with the mind-set of a private-equity investor.

Now, as the review points out, most people may say - "So what?" - that's always the intent. But those of you that have experience working in a variety of organizations can quickly attest to the fact that any and all of these rules are violated at any given time.

The simple fact is that if rules similar to these are applied, the rigor around execution improves, and these lessons therefore serve as a nice "gut check" as management evaluates the strategic direction of an effort and the way that they are undertaken.

The reviewer takes exception to the authors' simplicity, and uses #5 as an example. Although I agree with the reviewers assertion that debt can be both a problem and a burden, my sense is that he was taking the interpretation of the lessons more literally than they may have been intended.

The central point is that the more exceptional PE firms do a better job of focusing an organization's efforts on those things that truly matter - and they often do that by making sound economic and strategic decisions that can be more difficult for corporate incumbents to undertake - for both personal and political reasons. By aligning incentives effectively around those decisions, they extract value.

That's a message that, however simple, all of us can learn from. But in the end, my friends, "the devvil is in the details"...

I want to be like Oracle

George Anders, in today's WSJ, had an interesting take on Microsoft's bid for Yahoo. His point was that this acquisition needs to be stated simply like those that Oracle performs, where Larry Ellision states his intent to be #1 in every software category they compete in. This is akin to the old GE mantra where they want to be #1 or #2 in every business they are in.

The implication is that the technology industry is no different from any other industry as it matures. When you reach that stage, when market growth is harder to achieve, the larger opportunity is to lower costs and focus on gross margin.

Is online search there yet, or more importantly, should Microsoft continue to be reluctant to indicate they want to be THE dominant player? I think that the answer to both questions is no.

Either way, Microsoft should clearly articulate the strengths of this potential acquisition to the Street, and it goes way beyond streamlining some of the software engineering talent.

IHOP - A Finance and Marketing Story

Here's a great story that really helps illustrate the role that both finance and marketing play on corporate strategy --- and more importantly --- on profitability. First, some details on the deal (if you are new to it see my previous post: http://marketlevers.blogspot.com/index.html#5254144304795988766. The comments in this post stem from a recent discussion of IHOP's strategy and recent "leveraged repeat" outlined in this article from CFO magazine: http://www.cfo.com/article.cfm/9716592?f=alerts.

The Financial Rationale
IHOP was driven to examine its business in depth when its largest shareholder (Southeast Asset Management) filed a Form 13D with the SEC. This action prompted IHOP to perform its own internal review. Management realized that their balance sheet intensive model needed to be refined. The decision was made to perform a leveraged recap to restructure the business.

Reasons:
- Significant reduction in on-going Capital Expense / Cost of capital
- Move from asset-intensive business to intellectual property base
- Significant cash flow upside in move to more direct franchise royalty model
- Return more cash to shareholders
- Allows IHOP to focus on their core operations - pleasing their customers through menu, store and service innovation

Result 1: Core strategy changes
As a result of the review, the core strategy changed focus dramatically as a result of the financial re-engineering of the company. As the last reason indicates above, IHOP moved from a chain operator to an IP "growth engine"; a place where the focus is on executing core competencies, and moving away from operations (like real estate management) that take them away from the improvement of their own business. Marketing and service become clear areas of corporate focus and expertise.

Result 2: IHOP delivers better financial results
As a result of their recap experience, IHOP has been able to:
- Purchase a company 40% larger than themselves (Applebee's) so that they could extract the value from their aged model
- Increase their same store sales by over 2.5% (a significant rise for old, existing locations) as a result of innovations that have been implemented with renewed focus
- Increase in profit by 37% - as Cap Ex and other Liabilities decline...
- Increase in cash flow and stock price

Lesson: This case is a very good example of what this blog is meant to be all about - illustrating the synergies that can be created when solid, innovative financial practice is coupled with a true appreciation of sound marketing. As IHOP continues to integrate Applebee's (and moves its focus from non-core ops to true differentiation in menu, service, and marketing) it will be worthwhile to watch how their stock (IHP), and their customers, benefit.

Applebee's, IHOP and the franchise model

How do you convert 70MM in negative cash flow to positive cash flow of 50MM in two years? You replicate what IHOP has done with it's stores, and is now planning to do with Applebee's --- you move to a franchise model.

An insightful story on the justification behind the Applebee's announcement, and how IHOP has used a "whole business securitization" to perform this feat in the past.

Link: http://www.cfo.com/article.cfm/9498239?f=alerts&x=1.

Growth and Cash Flow

CFO Magazine just posted an article about a new measure being calculated for companies that is meant to reflect the impact that core operating growth profile has on free cash flow growth. Generally (depending on the industry), assumptions are made about the impact that operating growth ultimately has on cash flow, and often that assumption is that the impact is negative. The reality in certain industries and companies is that operating growth can actually lead to significant cash flow growth (isn't that ultimately the goal?), and this measure helps to provide some insight into that relationship.

Article: http://www.cfo.com/article.cfm/9467185/c_9474019?f=alerts&x=1

Nice Summary on Leveraged Finance

Just ran across this really nice summary on leveraged finance. The authors view, which is shared by many others, is that we are looking at a top in the Private Equity market: http://www.americanbanker.com/article_search.html?articlequeryid=1527079127&hitnum=1.

IBanking - Best Deals Ever

For those of you that enjoy Corp Finance and the Private Equity marketplace, an interesting article on Michael Madden's "Best Deal Ever". I think it's a great summary of the type of thinking that helps these individuals execute and provide value within the marketplace. Post your thoughts...

Link: www.dealmakerdaily.com/magazine/article/6458.html