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CFO JANUARY/FEBRUARY 2012 www.cfo.com W h o s Out There? SCOTT TRAVASOS, CFO OF BLUE SHIELD OF CALIFORNIA FOUNDATION CFOs CAN’T IGNORE SOCIAL MEDIA. BUT WHAT’S THE ROI? CFO/360° REPORT RISKS TO AVOID WHEN EXPANDING OVERSEAS M&A WHY IT PAYS TO IMAGINE THE WORST OUTLOOK SURVEY CFO OPTIMISM TICKS UP

CFO Mag Jan-Feb 2012

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Page 1: CFO Mag Jan-Feb 2012

CFOJ A N U A R Y / F E B R U A R Y 2 0 1 2

www.cfo.com

Who’s Out There?

SCOTT TRAVASOS, CFO OF BLUE SHIELD OF CALIFORNIA FOUNDATION

CFOs CAN’T IGNORESOCIAL MEDIA.BUT WHAT’S THE ROI?

CFO/360° REPORTRISKS TO AVOID WHEN EXPANDING OVERSEAS

M&AWHY IT PAYS TO IMAGINE THE WORST

OUTLOOK SURVEYCFO OPTIMISM TICKS UP

Page 2: CFO Mag Jan-Feb 2012

© 2012 Sage Software, Inc. and its affi liated entities. All rights reserved.

Sage Fixed Assets 2012 radically simpli es xed asset management with easy-to-use functionality.

Fighting a losing battle with xed assets? Sage Fixed Assets 2012 helps you hold on to pro ts with real-time visibility of asset lifecycles. Now you can eliminate manual calculations by automating asset accounting depreciations. You can also streamline inventory management and conquer xed asset reporting. Visit SageBusinessKnows.com/Assets and make your business Sage.

Page 3: CFO Mag Jan-Feb 2012

1C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

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50

FeaturesWho’s oUt there?CFOs shouldn’t fear social media, and can’t ignore it. But what about the ROI? by david rosenbaum

cfo/360° report:

Global PositioninGExpanding abroad has lots of potential, and plenty of risks. Here are some quick tips to help you avoid problems with staffing, regulatory requirements, joint ventures, and more. by michelle celarier

52 human capital: The help

54 growth companies: howdy, parTner

55 technology: learning To Share

j a n u a r y / f e b r u a r y 2 0 1 2 V o l . 2 8 , n o . 1

37 business outlook survey

prOCeeding with CautiOnWhile the global outlook is mixed, U.S. CFOs are somewhat more optimistic. by kaTe o’Sullivan

Page 4: CFO Mag Jan-Feb 2012

2 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

CFO, Vol. 28, No. 1 (ISSN 8756-7113), is published 10 times a year, with combined January/February and July/August issues, and distributed to qualified chief financial officers by CFO Publishing LLC, 51 Sleeper St., Boston, MA 02210 (executive and editorial offices). Copyright ©2012, CFO Publishing LLC. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of CFO Publishing LLC. Requests for reprints and permissions should be directed to FosteReprints, (866) 879-9144; E-mail: [email protected]; Website: www.fostereprints.com. Subscriptions: U.S. and possessions: 1 year $65; 2 years $100; 3 years $130; foreign, 1 year $120 U.S. funds only. Periodicals postage paid at Boston, MA, and additional mailing offices. POSTMASTER: Send address changes to CFO, P.O. Box 1233, Skokie, IL 60076-8233. CFO is a registered trademark of CFO Publishing LLC. SUBSCRIBER SERVICES: To order a subscription or change your address, write to CFO, P.O. Box 1233, Skokie, IL 60076-8233, or call (800) 877-5416; or visit our Website at www.cfo.com/subscribe. For questions regarding your subscription, please contact [email protected]. To order back issues, call (617) 345-9700, ext. 3200. Back issues are $15 per copy, prepaid, and VISA/MasterCard orders only. Mailing list: We make a portion of our mailing list available to reputable firms.

up front4 from the editor

6 letters

10 toplineA new CFO steps into the batter’s box at Hillerich & Bradsby; how CFOs can help drive innovation; after a tumultuous stretch, HP CFO Cathie Lesjak assesses the company’s ups and downs; and more.

17 capital markets Making M&a saFer Four ways companies can mitigate some of the most common pitfalls when acquiring another business. By Vincent Ryan

21 risk management dOn’t trust, veriFy With antibribery actions on the rise, companies should monitor their business partners more closely than ever. By Sarah Johnson

23 accounting the COst OF COnFidenCe Two proposals aim to increase auditor independence, but may cause problems for CFOs. By David M. Katz

25 strategy in the FaMily way CFOs who work for family-owned companies can be invaluable advisers, but often remain on the outside looking in. By Alix Stuart

27 human capital the new talent Mix Finance chiefs are bolstering their strategic roles by hiring more FP&A help. By David McCann

31 growth companies where the MOney is, and the seCurity isn’t Cyber thieves are increasingly targeting small and midsize businesses, and why not? Most SMBs do little to protect themselves. By Russ Banham

33 technology dashbOards Can nOw gauge MOre data CFOs are expanding their use of dashboards to capture a wider range of metrics. By Marielle Segarra

56 the quiz

40On The RecORdcharles horn, CFO, Alliance Data Systems

INTERVIEW By kATE O’SULLIVAN

Have $1 Billion, Will Spend

from top to bottom

: calef brow

n, Dan Page/theispot, jam

es Steinberg/theispot, Scogin mayo

JANUARy/FEBRUARy 2012

VOL. 28, NO. 1

31

23

25

Page 5: CFO Mag Jan-Feb 2012

GR WTHIt’s what CGMA stands for.

Officially, it’s Chartered Global Management Accountant. Established by AICPA and CIMA, two of the world’s most prestigious accounting

bodies, CGMA is a new designation representing accomplished professionals that drive and deliver business success, worldwide.

Find out more at cgma.org

Page 6: CFO Mag Jan-Feb 2012

Joel Benjamin

from the editor s c o t t l e i B s , e d i t o r - i n - c h i e f

social studiesyou may not realize it, but there’s a good chance that as of this moment you’re acting out a scene from the movie The Social Network. late in the film, the company’s first CFo, eduardo Saverin, is being deposed in a civil suit:

Attorney: After expressing misgivings about Mr. Zuckerberg taking the company and moving it to California for the summer, why did you put $18,000 into an account for his use?

Saverin: I figured we were partners and I wanted to be a team player. I figured Mark, Dustin, and the interns could work on the site while I generated advertiser interest in New York. But what I mostly figured [was] how much could go wrong in three months?

to invest or not to invest? to regard three months as a period in which not much can happen, or as one in which everything might change? to appreciate just how big the next Big thing can be, or fail to? those are just some of the questions and challenges regarding social media that all CFos must confront, even if they aren’t quite ready to click the “like” button. if you think that social media is nothing more than a time killer for your kids and perhaps a hipster or two in the marketing department, think again. Senior editor David rosenbaum explains how social media can help you understand “Who’s out there?” (page 44), and how to redefine your relationship with them. (For a re-lated take, see “Deal with it,” page 56.)

elsewhere in this issue we take a look at different kinds of rela-tionships, specifically, those you’ll need to develop overseas if you hope to expand your global operations. in our inaugural CFo/360° Special report, we take a look at some of the challenges confronting companies that want to staff up foreign operations or develop joint ventures as a way to tap into emerging markets. See “Global Positioning,” page 50.

and speaking of global, our latest Duke university/CFO magazine Global Business outlook Survey finds that CFo optimism is up, at least a little. the same holds true for hiring and spending plans. See “Pro-ceeding with Caution,” page 37. CFO

SuBSCriBer ServiCeS:www.cfo.com/subscribe or call 800-877-5416

51 Sleeper Street, 3rd Floor, Boston, ma 02210 (617) 345-9700

6 West 48th Street, 7th Floor, new york, ny 10036 (212) 459-3004

CFO

4 C F O | J a n u a r y / f e B r u a r y 2 0 1 2 • c f o . c o m

Julia Homer executive vice President & Chief Content officer Senior vice President & Director of research Sam Knoxeditor-in-Chief, CFO magazine SCott leiBS ([email protected])

CFo maGazine/CFo.ComDeputy editors marie leone ([email protected]),Kate o’Sullivan ([email protected])articles editor eDWarD teaCH ([email protected])managing editor SuSan Kron ([email protected])

Senior editors:• Accounting & Tax/New York Bureau ChiefDaviD m. Katz ([email protected])• Banking & Capital markets vinCent ryan([email protected])• Human Capital & Careers DaviD mcCann([email protected])• risk & Compliance SaraH JoHnSon([email protected])* Growth Companies alix Stuart([email protected])• technology DaviD roSenBaum([email protected])

Staff Writer marielle SeGarra ([email protected])Copy editor Deana ColuCCiContributing editors ruSS BanHam, ranDy myerS

Design/art Director roBert l. leSSer

CFo reSearCHeditorial Director, research Celina roGerSresearch Director DaviD oWenS associate research Directors mary BetH FinDlay, JoSH Hyattresearch editor matt SurKamanager of research operations linDa KloCKnerContributing research editors elizaBetH Fry, eriC laurSen, CHriStoPHer WattS

CFo ConFerenCeSDirector of Program Development maureen CamPBell

eDitorial aDviSory BoarDDavid W. Devonshire, evP–evP/CFo retired, CFo, motorola inc.Bruce edwards, Chairman emeritus, Powerwave technologies inc. David e. Farber, the rvH Group, merrill lynchFrank r. Gatti, CFo & SvP, etSJames C. Johnston, President, Johnston Co.Stephen Payne, americas Working Capital leader, ernst & young llPalbert a. Pimentel, CFo & Coo, mcafee inc.ellen B. richstone, Former CFo, rohr inc., Sonus networks, and luminus Devices inc.Kenneth J. Sanginario, Principal, northStar management PartnersDebra Smithart-oglesby, Former CFo, First america automotive

eDitorial oFFiCeS

Page 7: CFO Mag Jan-Feb 2012
Page 8: CFO Mag Jan-Feb 2012

6 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

focus on business, not ITI think David Rosenbaum covers the sub-ject of the CFO-CIO relationship quite well in “CFOs and CIOs: Can We Talk?” (Decem-ber 2011). History shows the IT function to be far too technology-centric and not business- centric enough. The career path for people in IT is within IT, across enterprises, independent of a career within an employer. IT has also dem-onstrated that it is “technology fad–oriented,” rather than being focused on, or even aware of, the strategy or requirements of the business of

one’s current employer. The surveys referred to in your article show that the majority (67%) of CIOs do not see themselves as a “trusted partner or business peer” and even more (69%) do not see themselves viewed as a “valued service provider”—for good reason.

A CIO’s financial literacy is important, but even more important is lit-eracy in the strategy and requirements of the business. The “tyranny of the technician” is well known and widely experienced in business today. “Cloud computing” is nothing more than another technology fad, and a retreaded one at that. It is not a business strategy, but rather a wasteful opportunity to con-sume resources converting to another technology platform instead of defining and understanding the business processes supposedly being supported by IT.

Safety-Kleen CIO Mark Stone has it right: “.. .if you’re a CFO and your CIO is not on the same wavelength, find a new CIO.”

Don SherwooDboulder, colorado

Your article “CFOs and CIOs: Can We Talk?” raises some interesting chal-lenges and paradoxes:• CIOs who report to CFOs—a frequent occurrence but logically a disconnect• Businesses struggling to get strategic decision support information out of

business systems but chasing buzz technologies like cloud computing before addressing critical issues like precision configuration

• Cost-centric IT management instead of business value management (be-cause most people do not know how to do it) drives business systems further away from where the real value lies.

jameS roberTSonjames a. robertson and associates

Via e-mail

letters

CFO welcomes your letters

Send to: The editor, CFO, 51 Sleeper St., boston, ma 02210, or e-mail us at: [email protected]

Please include your full name, title, company name, address, and telephone number. Letters are subject to editing for clarity and length.

CFOCHAIRMAn & CeO Alan GlassEVP & PuBlIshEr Rob Stuart

AdVErTIsIng sAlEs/PrOduCT dEVElOPmEnTsEnIOr VP, ChIEF sAlEs OFFICEr lissa shortSenIOR Vp, e-MeDIA, MARKeTInG, & AudIEnCE dEVElOPmEnT John e. palsEnIOr VP, PrOduCT dEVElOPmEnT Rich RiveraVp, MARKeTInG Phillip loFasoOnlInE OPErATIOns mAnAgEr Jerry XenosdIrECTOr, sEArCh & AnAlyTICs Jeff goldsteinOnlInE OPErATIOns COOrdInATOr David GannaloSenIOR MARKeTInG MAnAGeR Tiffany CoesEnIOr wEBCAsT PrOduCEr Joe Fleischer wEBCAsT PrOduCEr Phil lavanco

nATIOnAl AdVErTIsIng OFFICENew York Metro/New England/Ohio/Pennsylvania Dulce A. ChicÓn, (212) 488-4718; fax: (212) 459-3007 New York/Southeast linda hooper, (212) 488-4722; fax: (212) 459-3007 or (212) 541-5567 Midwest Benjamin Cairns, (312) 445-6524West Coast Karin litcher, (650) 712-1922, fax (415) 680-2373; Sarah Allen, (415) 655-6636 Business Manager ryan lightbody; (212) 488-4711

whITE PAPEr lIBrAryKimberly leon (sales manager), lee hsieh, Holly Karasinski, Diego Rodriguez, Greg Wiener, (646) 556-7655; fax: (212)459-3007

CFO COnFeRenCeSSenIOR Vp & DIReCTOR Deborah pattondIrECTOr OF sAlEs, COnFErEnCEs Deborah HatcherSenIOR MARKeTInG MAnAGeR Joseph ZerbaDeSIGn DIReCTOR John FischerMAnAGeR, COnFeRenCe OpeRATIOnS & sAlEs suPPOrT lisa nelson

CFO ReSeARCH SeRVICeSdIrECTOr OF glOBAl rEsEArCh sAlEs Mike SlombasAlEs dEVElOPmEnT mAnAgEr Jeffrey stevens

FInAnCe DepARTMenTSenIOR Vp & CFO peter SpinelliCOnTrOllEr Pete BadasSenIOR ACCOunTAnT Allison GurvichACCOunTInG ASSISTAnT Tara Weaver

OpeRATIOnSDIReCTOR OF OpeRATIOnS melanie K. BeaulierpRODuCTIOn DIReCTOR laura l. IversonsEnIOr dIrECTOr, AudIEnCE dEVElOPmEnT Teresa A. GreendIrECTOr OF OnlInE dEVElOPmEnT Jiun Jye ChinIT MAnAGeR Ben radlinskihr AssIsTAnT roshelle loweOFFICE mAnAgEr & CrEdIT COnTrOllEr lucy E. Bean

Davis Plunkert/theispot

Page 9: CFO Mag Jan-Feb 2012

PRUDENTIAL CAPITAL GROUP

PROVIDING STRATEGIC CAPITAL THROUGH CHALLENGING TIMES.Prudential Capital Group has provided private capital to help

a wide range of companies meet their strategic challenges in

good times and bad for more than 70 years. We bring you:

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to finance a wide variety of transactions across the entire

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To see what our clients say about their long-term

relationships with Prudential Capital Group, visit

PrudentialCapitalGroup.com

© 2011. All data as of 9/30/11. Prudential Capital Group is a unit of Prudential Investment Management, Inc. a Prudential Financial company. Prudential Financial and the Rock logo are registered service marks of The Prudential Insurance Company of America and its affiliates.

Page 10: CFO Mag Jan-Feb 2012

8 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

Wanted: a Voice for Small business“FASB as Private Company Standards-Setter?” (November 2011) misses a major point. The three-decades-old issue of private standards is being addressed, once again, and that’s good. The problem is that the solutions being put forth have one major shortcoming: there is no real representa-tion of small business on the Blue Ribbon Panel, the Financial Accounting Standards Board, or the standards-setting groups of the American Institute of Certified Public Accountants.

Specifically, the one organization that represents only practicing CPAs, the Na-tional Conference of CPA Practitioners (NCCPAP), is not represented. These are the CPAs who deal with small businesses on a daily basis, who prepare the financial statements for small businesses, who as-sist small businesses with their banking and credit needs, and who understand the problems and opportunities of small busi-nesses.

Both FASB and the AICPA have had 30 years to come up with standards to help small business. But until the recent reces-sion and downturn of the U.S. economy, neither organization really seemed to rec-ognize that small business was a major part of the nation’s financial system. GAAP was the rule that was promulgated primarily to place controls on publicly held companies, and small businesses had to cope with it, in spite of the difficulties it presented.

Now the Blue Ribbon Panel has come up with a plan that is supposed to give relief to small business. The mem-bers of the panel are well meaning, but none really repre-sents small business. One would get the impression that a small business, to the panel, FASB, and the AICPA, is any organization that is not a public company.

To have a discussion or plan for standards for small business without representation by the NCCPAP will prob-ably produce a warmed-over model of GAAP, rather than a clear, concise set of new rules, planned and designed for the millions of U.S. small businesses.

edwin j. Kliegman massapequa Park, new york

can We cure market Volatility?I am encouraged that the structural trading weaknesses and faults inherent in the U.S. equity markets are finally garner-ing some attention. “Follow the Bouncing Stock” (Novem-ber 2011) touched on many aspects of the problem, but ne-glected to tell the stories of the genesis of these issues and also the role of supplemental liquidity providers.

It is quite clear that exchanges/participants and regula-tory bodies are not eager to effect the changes necessary to reduce volatility and level the playing field.

I challenge the listed companies to speak up and voice their concerns, backed by the threat of removing their list-ings. Perhaps then we might see substantive change.

edWard collinSrye, new york

The myth of collective StandardsThe notion that standards can be set outside of the individual enterprises doing the ac-counting is pure fallacy (“New Leasing Pro-posals Continue to Draw Heat,” Topline, November 2011). “Collective standards” à la the Financial Accounting Standards Board, the International Accounting Standards Board, and so on are nothing more than an exercise in futility. The individual’s exis-tence is independent of the collective. The same cannot be said of the collective, which is but a group of individuals. Without the in-dividual, there is no group.

The take-away here is that for FASB/IASB to legitimately set accounting stan-dards, they must have the consent of all the individuals who would be affected by the

standards-setting. Universal consent for accounting stan-dards is absent, so the very existence of collective standards coming from such bodies is illegitimate.

name WiThheld by requeSTVia e-mail

calculating PeopleWhen I first became a manager, I often thought of staff train-ing and development activities as similar to an asset on the balance sheet, something that would be used through time for productive purposes (“Power from the People,” Novem-ber 2011). For some efforts, where the benefits are identifi-able, it is even possible to do rough ROI calculations.

daVid K. WalTzVia e-mail

Who’s more important?There is really only one question for companies here (“An Eroding Compact,” From the Editor, October 2011): Who are more important: your employees or the people that gam-ble on your stock?

john j. houghTonVia e-mail

adam

niklew

icz/theispot

“The FAF’s Blue Ribbon Panel has

come up with a plan that is sup-

posed to give relief to small business...

but none [of the members]

really represents small business.”

lett

ers

Page 11: CFO Mag Jan-Feb 2012
Page 12: CFO Mag Jan-Feb 2012

topline

10 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

Pitchers and catchers report to spring training in just a few days, but at hillerich & Bradsby, manufacturer of the iconic Louisville slugger baseball bat, new cFO Lawrence Writer has been on the field since november.

in a sense, Writer will serve as the corporate equivalent of a player-coach, since he holds the dual titles of cFO and cOO. he was brought into the 127-year-old, family-owned company to help oversee day-to-day operations and to ex-pand its global footprint.

that means he will build on both a historic product legacy (the company’s museum displays Louisville sluggers used by Babe ruth and dozens of other baseball legends) and a long-standing relationship with Major League Baseball (MLB), while also addressing everything from “nonwood bat technology and gloves to a social media strategy that gets our name out there for the next generation of baseball players.”

the company makes all of its wooden bats in the Unit-ed states, usually from ash and maple trees grown on 6,000 acres of land that it owns in new York and Pennsylvania. the manufacturing process is highly computerized, but Writer explains that the staining and engraving is all done by hand in Louisville. “it’s fun,” he says. “We put a board up that says, ‘now making bats for derek Jeter,’ or whomever.”

One critical role that Writer will play is in guiding the company’s innovation agenda. sounding much like a major leaguer himself, Writer says that “you have only one product

season a year—you get one shot.” so the com-pany holds an annual innovation summit that brings together everyone from its own test engineers to coaches and players from Little

ManuFaCturing

In the Swing of ThingsThink Big: Hillerich & Bradsby wants its sporting-goods products, including the iconic Louisville Slugger baseball bat, to become major hits in emerging markets.

© New H&B CFO Lawrence Writer: pushing the family business to innovate and produce products more quickly because “you get only one shot each season.”

Page 13: CFO Mag Jan-Feb 2012

11C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

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League to MLB. It debuts its concepts in the spring and brings new products to market in the fall. Those products include not only the company’s famed baseball bats, but also PowerBilt golf equipment and the Bionic Gloves line of sports and outdoor gloves.

That schedule requires care-ful coordination, because aluminum and composite bats are now made in the Far East, which poses a challenge regarding manufacturing and ship-ping lead times. (Writer, in fact, spent a week in China almost immediately upon assuming his post at H&B, so-lidifying a spirit of partnership with the company’s vendors there.) Further complicating the company’s produc-tion cycle, H&B must build in time for quality testing and, in the case of Little League and some other organizations, certification testing.

As a result, Writer wants to revise the company’s production calendar in order to bring products to market more quickly. “We’re looking at what that means for all pieces of the pie,” he says, “from the supply chain to fore-casting to the ways in which marketing is aligned with operations.”

As for expanding H&B’s glob-al presence, Writer says that while baseball remains a predominantly American pastime, the Asian market is growing, most notably Taiwan and Japan, but also Korea. The Caribbean, Mexico, and Latin America market is promising as well, although it is con-siderably more price-sensitive, which further underscores the need for greater efficiency.

An accomplished triathlete, Writer did something of a farm-team stint at H&B before assuming his cur-rent post, by spending six months with the company as a consultant while a director at AlixPartners. He reports to CEO John A. Hillerich IV, who is part of the fifth generation to run the family firm. (For more on the dynamic between family-owned firms and nonfamily CFOs, see “In the Fam-ily Way,” page 25.) — s c o t t l e i b s

innOvatiOn

Forging Ahead: How to Get

Innovation RightCompanies often declare that “innovation” is a top priority and spend hours in conferences and meetings discussing it, to little effect. That’s because many businesses don’t know what innovation really means—or what challenges it presents, says Steve Faktor, former vice president and head of the Chairman’s Innovation Fund at American Express and the founder of Ideafaktory, a company that develops patents and incubates start-ups. “When you have something that sounds cool and gives you hope that creativity will flourish in your business, peo-ple gravitate toward it,” Faktor says. “But the reality is that most large organiza-tions aren’t built to innovate.”

To succeed, Faktor says, companies must be willing to occasionally “can-nibalize [their] own business” and endure some growing pains as a new product finds a market. Those aren’t easy decisions, and that’s where the CFO comes in. If an R&D team came up with a new technology that would replace or make obso-lete a product with a predictable revenue stream, for example, would the compa-ny push ahead with it, even if it meant taking a step back today in order to even-

tually take two steps forward? Is the CFO prepared to “talk people down” from unreal-istic expectations or help them avoid analysis paralysis?

Faktor says that CFOs should set rea-sonable criteria, using an uptick in adoption rate as a measure of success, for instance, or establishing trigger points at each stage of development that will determine whether a new idea continues to receive funding. Com-pensation plans that reward people for tak-ing careful risks can also help, because they send a powerful signal that the company is serious about innovation.

Perhaps most important, innovation should not be something people forget about when they leave the conference room. If a company is truly innovative, Faktor says, it won’t need to call meetings to discuss its “in-novation strategy,” because that strategy will have become part of business as usual.

—Marielle Segarra

A World of InnovAtIonTop 10 countries for innovation as ranked by Insead’s Global Innovation Index Ranking Country ’11 ’10 ’09 Switzerland 1 4 7

Sweden 2 2 3

Singapore 3 7 5

Hong Kong 4 3 12

Finland 5 6 13

Denmark 6 5 8

U.S.A. 7 11 1

Canada 8 12 11

Netherlands 9 8 10

U.K. 10 14 4

Rankings are based on a wide range of weighted and nonweighted measures, ranging from countries’ political and regulatory environments to education systems, financial systems, and specific outputs such as patents awarded.

›› Steve Faktor will offer a detailed view of how CFOs can help drive innovation at our CFo Leadership Summit Conference in Orlando, March 11–14. For more details, see www.cfo.com/conferences.

Page 14: CFO Mag Jan-Feb 2012

12 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

topl

ine

What does an embattled, post-downturn company do when it looks up and sees distressingly few growth prospects? It puts on its rosiest-tinted glasses and looks again.

a recent study of 184 senior finance executives conducted by CFo Re-search services in conjunction with Ibm suggests that companies face a grow-or-die imperative. as markets continue to flounder, identifying new growth opportunities will be key to maintaining profitability over the next two years, say survey respondents.

after cutting to the bone during the downturn, many companies have all but exhausted cost-control as a means of protecting the bottom line. Fully half of senior finance executives agree strongly that cost reduction will not be suf-ficient to maintain profitability over the next two years, and an additional 30% agree to at least some extent.

at the same time, an overwhelming majority (83%) say that it will be more difficult to maintain profitability now than it was the last time the economy be-gan to rebound. Companies have little choice but to pursue growth—even if it means taking on unprecedented levels of operating and financial risk.

Fortunately, senior finance executives appear to be optimistic about growth opportunities. but to what extent that optimism reflects an actual eas-ing of pressures, versus being fabricated out of necessity, is an open question.

— M a t t s u r k a

grOwth COmpanies

Squint If You

Have To

Harry c

ampbell/theispot (top), T

hinkstock (bottom)

why growth is imperativeWhich of the following statements best describes your company’s primary business objective ...

…over the past three years?Controlling costs to maintain profitability ❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚ 43%

Identifying new growth opportunities ❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚ 33%

Capturing market share from competitors ❚❚❚❚❚❚❚❚❚❚❚ 19%

Other ❚❚❚ 5%

…over the next two years?

Identifying new growth opportunities ❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚ 52%

Capturing market share from competitors❚❚❚❚❚❚❚❚❚❚❚❚❚❚❚ 26%

Controlling costs to maintain profitability❚❚❚❚❚❚❚❚❚❚ 17%

Other ❚❚❚ 5%Source: “Strategies for Better Business Insight,” CFO Research Services in conjunction with IBM, November 2011

The U.S. Postal Service’s Decem-ber decision to decrease the expected standard delivery time of first-class mail to two-to-three days could have a negative impact on companies’ working capital.

Indeed, the move could cost a U.S. company with $10 billion in revenues up to $100 million in working capital, according to Veronica Heald, a practice leader at REL Consulting, a division of The Hackett Group that focuses on working capital. She esti-mates that 60% of payments received in the United States are via mailed checks; therefore a slowing of first-class

service could create a lag both in the distribution of invoices and the receipt of payments.

Smaller companies in particular may feel the pain. Heald suggests that companies that have yet to embrace e-invoicing explore the option. (The initial administrative burden can be significant, however; a company has to be sure customers’ accounts-payable departments can accept invoices by

e-mail or other means, and establish a way to acknowledge payment was re-ceived.) Companies should also beware of customers that want to continue receiving paper bills (some companies see it as a way to delay payments be-cause they calculate the due date from the date they receive the bill versus the invoice date; companies should clarify specific payment terms). And consider billing more frequently. “When trea-sury comes knocking at the end of the month, that’s when everyone rushes to get their invoices out,” says Heald. If there is a silver lining in the prospect of slower mail, it could be that com-panies will take a fresh look at how to improve a basic, but important, aspect of working capital. —david M. katz

wOrking Capital

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Page 15: CFO Mag Jan-Feb 2012

How a midsize restaurant group is earning a bigger piece of the pie. On a smarter planet, midsize businesses need analytics to better serve their customers, operate more effi ciently and foster growth. Papa Gino’s Inc., the Boston-based pizza and sandwich chain with about 150 corporate employees, was sitting on a gold mine of untapped sales, marketing and operational data. However, they needed a better way to leverage all this powerful data to make better decisions for their company. Working with IBM® and Business Partner QueBIT, they deployed a business analytics solution based on IBM Cognos® software that quickly transformed their data into actionable business insights. Analytics helped them discover that reward members visit their restaurants 35% more frequently and spend 50% more on online transactions. With new insights into the impact of their loyalty program, they can develop offers based on purchase patterns to increase the size of orders and purchase frequency. To see how IBM and our Business Partners can help your midsize business work smarter, visit ibm.com/engines/pizza. Let’s build a smarter planet.

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Page 16: CFO Mag Jan-Feb 2012

14 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

Lesjak photo, Todd Selby/c

orbis outline

In Its most recent 10-K fil-ing, computer giant Hewlett-Pack-ard lists among its business risks the “development of cloud-based solutions,” which would require the company to “transition to an envi-ronment characterized by cloud-based computing and software being delivered as a service.”

“transition” has been the order of the day at HP for some time now, and not just in terms of its tech-nologies. Last August, former ceo Leo Apotheker announced that HP would abandon its touchPad tab-let (hardware, not software), essen-tially writing off its investment in the Webos operating system it got when it acquired Palm for $1.2 bil-lion in 2010. About a month later, Apotheker was gone, replaced by former ebay ceo meg Whitman. she announced in December that HP would release Webos to the open-source community for further development and would not, in fact, give up on tablets.

Whitman, HP’s third sitting ceo since mark Hurd’s August 2010 ouster (after a sexual-harass-ment investigation) in August 2010, also intimated that HP will pull back from its recent acquisitions binge in order to focus on organic growth and the r&D needed to confront the very trends it cited as risks, namely cloud computing and soft-ware-as-a-service.

cFo catherine Lesjak, a 24-year veteran of HP, has not been im-mune to the tumult; in fact, she con-ducted a fierce and public bidding war with Dell for storage company 3PAr while serving as interim ceo

strategy

HP’s Interesting Timesto

plin

e

between Hurd and Apotheker.But she says the deal was worth

it. “3PAr is the architecture of the future for cloud storage,” she main-tains, defending a $2.4 billion pur-chase price that was criticized by some as too high. “It’s built to be scalable and allows customers to build capacity as they need it.” that said, “Would I have preferred not to have done [the deal] in public? Yes.”

Last month, standard & Poor’s downgraded HP’s long-term credit rating from A to BBB+, citing con-cerns over the firm’s “inconsistent” strategies and senior management turnover. “the last 12 months have been difficult for HP,” admits Lesjak. “the consumer market was difficult in 2011,” she says. the tsunami in Japan and the flooding in thailand

affected HP’s manufacturing, inven-tory, and supply chain. “Also, we didn’t lead as well as we should have.

“In 2012,” she continues, echo-ing Whitman, “we’ll step back, focus on our cost structure, and grow the top line. the first facilitates the sec-ond. Financial professionals need to be adaptable, to help the business understand and anticipate changing market conditions.”

Indeed, Lesjak says that the last few years, tumultuous as they’ve been, have been critical to the devel-opment of HP’s finance team. turn-ing the old chinese curse, “may you live in interesting times” on its head, she says, “not to sugarcoat it, but if everything’s going well, it may be lucrative, but it’s just not as inter-esting.” — d a v i d R o s e n b a u m

†HP CFO Catherine Lesjak (left) served as interim CEO during a period that saw Mark Hurd (below, left) depart, followed by Leo Apotheker (bottom) before Meg Whitman took the helm.

bumpy RideThe many changes at HP have not helped its stock price.

Source: Yahoo Finance

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OctJulAprJan2010

OctJulApr

Page 17: CFO Mag Jan-Feb 2012

(Left):Resources Global ProfessionalsElisabeth DickRegional Managing DirectorLead Client Service Partner

(Right):Caesars EntertainmentJonathan HalkyardSVP & CFO

When you’re building an empire,there’s no time for a learning curve.

The entertainment industry moves fast. Gaming moves even faster. CaesarsEntertainment competes in both arenas. So when they needed help restructuringtheir financial operations, Caesars looked for a consulting firm that was both agileand responsive. They chose Resources. Our highly accomplished team helped getthe job done fast. That’s how to build a financial empire.

©2012 Resources Global Professionals Consulting. From the inside out.resourcesglobal.com

Page 18: CFO Mag Jan-Feb 2012

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Page 19: CFO Mag Jan-Feb 2012

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17C F O | J a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

making m&a Safer Here are four ways companies can mitigate some of the largest risks

of acquiring another business. b y V i n c e n t R y a n

questions and demanding more accountability.”There is also less margin for error economical-

ly, points out Reeve Waud, managing partner at pri-vate-equity firm Waud Capital Partners. “The M&A market has become much more efficient,” Waud says. “Many potential buyers review the asset or business that’s up for sale, and the acquirer inevitably pays a very full price. That leaves it less room if it is wrong.”

To raise the probability of a deal being successful, acquirers are rethinking how they underwrite risk, as-sess value, and perform due diligence on previously ig-nored aspects of transactions, like customer attrition. They are also trying to prevent their share price from getting slammed as a result of placing a fair value on the acquired assets. Below are some of the things ac-quirers will do to minimize acquisition risks this year.

efore Michael Hagedorn, finance chief at $12.1 billion banking firm UMB Financial, pulls the trigger on a deal, he tests it using at least three sets of assumptions—opti-mistic, neutral, and pessimistic. Sometimes he uses five. Why? “So that management knows [just] how bad this thing could get if it were to go bad,” he says.

Overcautious? Some CFOs might say so. After all, contemplating worst-case outcomes in a merger or acquisition is not something businesses are in the habit of doing. But in the current climate, more executives are allowing themselves to imagine the worst, gauging M&A risk by scenario planning, stress-testing dis-counted cash-flow models, or by just assuming that a merger will have negative side effects.

Global economic conditions have height-ened overall M&A risk and are making buyers skittish: deal volumes cratered in the fourth quarter of 2011. “No one wanted to be the first to step out of line before there was a better sense of the economy’s direction,” says John Bogush, a partner at The Highland Group, an M&A consultancy.

This year, it seems, things won’t get any easier. The margin of error for management is smaller be-cause “shareholders and boards are much less will-ing to accept the risk of an M&A failure,” Bogush says. Rich Jeanneret, Americas vice chair of transaction ser-vices at Ernst & Young, says, “Boards are very inter-ested in top-line growth, and they are asking a lot more

capital markets

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Page 20: CFO Mag Jan-Feb 2012

Focus on what drives the businessWhen assessing an acquisition, the deal team needs to weed through co-pious amounts of data to focus on the three or four key things that are most important to creating value post- acquisition. “If you don’t understand [those items], you don’t understand the business well enough to buy it,” says Waud.

In the home-alarm industry, for example, a sector in which Waud Cap-ital has acquired 36 companies, the drivers are the percentage of custom-ers a company loses every year; the cost to gain a new customer through the company’s own marketing efforts; and the cost to acquire a customer in oth-er ways, such as buying accounts from a competitor. It’s no coincidence that all three drivers relate to retaining and gaining customers; in a low-growth economy, existing customers are gold.

Perhaps the greatest risks in M&A, in fact, involve the intangible as-sets of the seller—particularly its cur-rent customers, says Howard Johnson, managing director of Veracap Corpo-rate Finance. “The question a buyer should ask is, ‘What creates stickiness between a customer and the company as an organization, as opposed to a par-ticular individual?’” says Johnson. “If there is no barrier to exit, that should send up a red flag.”

don’t rely on revenue growthIn a recent Ernst & Young survey, 40% of executives said that deals most often fell short of expectations because rev-enue gains didn’t materialize. “Stake-holders are interested in the top line,” says Jeanneret. Companies that meet earnings targets due to cost-cutting are often punished by the market.

Knowing that, however, may cause acquirers to overemphasize the potential revenue boost from a take-over. “Generally, I don’t like to assume any revenue growth,” says Waud, be-

cause that puts the success or failure of a deal at the mercy of something he can’t control. “I would rather deter-mine whether or not a deal was going to be good or bad based on flat revenue and how I can improve the business,” he says.

Cheryl Beebe, CFO of Corn Prod-ucts International, a $5 billion maker of sweeteners and starches, says cash flow and the value derived from cash flow are key. As a publicly traded company, Corn Products focuses on a deal’s re-turn on invested capital. “You can do a ‘strategic acquisition’ and get a boost in revenues and operating income, but that doesn’t necessarily mean you get

capi

tal m

arke

ts

a return on invested capital that ex-ceeds your cost of capital,” Beebe says. “That’s a little tougher criteria.”

There are plenty of other cri-teria that companies should be us-ing to guide the deals they invest in. For example, in 2010 UMB Finan-cial diversified the revenue stream of its mutual-fund business by buying a fixed-income shop, Reams Capital Management. Reams’s offerings com-plemented UMB’s international and midcap equity products. “We saw what was happening with interest rates, and from a risk perspective decided that getting into the fixed-income busi-ness was something that made sense

Jeff Sciortino

18 C F O | J a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

cheryl beebe, cfo of corn products international: “It helps a tremendous amount to really know what you’re buying, and to know how much you will and won’t pay.”

Page 21: CFO Mag Jan-Feb 2012

for us and our strategic plan,” says CFO Hagedorn. “The revenue streams com-ing out of our Scout mutual funds are less risky because they’re not depen-dent on equity markets.”

Make risk Mitigation central to the dealHagedorn does something that can make his business managers scowl. He runs different hurdle rates depending on the riskiness of the investment. The lower the hurdle rate, of course, the more likely a given deal will get done. “Certain businesses just present more risk. A pure banking franchise with a balance sheet has a lower hurdle rate than a fee-income business,” he says. While a fee-income business is com-pletely dependent upon continuing to perform a certain activity to get a fee- income stream, a banking business provides “more levers to pull,” like the ability to raise or lower deposit pricing and loan rates.

Risk management also can be in-tegrated into other aspects of deal as-sessment and execution, like the cal-culation of proposed synergies. Corn Products has found a way to manage and minimize the risk associated with delivering on a specific dollar amount of synergies. For cost-savings syner-gies, the company’s management has to be able to define the action associat-ed with a cost savings. Process owners, not just the corporate-development staff, have to agree to the number.

So if Corn Products promises a $5 million savings in IT, the chief infor-mation officer has to document how that $5 million target will be achieved, Beebe says. That contrasts with the more common approach, in which a top-level modeling assumption is made that savings will amount to “x%” of projected revenues.

A third way to incorporate M&A risk mitigation is to put more structure into a deal, which is especially useful in purchases of private companies. “Give the sellers the price they want, but structure the deal in a way that helps

to mitigate the risk,” Veracap’s John-son advises.

More buyers are using instru-ments like promissory notes attached to liability and performance condi-tions. They are also spending more time on postacquisition contracts that keep sellers engaged in the business. UMB’s Hagedorn says that five years ago buyers couldn’t get earn-outs, but UMB has recently negotiated some that last as long as five years.

Forecast the accountingWith management on the hook for delivering tangible results that boost earnings per share, acquirers are more aware of a deal’s “accounting risk”: How will the transaction affect the buyer’s financial statements, and in particular will it be accretive to earn-ings per share after the close?

“We look at both cash flow and the accounting,” says UMB’s Hage-dorn, “because oftentimes in the ac-counting you have to record certain transactions that have no bearing on the cash of the company. Even though cash is king in my mind, it is important to know what is going to happen to our financial statements as the public sees them.”

Foreseeing how the amortiza-tion of intangible assets will play out in future earnings periods and wheth-er yearly impairment tests will cause goodwill to be marked up or down is difficult. Investment bankers don’t look at the accounting consequenc-es of a deal, for one. And much of the determination of how to allocate the purchase price among tangible and in-tangible assets, as well as goodwill, is

reviewed by auditors only after a deal closes, points out Veracap’s Johnson. Says CFO Beebe: “Even though you paid a certain price, you still have to go through all of the discounted cash flows for all of the entities. There are many unknowns until you get down to the books and records, which you don’t typically get in due diligence.”

With Corn Products Internation-al’s $1.4 billion acquisition of National Starch and Chemical Co. in 2010, Bee-be and her team estimated the compa-ny’s EBITDA before and after purchase price allocation and presented the numbers in the first earnings report af-ter the deal was announced.

If there is a final risk-mitigation technique that might be especially im-portant in 2012, it’s patience. Compa-nies that rush into deals are rarely glad they did. National Starch and Chemi-cal was put on the block by its owner, AkzoNobel, in 2008. Corn Products

considered buying the food-ingredi-ents business but thought the property was overvalued, and the financial cri-sis forced AkzoNobel to pull National Starch from the market. Corn Prod-ucts bided its time until 2010, when AkzoNobel was in a selling mood again and the price fell within the range that Corn Products had determined it would pay.

It takes discipline, but it’s impor-tant to “know how much you’re going to pay and how much you’re not going to pay,” says Beebe. “And it helps a tre-mendous amount to really know what you’re buying. That minimizes the risks and the surprises.” CFO

VINCENT RyAN IS SENIOR EDITOR FOR BANkING & CAPITAl MARkETS AT CFO.

“Give the sellers the price they want, but structure the deal in a way that helps to mitigate the risk.”

—howard johnson, managing director, veracap corporate finance

19C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

Page 22: CFO Mag Jan-Feb 2012

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Page 23: CFO Mag Jan-Feb 2012

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21C F O | j a n u a r y / f e B r u a r y 2 0 1 2 • c f o . c o m

Don’t truSt, Verify With antibribery actions on the rise, companies should monitor

their business partners more closely than ever. b y S a r a h j o h n S o n

FCPA provisions. Accused of facilitating bribes on behalf of its corporate clients in several countries, in-cluding Nigeria and Russia, the company agreed to pay $82 million to the U.S. government.

Vetting VendorsCompanies’ FCPA compliance programs have gen-erally focused on agents and freight forwarders, the types of business partners that tend to get in trouble with the law. Increasingly, however, companies are scrutinizing suppliers as well.

Due diligence of suppliers is becoming tougher; traditionally they have had to undergo only minimal credit checks, but now they are being chosen and re-viewed much more carefully. And suppliers increas-

he gist of the Foreign Corrupt pract- ices Act is simple: U.S. public companies cannot bribe government officials to win business. For the most part, executives understand the point of the 34-year-old law and have designed compliance programs to minimize the risk of their company or business part-ners violating the FCPA.

Yet, straightforward as such compliance may sound, “when you start drilling into implementing it, it’s actually very complex,” says Bruno Grandguillotte, chief compliance officer of IT distributor Ingram Mi-cro. Matters get complicated when companies have third parties do business on their behalf. Those parties may be tempted to use additional funds to win over accounts, push through permits, or speed up services in places where bribery may be considered a normal course of business.

Adding to companies’ bribery risk is a law that went into effect last July, the U.K. Bribery Act. The law affects all companies that do business in the Unit-ed Kingdom, and is expected to have a broader reach. Meanwhile, the U.S. Justice Department continues to file a relatively high number of enforcement actions.

In recent years, regulators have warned compa-nies through such actions to keep a careful watch on their third parties. This point was made in November 2010 when Panalpina, a Swiss logistics firm, pleaded guilty to criminal charges and settled Securities and Exchange Commission charges that it had violated

risk management

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Page 24: CFO Mag Jan-Feb 2012

ingly have to sign contracts that give their customers the right to audit them, and may also include an indem-nification clause.

Distributors like Ingram Micro have received a flurry of questionnaires from large IT manufacturers whose products they offer to resellers. The forms can be as long as 60 pages.

“Some of the questions are the same, but because every vendor works independently, each questionnaire is slightly different,” notes Tim Curran, CEO of the Global Technology Distri-bution Council. Curran’s trade associa-tion is working with manufacturers to develop a consistent electronic format and shared platform to make the pro-cess easier.

Questionnaires are just the start-ing point for better vetting. But the extra work comes with a high cost. Large distributors with hundreds of thousands of resellers, for example, would have to spend between $3,000 and $6,000 per third party for proper due diligence, says Rebekah Poston, a

partner at law firm Squire Sanders. “Fi-nancially speaking, it is prohibitive and impossible to perform the kind of due diligence the government wants you to perform,” she says.

Still, executives are finding that extra vetting feels safer and could out-weigh the reputational and investiga-tion costs that would arise if a supplier is ever accused of violating anticorrup-tion laws.

Prompted by the passage of the U.K. Bribery Act, Kimberly-Clark, the consumer packaged goods giant, bol-stered its FCPA-related compliance program last fall. “We have enhanced the contract language around third par-ties representing us, specifically in con-

nection with corruption,” says Thomas Mielke, Kimberly-Clark’s chief compli-ance officer. Now, the company’s busi-ness partners are not just required to note that they are aware of FCPA com-pliance and will follow antibribery laws; some must also agree to be subject to audits and to keep complete records of their payments.

Ranking the RiskiestIn addition to contract revisions, some companies are picking out their riski-est suppliers for more-intense reviews. These business partners are chosen based on several factors, including the countries they operate in, their history with anticorruption laws, and whether their board members are affiliated with any government officials.

But companies can’t thorough-ly evaluate every single supplier for FCPA risk—nor should they. By rank-ing their suppliers based on risk fac-tors, companies won’t waste time on those with the lowest likelihood

of causing serious problems. “You may have 10,000 suppliers, but they are not all creating risk for you,” says Brian Loughman, a leader in Ernst & Young’s Fraud Investigations and Dis-pute Services Practice.

In other words, a company proba-bly doesn’t need to be overly concerned about a small shop that provides cater-ing services to its European branch of-fice. But a situation in which an agent is helping the company set up a physi-cal presence in India should be looked at with special care.

To evaluate the compliance of more-questionable vendors, compa-nies may hire yet another third party, such as Forensic Risk Alliance. The

risk

man

agem

ent

firm will, for instance, compare a ven-dor’s pricing with that of peer compa-nies, since inflated charges could be a red flag that the vendor could be hiding improper payments.

Another reason to do extra vet-ting: regulators may look favorably at past due-diligence work. Liability can be greatly reduced “if you’re running a clean shop and can demonstrate you run a clean shop,” says Steve McGraw, chief executive of software firm Com-pliance 360.

When the worst happens and an FCPA investigation begins, regulators will be scrutinizing the firm’s compli-ance program. Under the law, authori-ties can nab companies and employees not only on bribery charges but also on failure to keep proper books and re-cords. At that point, providing docu-mented proof of proper due diligence may be all a company can do to distance itself from a corrupt business partner.

“Companies don’t get into trou-ble for doing their processes poorly,” comments Thomas Fox, a consultant who advises companies on their FCPA compliance programs. “They get into trouble when they don’t have any pro-cesses, or when they have a process but they don’t follow it.” CFO

SARAh JOhNSON IS SENIOR EDITOR FOR RISK & COMPLIANCE AT CFO.

riskiest areasCountries Considered the most Corrupt

1. Somalia

2. North Korea

3. Myanmar

4. Afghanistan

5. Uzbekistan

6. Turkmenistan

7. Sudan

8. Iraq

9. Haiti

10. Venezuelasource: transparency international’s Corruption perceptions index 2011

“Financially speaking, it is prohibitive and impossible to perform the kind of due diligence the government wants you to perform.” —Rebekah Poston, squire sanders

22 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

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23C F O | j a n u a r y / f e B r u a r y 2 0 1 2 • C f o . C o m

The CosT of ConfidenCe Two proposals aim to increase auditor independence, but may cause problems for Cfos.

b y D a v i D M . K a t z

f CFOs had any doubt about whom the Public Compa-ny Accounting Oversight Board serves, the audit watchdog spells it out in big capital letters at the top of its Website: PCAOB OVERSEES THE AUDITORS OF COMPANIES TO PROTECT IN-VESTORS.

In other words, the board doesn’t see itself as primarily serv-ing finance chiefs or the com-panies that employ them—and certainly not the audit firms it reg-ulates. That distinction became crystal clear last year with the board’s issuance of two concept releases, one on providing more-robust accounting reports and the other on boosting auditor vigilance. In both cases, the board said it was responding to inves-tor concerns.

With public comment on the releases in, the PCAOB is now mulling whether to turn them into full-blown regulatory proposals. Such proposals, if enact-ed, would produce dramatic changes in the client-au-ditor relationship—and finance chiefs see themselves as being on the wrong end of those changes. The sug-gested moves would “create a lot of tension” between finance executives and auditors, says Clyde Hosein, CFO of Marvell Technology Group, “and a lot of work for management that [would be] nonproductive.”

accounting

I

ExpEnsivE narrativEsThe first concept release, issued last June, introduced the idea of requiring auditors to supply a “narrative” about their clients in addition to their usual pass/fail opinions on company financial reports. Dubbed the Auditor’s Discussion and Analysis (AD&A), the prose paragraphs would resemble the Management’s Dis-cussion and Analysis contained in corporate quarterly and annual reports.

While the cost of a mandatory AD&A report may not be readily apparent, it could be sizable. Dee Mirando-Gould, a director in the financial manage-ment practice at consulting firm MorganFranklin, recalls the issue being “very actively discussed” dur-ing her tenure as an associate chief auditor with the PCAOB from August 2008 through January 2011. In-

Page 26: CFO Mag Jan-Feb 2012

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obert Houser

24 C F O | j a n u a R y / f e b R u a R y 2 0 1 2 • c f o . c o m

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vestors on the board’s Standing Advi-sory Group (which also includes audi-tors and public-company executives, among others) wondered why AD&As would cost companies more money, says Mirando-Gould. If the narrative merely amounted to what the auditor was already communicating to the cli-ent’s audit committee, why couldn’t the auditor simply use that for the AD&A?

The reason is that the report sup-plied by the auditor to the audit com-mittee is often a bare-bones summary that the auditor elaborates on during audit committee meetings. “If an au-ditor is going to prepare an [AD&A], it’s going to take a lot longer to prepare it, and a lot more review time,” says Mirando-Gould, who notes that as many as three audit partners might have to opine on it. The result: more billable hours.

Auditors themselves have also raised ethical questions about the AD&A. Some say it would create an awkward situation in that they would be required to discuss the nature of management’s financials. “Should the auditor be in a position to create orig-inal material [concerning] financial statements,” asks Mirando-Gould, “or is that really the responsibility of man-agement?”

Costly transitionsThe PCAOB’s second concept release, issued in August, offered a plan to boost auditor independence by mandating audit-firm rotation. The plan would limit the number of consecutive fiscal years that a registered public account-ing firm could serve as the auditor of a public company. Among the ques-

tions the board posed in the release was whether it should consider a rotation requirement only for audit tenures of more than 10 years or only for the audi-tors of the largest companies.

Many finance chiefs think that be-ing compelled to change audit firms every 5 or 10 years would be especial-ly disruptive. Roger Moody, CFO of Nanosphere, notes that the medical diagnostic toolmaker enjoyed a par-ticularly smooth transition when its auditor, Deloitte, had to switch lead audit partners. Aided by a “relation-ship partner” who wasn’t involved with the company on a day-to-day basis, the firm and the client worked to find a lead partner who was a “good fit,” ac-cording to Moody.

Mandatory audit-firm rotation, however, would make it “much hard-er to provide that seamless transi-tion we had when we had the partner transition,” he says. “I’m quite sure it wouldn’t be as seamless, and could cre-ate problems for shareholders by caus-ing hiccups or confusion [in the com-pany’s financial reporting].”

There’s little doubt that such dis-ruptions would have costs attached to them—especially in the early stages of the transition. “If you have a whole new engagement team with no history [with the company], they’re going to have to look at past work papers. It’s going to take longer to do the audit in the first year, even the first two years,” says Mirando-Gould.

Another cost would come in the form of the hours that CFOs and fi-nance staffers would have to spend on the auditor transition, instead of on more-worthwhile endeavors. “They’re all busy doing normal work, and they don’t necessarily build in time to deal

with the auditors” in such situations, says Mirando-Gould.

What’s broken?In view of such arguments against the two concept releases, some CFOs are puzzled about why the PCAOB has served them up now. “What’s broken that they’re trying to fix?” asks Mar-vell’s Hosein.

For its part, the board has alluded to a growing number of auditor mis-takes. The PCAOB’s inspectors have “identified more issues than in pri-or years,” James Doty, the overseer’s chairman, said in 2011. “The board is troubled by the volume of significant deficiencies, especially in areas identi-fied in prior inspections.” The assump-tion is that such errors stem from au-ditors’ increasingly cozy relationships with their clients. Hence the need for audit-firm rotation.

But a more compelling reason may be the loss of investor confidence following the collapse of many prom-inent financial-services firms in 2008, starting with Lehman Brothers. “Inves-tor representatives have...made clear to the PCAOB that they do not under-stand how, during the height of the fi-nancial crisis, virtually all companies that received government assistance, or went bankrupt, were given clean au-dit opinions,” Steven Harris, a member of the oversight board, said in a speech last fall.

As long as that question lingers, the regulatory pressure on auditors—and their clients—is sure to grow. CFO

DAvID M. KATz IS NeW YORK BuReAu CHIeF AND SeNIOR eDITOR FOR ACCOuNTING AT CFO.

These proposed changes could “create a lot of tension” between finance executives and auditors “and a lot of nonproductive work for management.” —Clyde Hosein, CFO, marvell teChnOlOgy grOup

Page 27: CFO Mag Jan-Feb 2012

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25C F O | J a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

That shock thrust Leonard Jr. into the top post overnight. He rose to the challenge; two decades after the tax problems came to light, the company is thriv-ing and bigger than ever, with four grocery stores, nine wine shops, and 2,000 employees; revenue has grown from $147 million in 1993 (when Leonard Jr. took over) to around $400 million today.

But the story didn’t have to turn out that way, and, in fact, it rarely does. Few family-run companies make it past the first generation; even fewer make it to the third or fourth. “When you get to the point of succes-sion—a retirement or a sudden death—less than half of all family companies have a formal plan in place,” says James Mattie, a partner with PricewaterhouseC-oopers who specializes in family businesses. That can

rom childhood, Stew Leonard Jr.was groomed to take over his father’s Connect-icut-based dairy and retail grocery business. He started by unloading trucks and stocking shelves and moved into management roles after gradu-ating from college with an accounting degree. After a stint away at business school, he returned to the company in the early 1980s, at which time his father decided that Stew, who had expressed some ambivalence in the past, was serious about succeeding him. He gave his son the title of “president,” not to mention a desk next to his in the CEO office.

Still, the transition was bumpy. “I had a ti-tle, but it wasn’t like I was really in charge,” says Leonard. His enthusiasm for helping the fast-growing business grow even faster was mingled with frustration at being in the long shadow of his father, as well as several uncles and other family members. His father’s shoes looked to be par-ticularly difficult to fill, because he was a well-known and well-liked entrepreneur who once received a Pres-idential entrepreneurial excellence award from Presi-dent Reagan and had been hailed in books and maga-zines as a success story.

Then, the unthinkable happened. Leonard’s fa-ther and two uncles were accused of tax fraud and ul-timately convicted of evading $17 million in taxes over 10 years. Leonard’s father was sent to prison for more than 3 years. (His brother was later convicted of simi-lar but unrelated tax charges).

strategyIn The famIly way

cfos who work for family-owned companies can be invaluable advisers, but often remain on the outside looking in. b y A l i x S t u A r t

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Photo courtesy of Stew Leonard’s

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be especially devastating when family members are at odds with one anoth-er and when there are no outside board members or others who can step in to fill the gap.

CFOs can play a variety of roles in helping family businesses avoid such crises, though becoming the next company leader is not likely one of them. “You come into a family busi-ness knowing you’re not going to be the president or CEO as long as there’s someone in the family who can do it,” says Thomas Pohmer, CFO at P.C. Richard & Son, an electronics retailer, since 1991.

Mattie agrees: “Our survey found that 60% of family-business owners expect family members to assume key roles, but when it comes to the CFO post, most CFOs are nonfamily mem-bers.” While a shock may thrust a non-family CFO into the spotlight tem-porarily, finance executives at such companies can do themselves and their companies a favor by encourag-ing the family to plan ahead.

Hard-Won WisdomToday, rule number one at Stew Leon-ard’s is to make sure that no one joins the company out of a misguided sense of duty or entitlement. With the old-est of the next generation now in their 20s, Leonard says a new policy holds that “none of our kids can work at the company until they work outside it for three years after graduating college.”

That fits the path he took, as well

as his two sisters, who are also involved in the busi-ness. One sister spent time in France studying baking and becoming a

cheese expert before coming back to the business to start an in-store bak-ery. The other studied management at The Walt Disney Co. before returning to the family business to build out its human-resource function.

The company is currently in the process of setting up an advisory com-mittee of four nonfamily members, in-cluding an industrial psychologist, to review job applications from family members who complete the three-year requirement. “We’re trying to make it so that family members don’t have to decide on their children; we want it to be market-driven,” says Leonard.

Whether or not family members will be required to spend time outside the business is a “major decision,” and one that families should consider be-fore the next generation begins to go to college, says John L. Ward, co-director of the Center for Family Enterprises at the Kellogg School of Management

and a consultant to Stew Leonard’s. His opinion: “A significant amount of out-side work experience is important. It gives people an opportunity to learn in a different environment.” It also helps them gain credibility at the company.

all in tHe FamilyAt P.C. Richard & Son, current presi-dent and future CEO Gregg Richard, 47, says he learned the business at his grandfather’s knee, and sees no need to go outside the company for training.

In business since 1909, P.C. Rich-ard has grown from a hardware store to a $1.5 billion company that competes with Best Buy. Gregg’s father, Gary, be-came president in 1980 and later CEO when Gregg’s grandfather A.J. passed away at the age of 95. Gregg, president since 2004, is now following a similar staged transition behind his own fa-ther, who “will certainly be involved in the business until the day he dies,” Gregg says, though he has already be-gun to lessen his involvement.

PwC’s Mattie says the “stay-in-side” approach can be as successful as the one Stew Leonard’s is employ-ing, provided the range of experienc-es gained by the heirs apparent is still broad. “In a larger business, making the rounds and spending meaningful time in each department can be a good sec-ond option to going outside,” he says. Serving on outside boards and other nonbusiness projects can also help to broaden a family member’s business acumen.

Looking ahead, Gregg says it’s a little early to set out a path for his own children, who range in age from 12 to 23, though the conversation at home often turns to the business. “Absolute-ly” his preference would be for a family member to take over, “if they have the ability and humility to run the compa-ny,” he says. “But if they’re not capable, we’re not going to put it in their hands and put us out of business.” CFO

ALIx STuART IS SEnIOR EDITOR FOR GROWTH COMPAnIES AT CFO.

stra

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A fAmily AffAir: The Leonards (left to right): Stew Jr., Tom, Beth, Jill, Stew Sr., and Marianne. No family member can join the business until he or she has worked outside it.

“You come into a family business knowing you’re not going to be the [company leader] as long as there’s someone in the fam-ily who can do it.”

—ThomAs Pohmer, CFO, P.C. RiChaRd & SOn

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The new TalenT mix finance chiefs are bolstering their strategic roles by hiring more fP&a help.

b y D a v i D M c C a n n

Specifically, companies need finance people who not only bring analytical skills but also influenc-ing skills. They also require staffers with the ability to work across functions and, most important, the confi-dence to be credible business advisers, says Jeff Thom-son, president and CEO of the Institute of Manage-ment Accountants.

The most desirable finance staffer, says Donald Kilinski, CFO practice leader at recruiting firm DHR International, is a CPA who then gets an MBA. Such a person may be more able to advise on strategic matters,

t’s not news that today’s CFOs aremore strategically oriented than many of their prede-cessors. But they are now trying to bring more of that analytical mind-set to their staffs, by adding more fi-nancial analysts than other types of finance positions.

Compared with just two or three years ago, new hires are more likely to be financial planning and anal-ysis (FP&A) staffers than technical accountants ded-icated to financial reporting. Companies have also stepped up the training of existing accounting and in-ternal-audit staff for redeployment to FP&A and man-agerial accounting roles.

For many organizations, factors driving the shift include a now-well-oiled machinery for achieving Sar-banes-Oxley compliance that needs less maintenance and three years of economic turmoil that make cre-ative growth strategies more crucial than ever.

In the latest Duke University/CFO Global Busi-ness Outlook Survey, 48% of responding CFOs said that, given an opportunity to add head count, they would most likely bulk up FP&A staff. Only 31% said the same for accounting/financial reporting.

To be sure, firms are still adding accountants, and finance departments are growing overall. More survey participants (27%) said they’ve increased accounting staff over the past two years than decreased it (20%).

But there is clearly a growing preference for those with broader business training. More than 2.5 times as many survey respondents (16%) have added people with MBA degrees than subtracted them (6%).

human capital

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lsuch as what projects should be funded, whether something should be acquired, built, or bought, and whether products or services should be eliminated.

At Sandoz Pharmaceuticals North America, a $3.2 billion unit of health-care giant Novartis, the number of peo-ple in the business planning and anal-ysis department has grown 25% since 2008. That’s good for the finance func-tion overall, allowing it to be a bigger player in the firm’s cross-functional de-velopment efforts. “We now have a bet-ter seat at the table that lets us do our jobs better,” says CFO James Masta.

Masta’s group now has dedicated FP&A staff to support both business development and research and devel-opment. The former allows finance to be at the forefront of negotiations with its suppliers, for example. “While busi-ness development might just want to go in and close a deal, we can tailor it to fit with our budget constraints and to what makes most sense in getting value from that agreement,” Masta says.

The added financial-analysis mus-cle helped the company score a big win in licensing contracts with drug com-panies. Historically, Sandoz, which dis-tributes generic drugs, profited in the earlier part of the contract periods but often got stuck near the end with inven-tory that it had to sell for a loss. Now the contracts carry stop-loss clauses de-signed to prevent that scenario.

no longer sarboxed inAt Worthington Industries, the inter-nal-audit department spent about sev-en years focused heavily on perfecting internal controls for Sarbanes-Oxley compliance, says CFO Andy Rose. By late 2008 the company was in good shape on that front, so it shifted the group’s efforts to working more with business units on process improve-ments. Some people had to be trained, and the company eliminated two posi-tions from its internal-audit staff.

At the same time, Worthington has doubled the number of people dedicated to mergers and acquisitions.

The publicly held, $2.5 billion metals manufacturer has made seven acqui-sitions, as well as three divestitures, in the past two years.

As a result, the M&A group ex-panded from 1.5 dedicated people to 3, including a new hire and 50% of a trea-sury staffer’s time. The finance depart-ment also redeployed people tempo-rarily according to the requirements of specific deals. For example, a regional controller was assigned for 10 months to one transaction, spending 6 months on due diligence and 4 on integrating the acquired firm into Worthington.

Smaller companies are experienc-ing similar changes. In 2009, Safeguard Self Storage shed two accounting posi-tions after streamlining its transaction-al processes and has not refilled them. “We have only 11 people in account-ing and finance, so cutting 2 was a big

swipe at the staff,” says Mark Rinder, a CFO with executive outsourcing firm Tatum who is currently Safeguard’s fi-nance chief. Rinder says he now spends most of his time with his head of FP&A. “It is with him that I am able to help our CEO and vice president of opera-tions achieve their strategic objectives by mining data and finding opportuni-ties,” Rinder says.

The global imperaTiveSome argue that an emphasis on FP&A over accounting is misguided. Jona-than Schiff, an accounting profes-sor at Fairleigh Dickinson University and an adviser to large corporations, points to new and pending regulation from the Dodd-Frank Act and inter-national financial reporting standards, major changes in tax law, and the im-pact of globalization as areas where companies will need accounting ex-pertise. In China alone, there are U.S. GAAP, IFRS, and Chinese accounting standards to understand and follow. “There is a raft of technical knowledge that’s needed,” Schiff says.

Still, says Peter McLean, who heads the global financial officers prac-tice at recruiter Korn/Ferry, expanding into emerging markets requires close partnering between finance and opera-tional management to allocate capital, “which translates into a need for great-er FP&A expertise.” CFO

DAvID McCANN IS SENIOR EDITOR FOR HUMAN CAPITAL & CAREERS AT CFO.

PLAN ON ITGiven an opportunity to add finance/accounting head count, which area would you most likely try to bulk up?

Financial planning 48% and analysis

Accounting/financial 31% reporting

Internal audit 7%

Tax 6%

Treasury 2%

Other 5%

Source for both charts: Duke University/CFO Magazine Global Business Outlook Survey

ACCOUNTANTS WITH VISIONWhich of these statements do you agree with?*

Many of our accountants could, with little or no training, 21% be redeployed to more-strategic roles.

Many of our accountants could, with training, be so redeployed. 36%

Few or none of our accountants could be so redeployed. 34%

Accounting is a strategic as well as a technical endeavor. 44%

Accounting is not currently a strategic endeavor, but it should be. 20%

Accounting is not a strategic endeavor. 12%

*Participants were asked to check all that applied.

Page 31: CFO Mag Jan-Feb 2012

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Page 32: CFO Mag Jan-Feb 2012

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Dot every i. Cross every 题

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31C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

Where the money is, anD the security isn’t cyber thieves are increasingly targeting small and midsize businesses, and why not?

most smbs do little to protect themselves. b y R u s s b a n h a m

esterday’s hackers, whose exploits were often designed to earn brag-ging rights within the hacker community, have given way to far more sophisticated cyber criminals in pursuit of cold, hard cash. Some penetrate databases to steal the personally identifiable information (PID) of employees and customers. Others steal intellectual property and business data. Some use it, while others sell it to other criminals.

Which companies are hackers targeting? “The main focus of hackers seeking PID is midsize com-panies,” says Paul Viollis, CEO of Risk Control Strat-egies (RCS), a security and investigative firm. Why? “They’re perceived as the path of least resistance.”

Midsize organizations with up to 100 employees and $100 million a year in revenue “lack the securi-ty budgets of their big-business peers,” explains Tim Matthews, director of product marketing at Syman-tec, a leading security systems provider.

A recent Symantec survey of more than 2,000 small and midsize enterprises found that 73% had been victimized by cyber attacks, and the cost can-not be measured by dollars alone. “There’s always the

growth companies

Yrisk of customers no longer conducting business with you,” Matthews says. “Once your reputation is tar-nished, shutting down becomes a very real possibility.”

Breaking and enteringMidsize enterprises are vulnerable to a variety of ex-ploits, including “phishing,” in which employees are lured to phony Websites through e-mail or IM; SQL injection attacks that invade operating systems to gut the contents of poorly designed websites; bots that take over machines, turning them into “zombies” that crim-inals can control—the list is long. Legacy systems that haven’t been diligently patched or upgraded to guard against new threats are particularly vulnerable.

Social engineering—the art of tricking people—has caused more security breaches than all external at-

Page 34: CFO Mag Jan-Feb 2012

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security guru, and implement encryp-tion, firewalls, intrusion detection, and other security tools. But today, as RCS’s Viollis notes, “how many mid-size enterprises have cash to spare?”

There are, however, measures that won’t break the bank, notes Alan Wlasuk, CEO of 403 Web Security. He suggests starting with a relatively inex-pensive scan of your IT system to de-termine its vulnerabilities, educating your staff about the threat of social en-gineering, and keeping up with securi-ty fixes.

And, since hackers aren’t the only ones breaking into databases (dis-gruntled employees and those experi-encing tough financial times are other threats), it’s smart for CFOs to insist upon background checks for new em-ployees and the implementation of strict data-access rules, such as mak-ing sure HR can’t access customer data and sales can’t access employee data.

Other relatively low-cost mea-sures include mandating strong pass-words (at least eight characters, a mix of numerals and upper- and lower-case letters). Customer data should be kept off of laptops, smart phones, and USB drives unless encrypted or, at least, password protected. Also, it’s not smart to store unneeded data; erase it.

Finally, consider buying cyber in-surance. The cost has come down by more than 20% from five years ago,” according to Robert Parisi, senior vice president of insurance broker Marsh. Plus, he says, insurers are tossing in freebies such as security assessments, victim breach notification, and credit monitoring.

“In an era where a lot of compa-nies have cut into IT resources, in-surance can be as important as the firewall,” Ponemon says. “With cy-ber insurance,” ACE’s Merrill adds, sounding like a salesman, “you’re buy-ing more than coverage; you’re buying peace of mind.” CFO

RUSS BAnHAM IS A COnTRIBUTIng EdITOR OF CFO.

tacks combined, according to 403 Web Security, a web-application develop-ment company.

Social engineering was behind a March 2011 data breach at security firm RSA. Employees received an e-mail and an attached spreadsheet with the sub-ject line, “2011 Recruitment Plan.xls.” Once opened, the spreadsheet installed a backdoor in RSA’s system that com-promised the code of RSA’s SecurId token. Estimates of what RSA’s parent, EMC, spent to clean up the fallout have run north of $66 million.

“We’ve estimated that a data breach costs companies an average of $214 per compromised record, and

this excludes litigation and reputation-related issues that are difficult to mea-sure,” says Larry Ponemon, founder of the Ponemon Institute, which focuses on data-protection practices.

Ponemon agrees that today mid-size enterprises are in the crosshairs. “Why hack into a major retail bank that has topnotch security when you can hack into a much smaller enterprise that has access to the bank’s data?” Ponemon asks. “It’s easier to break into the side door than the front door.”

And those side doors aren’t locked at many midsize organizations. Of the 761 data breaches investigated in 2010 by the U.S. Secret Service and Verizon Communications’s forensics analysis unit, 63% occurred at companies with 100 or fewer employees.

Most of those breaches were not as sophisticated as the RSA hack. A recent Ponemon survey cites lost or stolen mobile devices as the greatest trending security risk. The risk doesn’t necessar-ily decline when the focus shifts. “Com-panies think because they outsource services or security they also outsource liability,” says Toby Merrill, vice presi-

dent at insurer ACE Professional Risk. “They’re wrong.”

“you will be sued”Forty-six states have data-breach laws that require organizations to notify anyone whose personal data may have been compromised. Massachusetts’s is the toughest, stipulating penalties of up to $5,000 per violation. Multiply that by thousands of affected customers, and the potential cost to the enterprise is staggering. These laws make it clear that responsibility lies with the com-pany that collected and stored the data. “That's who will be sued,” Merrill says.

But many midsize businesses be-lieve the cloud offers greater security Boloco, a $20 million chain of 18 bur-rito restaurants stores customer in-formation in the cloud via netPOS, a point-of-sale systems provider. “no credit-card swipe lives in our system,” says Boloco CFO Patrick Renna. “Our philosophy is to leverage the security expertise of much larger companies that have resources we don’t.”

Boloco requires its various soft-ware-as-a-service providers to comply with the payment-card industry’s data-security standard and with the SAS 70 auditing standard, which permits an independent auditor to evaluate and issue an opinion on the provider’s se-curity controls. Boloco also assesses its providers’ finances. That’s smart, says Tracey Vispoli, global cyber solutions manager for the Chubb group of In-surance Cos. If you’re suing, you want your provider to be solvent.

Hack counterattackWhat else can midsize companies do? If they had the cash, they could hire a

32 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

From 2005 to 2011, the average cost of a data breach for organizations with

fewer than 500 employees was $410,047.—“U.S. Cost of a Data Breach” studies, 2005 to 2011, Ponemon Institute

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DashBoarDs Can now gauge more Data Cfos are expanding their use of dashboards to capture a wider range of metrics.

b y M a r i e l l e S e g a r r a

t Brightpoint, a global communications technology company, CFO Vince Donargo spends plenty of time studying both operational and financial metrics. But in order to track key data points, such as receivables and on-time shipping performance, he must sift through separate daily reports that land in his in-box as e-mails or spreadsheets sent from the company’s many global business units.

Although Donargo says this approach works, it’s far from ideal. So this year Brightpoint will im-plement a formal, integrated dashboard that will enable Donargo and other executives to monitor a wide array of key metrics through a single plat-form. The move will streamline financial analysis by integrating the numbers so that executives can more easily monitor them and communicate them to the CEO. There is also “a cost-saving aspect to having a dashboard,” Donargo adds, because it can save em-ployees the time and effort they currently expend cre-ating and disseminating multiple separate reports.

Dashboards have been around for many years, but it has taken time for their actual usage to catch up with their intuitive appeal. As business conditions be-come ever more volatile, however, and as companies lose what little margin for error they had in terms of responding to unpleasant surprises, interest in dash-boards is accelerating. Companies are also starting to broaden the range of metrics they can access from

technology

Adashboards, says David White, a senior research ana-lyst at Aberdeen Group. While in the past senior exec-utives might have focused solely on high-level metrics like sales revenue and profitability, they now use dash-boards to track operational and tactical metrics, such as how many new accounts sales representatives have acquired in the last quarter.

when you need to know nowOne major appeal of dashboards, according to White, is that they can help executives narrow the “decision window”—the period of time they have to make a de-cision after a business event. A recent Aberdeen study found that 64% of business managers have seen their decision-making time shrink over the last year. A dif-

Page 36: CFO Mag Jan-Feb 2012

warehouse technology and related in-frastructure continue to make it faster and easier to glean insights.”

Costs and implementation times vary enormously. One consultant said he built a simple dashboard for a client whose data was in good shape in a mat-ter of hours, for just over $1,000. On the high end, a global system with many users may take months to develop and cost in the high six figures. “It’s hard to give a price,” one expert quips, “but it’s always between $1 and $1 million.” CFO

MarIelle Segarra IS Staff wrIter at CFO.

ferent aberdeen survey found that 28% of business managers said they needed data to make decisions within an hour of a business event; another 42% need-ed information within a day.

“there’s a lot of pressure on the organization to take in raw data and to turn it into useful information in a time frame that suits the business,” white says. “there’s tremendous pressure on these operational managers to respond faster, and old-fashioned business in-telligence is just not intuitive enough.”

as an example, if a dashboard showed that sales revenue was not on target, a CfO would want to know more, like what region had the low-est sales, or what product was lagging. for some finance chiefs, getting those numbers often means asking a junior finance staffer or someone in It to dig them up, which could take days. De-ploying dashboards that allow CfOs to drill down to the specifics themselves enables them to make decisions faster.

a leg upKevin Knapp, CfO of the online re-cruitment site CareerBuilder, agrees. “the importance of dashboards has increased as the speed of change has increased,” he says. “every organiza-tion today needs to adapt quicker than its competitors.” to that end, he says, companies should include operational metrics in their dashboards to gain a competitive advantage. “financial re-sults are really just the consequence or byproduct of daily operational deci-sions,” Knapp says. “If you solely focus on financial targets, you can neglect the inputs that truly drive those results.”

at CareerBuilder, operational metrics “have a more prominent share of our executive dashboards than our financial results,” Knapp says. the site’s number of unique visitors, job listings, and applications per job seeker or job posting are all significant pieces of information.

Still, financial metrics remain crit-ical. “By and large, companies...are in-terested in the basic revenue cycle and

cash cycle fundamentals,” says David Pefley, former CfO at software maker Virtutech and now a consulting CfO for several technology firms. “I think [most businesses] should be focused on bookings, the sales funnel leading to the bookings, the revenues, the receiv-ables, and collections,” he says.

Dashboards can be designed to enable CfOs to combine the two ap-proaches, providing both a financial overview and a deeper look at granu-lar operational data. and they will continue to evolve, says Knapp. “the world has become so much more data-centric, and the advancements in data-

34 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

federico Gam

barini/Landovte

chn

olog

yFinance and IT: A Beautiful Friendship?CFOs looking for profitable growth

are working more closely than ever with their IT departments, according to a recent sur-vey conducted by CFO Research Services for Hewlett-Packard. The survey, which included interviews with more than 30 senior execu-tives with finance experience at large com-panies, found that several factors have fos-tered this burgeoning symbiosis, including technology’s potential to promote top-line growth by driving better decisions.

Just as the right technology can help to increase revenue by enabling executives to make timely inventory and marketing de-cisions, outdated, slow systems can stunt growth, said some surveyed executives. Erick

Haskell, current chief operating officer and former CFO of Adidas China, learned this lesson the hard way when demand shrunk in a key region, but the company’s IT systems did not reveal which specific products were laggards. Without this data, the company could not accurately predict how many of each item it should continue to stock.

Adidas has since invested in a system that allows its CFO to see consumer-level sales data almost immediately. “I now have direct interfaces with all of my retail distribution partners and can read my retail sales on the ground,” Haskell said in the study. “I can pull up data not only at the store level but down to the SKU level. I can see which products are selling, and that means we can react much faster to those trends.”

While CFOs cited several other drivers for a closer finance-IT partnership—such as the need to balance technological innovation with budget considerations, and the technology challenges associated with integrating global acquisitions—they also noted the pressure to turn data into actionable information. As Tony Ho, corporate finance funding director in China for U.K. grocer Tesco, says, “We are in an industry that needs a lot of information. If we don’t have the technology we need to support that, we will not be the winner in the marketplace.” —M.S.

9good fIt: Technology investment helps Adidas deter-mine the right product mix for stores like this one, in Beijing.

Page 37: CFO Mag Jan-Feb 2012

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50

55

60

65

70

75

80

China

Asia

Europe

U.S.

Q4 ’11Q3 ’11Q2 ’11Q1 ’11

ven as the global economy con-tinues to be volatile, U.S. CFOs are slightly more op-timistic than they were three months ago. The latest Duke University/CFO Magazine Global Business Out-look survey finds that the CFO optimism index has moved up to 53 (on a scale of 1-100) from 47 last quar-ter. However, that level is still below the survey’s long-term average of 60. Finance chiefs plan to increase hir-ing this year but are still cautious, putting the chance of the United States entering a new recession in the next six months at 31%.

These mixed signals reflect the very mixed re-sults across individual businesses. For example, on one hand, says Mark Muskevitsch, finance chief at Wiscon-sin-based JX Enterprises, a heavy-duty-truck dealer, “Our little corner of the economy is doing very well,” thanks in part to customers’ increasing need for parts

Eand service as they keep old vehicles on the road.

On the other hand, Milton Bulloch, CFO at Al-pha Steel, a steel-fabrication company in Texas that has seen its business fall by half over the past few years, re-ports that “the economy for the year ahead is brutal,”

business outlook surveyProceeding with caution

while the global outlook is mixed, u.S. cFos are somewhat more optimistic. b y K a t e o ’ S u l l i v a n

37C F O | j a n u a r y / F e b r u a r y 2 0 1 2 • c F o . c o m

gor

don

Stud

er/t

heis

pot

Europe Feels the PainCFOs rate their optimism about their companies’ financial prospects compared with last quarter .†

Glum’s the WordCFOs rate their optimism about their domestic or regional economy compared with last quarter.*

pU.S.

pEUROPE

pASIA

pCHINA

pU.S.

pEUROPE

pASIA

pCHINA404550556065707580 China

Asia

Europe

U.S.

Q4 ’11Q3 ’11Q2 ’11Q1 ’11

*CFOs were asked to rate their optimism about the economy on a scale of 0–100, with 0 being least optimistic.

†CFOs were asked to rate their optimism about their companies on a scale of 0–100, with 0 being least optimistic.

Page 40: CFO Mag Jan-Feb 2012

busi

nes

s ou

tlook

sur

vey

38 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

citing a lack of demand for the com-pany’s products, mainly used in build-ing schools, strip malls, and multisto-ry office buildings. The business has shifted to focus on federal-government contracting in recent years, with good results. “That’s what’s kept us going,” says Bulloch.

Rob Ogilbee, CFO at Wish Farms in Florida, says his business is rela-tively insulated from the economy, as demand for the company’s produce typically outstrips supply. As for the broader economy, he says, “I think we’re basically going to have a repeat of 2011. It’s a perception issue. We may see growth in some sectors, but the typical American sees a bad economy, and that’s what they’re reacting to.”

At Measurement Inc., an educa-tional testing company in Florida, CFO Alex Avila echoes Ogilbee’s view on the year ahead. With his business de-pendent on state and federal education standards and budgets, Avila says, “ev-erybody’s kind of in waiting mode.”

Still SpendingOn average, CFOs do plan to boost ex-penditures in key categories such as capital spending, which they say they will increase by 8% over the next 12 months, a marked increase from their plans last quarter, when they said capi-tal expenditure would rise by just 4.5%. Technology spending will grow by 6%,

also an increase from last quarter, while research-and-development spending will increase by just under 3% and mar-keting and advertising spending will grow by about 2%, both in line with the levels forecast three months ago.

On the critical jobs front, finance executives have a somewhat improved outlook compared with last quarter, now saying they plan to increase their full-time domestic workforces by 1.5% on average over the next year, up from just under 1% last quarter. Such an in-crease would yield enough new jobs to bring the unemployment rate to near 8% by the end of the year.

At JX Enterprises, Muskevitsch says the firm is struggling to fill some 55 open positions. “We’d hire service technicians all day long if we could, at probably every one of our locations,” he says. The firm is having trouble finding workers with the appropriate skills, and those with the right train-ing are in demand at a range of differ-ent kinds of companies. “It’s just a high- demand, low-supply field,” says Mus-kevitsch. “Recruiting is a big challenge.”

Muskevitsch’s fellow finance ex-ecutives cite consumer demand, fed-eral-government policies, and price pressure from competitors as top con-cerns. The ability to maintain margins, the cost of health care, and the ability to forecast results lead the list of inter-nal, company-specific concerns. Just over half of the CFOs surveyed say they

have contingency plans in place should another recession occur, including layoffs as well as reductions in capital spending and R&D outlays.

OceanS apartCFOs are also worried about global fi-nancial instability, with nearly a quar-ter saying their businesses would ex-perience a significant effect should multiple European banks become in-solvent and an additional 59% saying they would feel a minor effect.

Europe’s finance chiefs, not sur-prisingly, are markedly less optimistic this quarter than last, with 66% say-ing their level of optimism has fallen. Ninety percent say the debt crisis has negatively affected their businesses, with 45% calling the impact “signifi-cant.” Europe’s CFOs put the prob-ability of their countries entering a recession in the next six months at nearly 50%.

In Asia, CFOs are less optimistic than they were last quarter, but remain more positive about their regional economy than their U.S. and European peers. In a dramatic contrast with their counterparts, Asia’s finance chiefs plan to expand their workforces by 5% on average in the next year and expect wages to rise by 7%. CFO

KATE O’SUllIvAN IS A DEpUTy EDITOR AT CFO.

Source for all charts: Duke University/CFO Magazine Global Business Outlook Survey of 1,050 CFOs: 551 from the U.S., 166 from Europe, and 333 from Asia (including 102 from China)

0%

1

2

3

4

5

6%

Wages

Q4 ’11Q3 ’11Q2 ’11Q1 ’11

. . .But Wages Are Flat12-month percentage change predicted by U.S. CFOs

pWages

Strength in Spending12-month percentage change predicted by U.S. CFOs

pCapital spending

pTechnology spending

pR&D spendingpMarketing &

advertising spending0%

2

4

6

8

10

12

14%

A&M SR&D STSCS

Q4 ’11Q3 ’11Q2 ’11Q1 ’11

Page 41: CFO Mag Jan-Feb 2012

-2%

-1

0

1

2

3

4

5

6%

Number of domestic full-time employeesNumber of domestic temporary employeesNumber of offshore outsourced employees

Q4Q3Q2Q1Q4Q3Q2Q1Q4

’09 | 2010 | 2011

Top Concerns of CFOsAbout the mAcro economy:

1. Consumer demand

2. Federal-government agenda/policies Price pressure from competitors

3. Global financial instability

4. National employment outlook Credit markets/interest rates Federal budget deficit

5. State/local government budget deficits

About their own compAnies:

1. Ability to maintain margins

2. Cost of health care

3. Ability to forecast results Attracting, retaining qualified employees

4. Working-capital management Maintaining morale/productivity

5. Balance-sheet weakness Managing IT systems

note: concerns that received identical scores are grouped together.

pnumber of offshore outsourced employees

pnumber of domestic full-time employees

pnumber of domestic temporary employees

12-month percentage change predicted by u.s. cFos

Jobs Still Wanted Inflation Worries Recedeinflation (change in prices of own- company products)

*numbers may not add to 100%, due to rounding.

European Relations if multiple european banks were to become insolvent, how would this impact your business?

Borrowing: Status Quo relative to fall 2010, does your company find borrowing now:

psignificant effect pminor effect

pno effect

peasier pAbout the same

pmore difficult

24%

59%

17%21%

57%

23%

0%

1.0

2.0

3.0

4.0%

Inflation

Q4 ’11Q3 ’11Q2 ’11Q1 ’11

Recession Ripples

pyes pno

54%

46%

Do you have a plan in place for actions your company would take in response to a recession? percentage who would cut dis- 68%

cretionary spending (such as r&D)

percentage who would dip into 44% cash stores to avoid making layoffs or cutting expenses

by what percentage would 30% you reduce your capex budget?

what percentage of your 8% workforce would you let go?

iF yes…

What is the probability that the U.S. will enter a recession in the next six months?

31%

39C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

Page 42: CFO Mag Jan-Feb 2012

Have $1 Billion, Will Spend

Alliance Data has shown strong growth through the downturn. How were you able to do that?Fortunately for us, when we went into the downturn we had very low debt levels and we had the ability to generate strong liquidity. So the company took what I call controlled risks. When many companies were going into their shells and protecting liquidity at all costs, we were deploying that liquidity to take advan-tage of disruptions in the market and buy undervalued assets.

With our private-label operation, we were aggressive in trying to acquire credit-card portfolios because no one else was show-ing up to bid. Internally, we saw that our own stock was undervalued, so we were very ac-tive in repurchasing shares. Our stock had dropped into the 20s, and we said, “Let’s be very aggressive.” We bought back close to 40% of our company at an average price of around $50, and currently we trade at $104.

When you have market disruptions, that’s when the best opportunities present themselves. Companies might be in trouble, and that’s when you get your best price mul-tiples.

40 C F O | j a n u a r y / F e b r u a r y 2 0 1 2 • c F o . c o m P o r t r a i t b y S c o g i n m a y o

As companies invest more money in customers—both to win them and to analyze their preferences and behaviors—Alliance Data Systems (ADS) is positioned to reap the rewards. Based in Dallas, the affinity-card and customer-loyalty program provider outperformed the gen-erally sluggish economy last year, watching its sales and earnings grow and its share price soar as all three of its divisions—private-label and co-branded credit cards, loyalty marketing, and a Canadian marketing business—benefited from a recovery in consumer credit and an increase in retailers’ spending on loyalty programs.

As his company enters 2012, ADS finance chief Charles Horn says he expects continued growth at home and in new and existing ven-tures abroad. The company is also launching a push to buy back up to $400 million of its own stock this year. Here, Horn describes the capital structure needed to support the compa-ny’s growth, as well as the potential challenges that ADS may face in the months ahead.

on the record: charles horn, CFO, Alliance Data Systems

Alliance Data is building its war chest in anticipation of serious deal-making.

Page 43: CFO Mag Jan-Feb 2012
Page 44: CFO Mag Jan-Feb 2012

on th

e re

cord

42 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

How are you thinking about the company’s capi-tal structure today?If you look at where we are from a funded-debt-to- EBITDA standpoint, we’re about 2.3:1, so we have a very good position. So over the next year we will probably add an incremental $1 billion of liquidity, about half from free cash flow and about half from new debt, again building up a war chest, so that down the road when opportuni-ties present themselves we will be able to take advantage of them.

As you think about raising debt right now, how is the market looking?I’d call it choppy. If you’re investment-grade and you’re a seasoned issuer, meaning you’ve been in the public mar-kets many times, you’re in good shape. But if you’re not—like us, we’ve never done public debt before—it’s a very choppy market. Windows of opportunity present them-selves, then concerns about sovereign debt pop up, ev-eryone pulls back, you have an outflow of funds, and the market closes. So what we’re looking to do is just be op-portunistic. We can be ready to access a number of dif-ferent markets on a moment’s notice based upon when those windows open up.

We have good, strong liquidity right now. We don’t have to do anything, so we don’t have to chase higher rates. We can just wait, let the windows of opportuni-ty develop, and then when they are open we can step in quickly.

Where are you looking for growth? We are very focused on organic growth. That would be especially true within our Epsilon marketing division, where we can look to expand into new channels to pro-vide our services.

Overall, we really have a four-pronged approach. First, we want to drive the organic growth we just talked about. Second, we want to continue to find portfolios for our private-label operation that make sense and fit within our expertise. Third, we want to expand our internation-al operations for our LoyaltyOne business out of Canada; we think the opportunity to go into markets like Brazil and India is very much there, and we may add a tuck-in acquisition if it makes sense. And then the fourth piece will be continuing to invest in the company through our share-repurchase program.

How much of the company’s business is based overseas?It’s still pretty small aside from our operation in Canada. That is by far the biggest piece, at about 25%. In Brazil we have a joint venture where we are a minority owner. And in India our business is a start-up. We haven’t even moved to a pilot yet.

How long have you had the joint venture in Bra-zil, and how did you find that opportunity?That opportunity [presented itself] in the third quarter of 2009. We liked the management team that was trying to start up the effort in Brazil. They needed a little bit of intellectual property and they also needed some capi-tal, and that’s where we fit in nicely. It’s a market that is very receptive to coalition programs, meaning compa-nies don’t mind working together with a common card or common royalty mechanism, and consumers are very re-ceptive to it as well. (See related story, “Global Position-ing,” page 50).

In a country like Brazil, it can be very useful to have a joint-venture partner that really knows the local market. Have you found that to be the case?Definitely. Their relationships and their knowledge of the market are very important. From both the tax and regulatory standpoints it’s a unique market. I can’t think of a better way to go into that market than with a joint venture.

What do you see as the biggest challenges to Alli-ance Data’s growth right now?Like any CFO, I worry about two things. First, liquidity. You always want to make sure you’re prepared before there’s a disruption in the market so that you have money before you absolutely have to have it. The second thing is to make sure that when you’re growing quickly, as we are, you have the appropriate controls and structures in place, and the proper oversight in place. While we love international expansion, and we like the green-field op-portunities, we want to make sure that everything is be-ing done correctly.

A related challenge is the pace of change in accounting regulations. When I first started as an accountant, everything was about matching revenues and expenses. Now it’s more about fair value, and it seems like the pace of rule-setting is very fast. But if you look at the Securities and Exchange Commission, it seems very focused on enforcement. That will drive it more to a specific rules-based environ-ment versus a guidelines-based environment, because the SEC wants specific things that it can point to and say a company did them right or it did them wrong. I think that’s going to put us further away from IFRS [interna-tional financial reporting standards] convergence down the road.

One scenario I could see happening is having gen-eral guidelines for IFRS but then having region-specific accounting rules underneath those.

—Interview by kate O’Sullivan

Page 45: CFO Mag Jan-Feb 2012

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Page 46: CFO Mag Jan-Feb 2012

But what’s the ROI?

By David Rosenbaum

CFOs can’t ignore social media.

WHO’S OUT THERE?

In 1775, when Boston silversmith Paul Revere famously rode northwest to alert the country-side that British troops were on the move, Bos-ton tanner William Dawes, bearing the same

message, rode not so famously southwest.When the British arrived in Lexington and Con-

cord, they did not meet many militiamen from the towns Dawes visited. Why? In The Tipping Point, Mal-colm Gladwell suggests that whereas Revere was a “connector,” blessed with “unique social skills,” Dawes was an ordinary man lacking Revere’s social network.

Today, we’d call Revere an influencer. He’d have thousands of Twitter followers and Facebook friends.

Rob

ert

Hou

ser

Page 47: CFO Mag Jan-Feb 2012

45C F O | J A N U A R Y / F E B R U A R Y 2 0 1 2 • C F O . C O M

“We’ve seen the biggest transformation by using social media internally. It’s like an internal

Twitter feed, integrated with sales to create a different system of communication.”

— SCOTT TRAVASOS, CFO, Blue Shield of California Foundation

Page 48: CFO Mag Jan-Feb 2012

46 C F O | J A N U A R Y / F E B R U A R Y 2 0 1 2 • C F O . C O M

He’d belong to the “Don’t Tread on Me” group on LinkedIn. Rather than knock on doors, he’d tweet “@sam-ueladams @johnhancock Citizens, militia, resist. #red-coats #toarms #bostonpostroad.” Sound crazy? Consider that #Egypt was 2011’s most used hashtag and that Arabic-language tweets soared from 99,000 a day in October 2010 to more than 2 million a day by the following October as the revolutionary movement took hold in that part of the world.

The power of social media—or, at least, its potentialpower—is not lost on American companies. Many are using it successfully for everything from new-product marketing to employee collaboration to innovative and very effective forms of customer service. But most companies are strug-gling mightily to turn nascent, ad hoc efforts into something resembling an actual strategy.

Clearly, social media engages enormous numbers of people: how else to explain how Starbucks got 8,006,349 Facebook “likes” (as of early December 2011) for its Frappuc-cino. That’s a lot of thumbs up for water, salt, erythritol, xan-than gum, carrageenan, maltodextrin, citric acid, milk, and coffee. More broadly, the numbers on social media adoption are spectacular. As of December, Facebook claimed 800 mil-lion active users worldwide, with 50% logging on every day. Twitter reported an average of 460,000 accounts created per day late last fall, with an average of 1 billion tweets per week. As of November 3, 2011, LinkedIn had 135 million members in more than 200 countries; two new users join every second.

That action is not just limited to consumers. A survey of 4,261 global executives conducted by McKinsey late last year found 72% reporting that their companies deployed at least one social technology. A November 2011 Towers Wat-son study of 604 global organizations found 69% planning to increase their use of social media tools over the next 12 months.

And, while Coca-Cola claims top honors for Face-book fans (32 million), it’s not just giant companies that are staking a corporate presence in the social media world. A November 2011 survey by Social Strategy1, a social media data-mining service, found that 63% of small-and-midsize-business owners have a social media presence: 61% on Face-book, 48% on LinkedIn, 37% on Twitter.

To date, however, much of this activity has been akin to an aspiring actor having a professional head shot taken: it’s standard practice, but it doesn’t guarantee you’ll land any roles. As they rush to put their best faces forward, companies increasingly want to know just what they can expect to gain for their trouble.

ROI Is Where You Find ItAccording to a recent IBM report on social media, the top social media challenge for companies is “establishing an ROI strategy.” However, many experts caution CFOs against in-sisting upon traditional metrics to determine ROI for such a young technology. As Forrester Research principal ana-lyst Nigel Fenwick says, “If you were a CFO back in the early 1990s and I came to you and said I wanted to implement e-mail, and you asked, ‘What’s the ROI?’ could you have got-ten an answer? Social media has become table stakes.” Or, as Kelly Dempski, director at Accenture Technology Labs, says, “There are 800 million Facebook users. That’s not a fad.”

According to Justin Fogarty, social media manager at Ariba, a business commerce network, CFOs should avoid relying on what’s easy to measure. If, for example, “you start incentivizing around website visitors or page views, people will [find a way to] hit those numbers. But did they do it by finding the right customers, or by cheap tricks?”

More often, customer demand is driving the adoption of social media. At BookRenter.com, CFO Gene Domecus says, “I can’t impose only financial-return expectations on social media investments. Social media is how the customer chooses to interact with us.”

BookRenter works like Netflix for college students, al-

HOW T0 MEASURE SUCCESS?Most-common methods by which companies measure social media marketing effectiveness:

Numbers linking as friends, followers, “likes”■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 60%

Sharing, forwarding, retweeting, or posting brand content■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ 39%

Qualified leads from social media■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 35%

Visits or time spent with branded social content■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 35%

Incremental sales attributable to social media■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 25%

Brand awareness/favorability (measured by surveys)■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 18%Source: Chief Marketer, “2011 Social Marketing Survey,” October 2011

Who’s Out There?

“If you were a CFO back in the early 1990s and I came to you and said I wanted to implement e-mail, and

you asked, ‘What’s the ROI?’ could you have gotten an answer?”— NIGEL FENWICK , FORRESTER RESEARCH ANALYST

Page 49: CFO Mag Jan-Feb 2012

lowing them to save money on textbooks by rent-ing instead of buying. “College students live on Facebook,” says Domecus. “That’s where we now find out about customer issues and challenges before anybody actually contacts our call center. When we hear about an issue, we reach out to re-solve it,” reducing help-desk costs. Indeed, many companies are beginning to monitor and interject themselves into customer conversations before those conversations turn into a wave of bad PR.

Method Products CFO Andrea Freedman, whose company sells eco-friendly cleaning prod-ucts, got a related, and unexpected, ROI from social media. In 2010 she received a cease-and-desist order from Clorox objecting to Method’s use of its daisy logo, which Clorox argued it had trademarked. Method made a video proposing that no one could trademark a daisy and posted it on YouTube. Method never heard from Clorox again. The video “got brand awareness up, solved our legal issue, and was much cheaper than law-yers,” says Freedman.

Begin by Listening“Most companies start their social media initia-tives by monitoring what’s going on ‘out there’ so they can understand what’s being said, discov-er influencers, and target their audience,” says Christopher Koch, an associate vice president at B2B research and consulting firm Information Technology Services Marketing Association.

Nutritional-supplement retailer GNC sells vitamins and other health products primarily to a young, athletic audience. Listening to and ana-lyzing online conversations with the help of soft-ware from Radian6, GNC noticed its target audi-ence was suddenly talking about coconut water. GNC wanted to get in on the trend but, says Chris James, GNC’s director of social media, “coconut water by itself tastes terrible. That’s what people were saying online.”

So GNC partnered with Pepsi and in May 2011 launched Phenom, a flavored coconut- water drink. Part of its marketing campaign in-cluded a multipronged social media strategy, re-plete with a Twitter hashtag, buying the keyword “Phenom” on Google AdWords, creating a mi-crosite dedicated to the new product, and work-ing with Radian6 (which, according to its vice president of marketing, Rob Begg, “crawls north of 150 million sources”) to target influencers and gauge early reaction.

Ultimately, GNC discovered it needed to go

Rob

ert

Hou

ser

Social media❚■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■■ ■ ■ 65%❚❚ 2%

Website upgrades■ ■■■■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 56%■ ■ 6%

Content creation■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■■■ ■ 53%❚❚ 2%

Landing-page optimization■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 51%❚ 1%

Search (SEO/PPC)■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 49%■ ■ 5%

Online advertising■ ■■ ■ ■ ■ ■ ■ ■ ■ ■■ ■ ■ 42%❚■■ 7%

E-mail■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 39%■ ■ 5%Source: 2011 MarketingSherpa Social Marketing Benchmark Survey

InvestIng In socIal MedIaWhere will marketing departments invest their online dollars?Budgets will increase ■ ■■

Budgets will decrease ■ ■■

“I can’t impose only financial-return expectations on social media investments.

Social media is how customers prefer to interact with us.”

Gene DoMecuS, cFo, BookRenter.com

47C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

Page 50: CFO Mag Jan-Feb 2012

had people in Singapore order from us because they have Facebook friends in the U.S.,” says Parks. “Who would ever have thought that? It’s crazy. And it’s so inexpensive. It costs me roughly $500 to $1,000 a month for the sweepstakes with Wildfire. With Google AdWords, I was spending $2,000 to $4,000 a month.”

Measuring a reduction in cost is not the same as calcu-lating a true ROI, however. And if matching a social media investment to an income-generating return is tricky, imag-ine trying to put a price tag on the ways that social media can enhance corporate performance. Yet that may be where the most promising payoff beckons. “We’ve seen the biggest transformation by using social media internally,” says Scott Travasos, CFO of Blue Shield of California Foundation.

A longtime client of Salesforce.com, Blue Shield ad-

48 C F O | J A N U A R Y / F E B R U A R Y 2 0 1 2 • C F O . C O M

Even as companies grap-

ple with how to do social media right, they must also be careful not to do it wrong. Consider Netflix CEO Reed Hastings’s blog-heard-round-the-world, in which he announced that Netflix would spin off the streaming side of its video rental service, forming Qwikster, with fees adjusted in a way that struck many customers as unfair. The blogosphere and Twitter-sphere exploded with appro-bation, and Hastings quickly reversed himself, but not before Netflix lost 800,000 subscribers in one quarter and saw its stock fall 25%.

Companies should take

note: as theoretically desir-able as transparency may be, social media can shorten considerably the distance between a bad decision and its consequences. Another potential pitfall is violat-ing Securities and Exchange Commission and Financial In-

dustry Regulatory Authority (FINRA) rules around online communications. Jim L. Pier-son, a manager at Beacon Hill Fund Services, which provides compliance and other services to funds, points out that fi-nancial institutions registered with the SEC or FINRA must now capture and track every-thing relevant to their busi-ness in social media just as they are required to monitor and archive e-mail.

According to FINRA Notice 10-06, “Every firm that intends to communicate, or permit its associated persons to communicate, through so-cial media sites must first en-sure that it can retain records of those communications....” (Technological help is plenti-ful—Socialware, Actiance, and Hearsay Social all provide social media compliance soft-

ware; Arkovi and Erado spe-cialize in archiving services.)

John Calvin Slemp, managing director at risk and internal-audit consultancy Protiviti, suggests that CFOs make sure people are trained not to tweet or post anything that could be deemed rel-evant to the business, such as, “I can’t wait for the party on Tuesday after the earnings report comes out!!!”

With most IT initia-tives, training comes at the end. Social media demands it up front. “We’ve all been burned by sending an e-mail we shouldn’t have,” says Slemp. “Social media is much worse. You’ve got to com-municate that risk to employ-ees and have a response plan ready in case someone says something they shouldn’t have.” —D.R.

When mum’s not so dumb

“It used to be that for every 10 hours

of downtime, a woman would spend 9 hours reading or watching TV. Now she spends those hours online, most of them on social media.” —IAN MARSHALL OF BENEFITS COSMETICS

back to the drawing board: Phenom’s taste was still unsat-isfactory, and GNC is reforming the product. “Social media validated what we were seeing in our other data feeds,” James says, including point-of-sale information from GNC’s brick-and-mortar stores. Social media couldn’t light a fire under a less-than-optimum product, but it could give a fast and de-tailed read into the nature of the problem. Social media, says James, “is a tool. It’s not the tool.”

From Listening to EngagingAfter learning how to listen, businesses must learn how to engage. One way is the popular “like” approach. As Bruce Parks, CEO of Chocolate Bakery, explains, “When we run a sweepstakes, you click ‘like’ on our Facebook page in order to enter. That increases our potential marketing field. We send out e-mails inviting the entrants’ friends to enter. Us-ing Facebook is brand-building, versus simply showing up in a Google search if people are looking for your product.”

Parks read about Wildfire social media marketing tools “in a tech magazine,” and became a subscriber in February 2010. That helped him to connect to a Facebook fan base, grow it, build an e-mail list, and automate Facebook contests.

Parks says social media has transformed Chocolate Bakery from a company whose customers could all be found within an 80-mile radius to an international concern. “We’ve

SILENCE IS GOLDEN: Netflix CEO Reed Hastings learned the hard way that social media works.

Who’s Out There?Enrique M

arcarian/Landov

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49C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

opted the tool’s new communication platform, Chatter, which in many ways mimics a Facebook page. When an employee opens Chatter, she sees profiles of people and groups (with pictures and icons); a separate col-umn allows her to search for any-thing stored by the application—cli-ent histories, analytics on deal close rates, price approval points, and so on. She can make recommendations, record “likes,” post stories about cli-ents or events, or share files. Access is role-based, so people see only what they should.

“I post three to five messages a day in Chatter to update my depart-ment,” Travasos says. “Things like, ‘I was scheduled for noon to complete this part of the close; I won’t.’ It’s like an internal Twitter feed, integrated with sales to create a different system of communication.”

As employees have rushed to adopt Facebook and other forms of social media in their personal lives, says Chatter senior vice president Kendall Collins, their workplace tech-nology arsenal can seem “like an IT museum. The very simple premise of a photo doesn’t exist in enterprise software. There are tables and data, but no pictures of customers. All enter-prise systems are based on reporting and control. New sys-tems will be based on people and interaction.”

“It’s hard to put a dollar figure on the collaboration ad-vantage we get from Chatter,” Travasos says. “It’s about ef-ficiency. We spend less time on transactions and more time on strategic analysis.”

Getting SocialSometime this spring, Wall Street is expected to value Face-book at an estimated $100 billion. Its shareholders aren’t the only ones who anticipate big things ahead for social media.

“We have a team of five people spending their whole life on digital marketing,” says Ian Marshall, managing director for the U.K. and Ireland for quirky San Francisco–based Benefits Cosmetics. The company tripled its spending on social media last year and expects to follow suit this year. “At the beginning of 2011, we had about 15,000 Facebook fans in the U.K.,” he says. “We ended the year with 100,000. This year we’re shooting for 250,000. It used to be that for every 10 hours of downtime, a woman would spend 9 hours reading or watching TV. Now she spends those hours on-line, most of them on social media. We’d be crazy to keep

trying to speak to our customers through the old model.”Ariba’s Fogarty suggests that companies get started by

targeting the areas most relevant to them. “It’s not about big numbers,” he says. “It’s about the right numbers.”

Fogarty also encourages companies to make sure IT is in the loop so that systems can be properly integrated. At a higher level, social media effort needs to be coordinated and planned, not ad hoc. “Too many companies,” Fogarty says, “want to have a Facebook page just because everybody else does.” While ROI may be hard to measure, companies can track metrics to gain a sense of confidence. “How long does it take a customer to find what he’s looking for? You can take that metric to see if social media is lowering your call- center costs, or lowering time-to-resolution, or improving customer satisfaction,” Fogarty suggests. Given that 60% of the people who use social media also post reviews on prod-ucts and services, the line between customer service and marketing has virtually disappeared.

That blurring further complicates ROI analysis, but also illustrates how transformative social media may be. Put an-other way, #movefast #movesmart #movenow.

Or run the risk of becoming William Dawes rather than Paul Revere. CFO

DAVID ROSeNBAUM IS SeNIOR eDITOR FOR TeCHNOlOGY AT CFO.

Communicating with customers■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■■ ■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ 74%

Responding to customer questions■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ 65%

Promoting events■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■■ ■ ■ ■ ■ ■ ■ ■ 60%

Generating sales leads■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■■ ■ ■ ■ ■ 52%

Selling products/services■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■■ ■ ■ ■ 50%

Soliciting customer reviews■ ■■ ■ ■ ■ ■ ■■ ■ ■ ■ ■ ■■ ■ ■ 48%

Capturing customer data■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■■ ■ ■ 46%

Brand monitoring■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■■ ■ ■ 46%

Customer research■ ■■ ■ ■■■ ■ ■ ■ ■ ■ ■ ■ ■ 43%

Recruiting employees■ ■■ ■ ■■■ ■ ■ ■ ■ ■ ■ ■ ■ 43%

Employee-to-employee interactions■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 41%

Soliciting customer ideas■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 40%

Providing support■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 40%

Expert insights/thought leadership■ ■■ ■ ■ ■ ■ ■ ■■■ ■ ■ 38%

Training/education■ ■■ ■ ■ ■ ■ ■■ ■ ■ ■ ■ 37%

Customer-to-customer interactions■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 35%

Vendor or partner communications■ ■■ ■ ■ ■ ■ ■ ■ 27% Source: IBM survey of 351 social media executives

SOCial Media PriOritieSTop goals cited by companies regarding their social media strategies

Page 52: CFO Mag Jan-Feb 2012
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51C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

➸As finAnce chiefs help their compAnies search for growth opportunities, more and more often they find themselves looking outside the United states rather than at home. While the domestic market remains plagued by a seemingly endless slow-growth recovery, not to mention the fierce competition endemic to a highly developed economy, emerging markets offer the allure of double-digit growth. But cfos know—often from hard-won ➸

Expanding abroad has lots of potential, and plenty of risks. Here are some quick tips to help you avoid problems with staffing, regulatory requirements, joint ventures, and more.

By Michelle CelarierIllustrations by Chris Buzelli

Global Positioning

CFO/360°RepORt

0

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52 C F O | J A N U A R Y / F E B R U A R Y 2 0 1 2 • C F O . C O M

experience—that those developing markets not only offer the promise of great reward but also pose many risks.

How should finance executives proceed in foreign mar-kets in 2012? In our inaugural CFO/360° report, we offer ad-vice from several distinct vantage points, as determined by the editors who oversee our coverage of each topic area. Our goal is to provide highly focused, actionable insights to help you navigate whichever challenge is most relevant to your company’s situation. Of course, you may well decide that our entire package is indispensable. Either way, this CFO/360° report will be a very useful and efficient way to enhance your knowledge of global business practices. Throughout 2012 we will bring you quarterly CFO/360° reports on a range of core finance challenges and opportunities.

HUMAN CAPITAL

THE HELPLOGISTICAL AND LEGAL CHALLENGES ABOUND WHEN HIRING OVERSEAS.W B H N H client who wanted to expand into Europe that in some coun-tries he would have to offer not two weeks, nor four weeks, nor even six weeks of holiday pay to locals who work more

Jason Grow

than a 35-hour week, but a full 36 days’ worth, the CFO balked. At the U.S. company, the most vacation time award-ed was four weeks—and that was only for the chief executive.

“He could not get his head around it,” recalls Hite, whose firm, Hull Speed Associates, helps companies set up subsidiaries around the world.

U.S. companies have been expanding globally for de-cades, but it’s still hard for many U.S. executives to fully grasp that they’re not in Kansas—or New Hampshire—any-more. A common initial stumbling block as companies skip down the yellow brick road is the realization that while in the U.S. most employees are hired “at will” and can be let go with no strings attached, in many other countries workers have employment contracts that spell out compensation, working hours, vacation, termination, and severance—much of it more generous than what U.S. companies typi-cally offer.

To avoid incurring such expenses unawares, finance chiefs should do their homework for each local market. Small to midsize companies that are moving abroad for the first time but are “highly U.S.-centric” are the most like-ly to get into trouble, says Shan Nair, founder of human-resources and accounting-services firm Nair & Co., whose clients typically have sales between $300 million and $3 bil-lion, with anywhere from 20 to 1,500 employees worldwide. “The temptation is to do things on the cheap and cut cor-ners, to think, ‘We’re small and won’t be on anybody’s radar screen.’” But when things don’t work out, employees may

CFO/360° REPORTGLOBAL POSITIONING0

“If you’re going into a joint venture,you have to figure out what themanagement structure is. Who hasthe decision-making power?”LARRY HARDING, President, High Street Partners

Page 55: CFO Mag Jan-Feb 2012

at multinationals, or those who have studied extensively abroad. Career-oriented social media sites such as LinkedIn are becoming a major source for leads in many countries. NetSuite CFO Ron Gill says his firm has increasingly relied on the service to help identify local finance talent in Manila since establishing a shared-services center there in 2007.

Foreign companies should not expect such talent to come cheap, especially in booming economies. Professional salaries in emerging markets like the BRIC countries (Bra-zil, Russia, India, and China) are fast approaching, or even exceeding, those in the U.S.

Local finance executives also need to understand the ethical and compliance standards they are expected to uphold. For example, U.S. companies must comply with the Foreign Corrupt Practices Act, which prohibits mak-ing bribes to win business. But in a number of countries, like China and Saudi Arabia, such practices are common, says Blythe McGarvie, a former CFO and now CEO of LIF Group, a strategic consultancy. She says one of the biggest risks is hiring someone who is rooted in the local traditions and feels pressure to conform rather than uphold U.S. law. “I’ve had to fire people for that,” she says.

Internal checks and balances are crucial to avoiding such problems. Brown recommends that the CFO establish a direct personal relationship with outside auditors and law-yers in the foreign country; such advisers should report to him. The CFO should hold in-person meetings with local finance staff once or twice a year, and the parent company should conduct surprise audits of the local unit several times a year as well, says Brown.

complain to the authorities, and the costs of ignoring local laws can pile up.

Companies just starting to do business abroad may be-lieve they are on safe ground by hiring locals—particularly salespeople—as independent contractors until they deter-mine whether the market proves profitable. But that tack can prove problematic if the person works for just one com-pany, carries a company laptop, or drives around in a com-pany car. Under those circumstances, he is likely to be con-sidered an employee. In Brazil and China, in fact, it’s actually illegal for a foreign company to employ individuals as con-tractors. One option for new market entrants in Brazil is for the foreign company to partner with a local company that can then hire local staff. In China, foreign entities need to either establish a wholly-owned foreign subsidiary or find a joint-venture partner.

In Europe, contractor agreements can work—but typi-cally for assignments of no more than a year. After that, Nair says, the individual gains additional employment rights. For those entering the European market for the first time, Nair recommends hiring people on a short-term contract, with no responsibilities beyond that, so that the company doesn’t incur ongoing employment liabilities.

It’s hard to undo the damage if contracts aren’t writ-ten properly. In certain European countries, for example, employees are entitled to the equivalent of an extra month’s worth of their annual base salary to pay for their vacations; U.S. employers must take care to ensure that contracts stipu-late that the amount is included in the yearly salary, or they may have to provide it as an additional payment.

Meanwhile, in FinanceWhen it comes to establishing a finance department over-seas, many global companies use a mix of local talent and ex-pats. “As you’re getting started, it makes sense to have some-one from within your company relocate to the new market,” says Thack Brown, SAP’s CFO for Latin America. “You need to make sure you have someone you trust who can keep an eye on things and extend the culture of your organization.” That person also needs to be adaptable and willing to learn what are typically quite different tax and labor laws.

Brazil, where Brown has lived for the past 10 years, is re-nowned for its Byzantine tax structure (see “Brazil Is Boom-ing [and Maddening],” CFO, July/August 2010). “New pro-nouncements or interpretations are made every single day,” he says with a sigh. “I’ve spent a lot of time educating my parent-company counterparts on what is going on here. So many things come up and they say, ‘That can’t be right. Is that really the way things work?’ If you don’t have someone in the parent company who is open to hearing about these differences, you can really struggle.”

When hiring locals as finance-department managers, Brown recommends looking for people with experience

53C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

When it comes to establish- ing a finance department overseas, many global companies use a mix of local talent and expats. “You need to make sure you have someone you trust who can keep an eye on things,” says Thack Brown, SAP’s CFO for Latin America.

Page 56: CFO Mag Jan-Feb 2012

Daniel H

ennessy

GROWTH COMPANIES

HOWDY, PARTNERIDENTIFYING A LIKEMINDED VENTURE PARTNER CAN BE THE KEY TO SUCCESS IN A NEW MARKET.B C, CFO - NineSigma, is a fan of what he calls a “de-risking” approach to global expansion: joint ventures. “We prefer to dip our toe into a market, rather than doing a swan dive,” he says. By working with a local partner, his company can get the lay of the land as it develops its expansion strategy.

The company’s caution is due in part to the nature of its business, which involves providing everything from fa-cilitated technology services to coaching and consulting to helping companies enhance their innovation capabilities. With significant intellectual property at stake, Chorba says NineSigma can’t be too careful.

“We look to where there is a cultural and phil-osophical alignment regarding the treatment of in-tellectual property,” he explains, singling out South Africa and Brazil as countries he has found to be im-pressive on that score.

To make joint ventures work, companies must be clear about their objectives, says Larry Harding, founder and president of High Street Partners, a con-sulting firm that assists clients with overseas expan-sion. Harding notes that in a joint venture, “you’re replacing one set of risk variables with another.” And while the CFO may not be the one making all the de-cisions regarding a partnership, he’s typically the one charged with making it work out financially.

“If you’re going into a joint venture, you have to figure out what the management structure is,” says Harding. “How do you split the profits? What do you do if it’s a loss-making enterprise? And who has the decision-making power?”

Evaluating the risk and figuring out how to un-wind the marriage if it doesn’t work are typically the issues foremost in a CFO’s mind. One way to handle such challenges is to adopt a revenue-sharing mod-el, an approach that NineSigma favors. “We don’t commingle funds. We don’t invest in them, and they don’t invest in us,” says Chorba. Working with a third party in another country might slow market penetra-tion, he acknowledges, but NineSigma has built that lag time into its business model.

“We need the common understanding up front,” Chorba says, explaining that the company will have a memo of understanding to state the objectives.

54 C F O | J A N U A R Y / F E B R U A R Y 2 0 1 2 • C F O . C O M

While not a binding agreement, it lays out the compensation and revenue-sharing models and explains how each party will benefit. The company then creates a pilot to test how effective the union is.

Management from afar can be tricky, so it’s important to provide guidance and resources to help the local expansion teams without micromanaging them, Chorba adds. Instead, ongoing collaboration among the delivery teams is essential for quality control and consistency. NineSigma also has a global team of executives who spend days at a time meeting with its partners at least a few times a year.

The lack of control that a partnership involves is one of the pitfalls of going the joint-venture route, says Jeff Wakely, CFO and treasurer for TechTarget, an online business me-dia company. He cites the company’s partnership in China as an example. “To go into China and start from a dead stop is very difficult,” he says. But forming a partnership there can be a nightmare in its own right. Managing accounts re-ceivable is one challenging arena. Wakely says that Chinese companies may take as long as a year to pay. Moreover, ex-penses are often reimbursed in cash. “A lot of practices aren’t

When creating an offshore shared-services center, “make sure the infrastructure is there and the political environment is stable.”SCOTT DAVIDSON, CFO, Quest Software

CFO/360° REPORTGLOBAL POSITIONING0

Page 57: CFO Mag Jan-Feb 2012

tain low-cost areas. Davidson has nixed India for its limited infrastructure and higher employee churn rate, and China for its political environment.

Depending on the complexity and scope of the process-es involved, the move to an offshore operations center can vary widely, from mere weeks to many months. Working with an outsourcing partner can help accelerate the process and smooth over bumps. For example, EXL, a provider of outsourcing services, has successfully migrated key business processes for clients like American Express, Travelers, and Centrica. Initially, the firm staffs these locations with both locals and employees from corporate headquarters for six months to a year. The most difficult and most important de-cision is hiring the right leadership for the center, says Rohit Kapoor, president and CEO at EXL. That person will be re-sponsible for building the corporate brand in the region, and needs to be connected with regulators and be knowledgeable about local regulations.

Processes that can be standardized and centralized can more easily be moved to offshore locations, but those that re-quire substantial human interaction or language fluency, or that have specific regulatory requirements, can be more diffi-cult to move to a shared-services center. For example, vendor payments can be made from virtually any location, but sen-sitive employee records are harder to aggregate offshore be-cause errors can create huge employee dissatisfaction. Pilot programs can help smooth the transition, says Kapoor. CFO

MICHELLE CELARIER IS A NEW YORKBASED WRITER.

55C F O | J A N U A R Y / F E B R U A R Y 2 0 1 2 • C F O . C O M

Management from afar can be tricky, so it’s important to provide guidance and resources to help the local expansion teams with-out micromanaging them,according to NineSigma CFO Bill Chorba.

well documented. You have to be in front of that,” he says. After participating in a partnership in China for two years, TechTarget has taken over the operations of the partner company, Keji Wangtuo Information Technology, to ensure tighter control of the operation.

A joint venture is not always an alternative to setting up a permanent office or hiring employees. More often, it is a step in the process. But since the agreement is with a busi-ness entity, not an individual, the U.S. finance chief does not have to worry about complying with local labor laws or pay-ing employee-related taxes, which are the responsibility of the local partner. “That’s a huge benefit to us,” says Chorba.

TECHNOLOGY

LEARNING TO SHARECFO NEED TO LOOK BEYOND COST SAVINGS WHEN WEIGHING A MOVE TO SHARED SERVICES.W desire to tap into a new universe of customers, there are oth-er motivations. Often U.S. companies see a chance to save by establishing shared-services centers overseas, where the cost of providing IT, finance, and a range of back-office func-tions can be considerably less than providing them from a U.S. base of operations. While the global reach of the Inter-net certainly makes such efforts more viable than ever be-fore, a host of other factors play a role in finding the right site for an offshore location.

In 2011, Quest Software CFO Scott Davidson set up a shared-services center for the firm’s European operations in Ireland. Now a predominant portion of the sales support, finance, and accounting for its European offices is consol-idated through the Irish shared-services center. The move helped Quest save money, but Ireland is “not purely a place to go because it’s less expensive,” says Davidson. While pricier than Asia, Irish labor costs are about 10% cheaper than the rest of Europe, and labor laws are more employer-friendly. More important, the government has invested in education and technology infrastructure development, so the country now has well-trained engineers and finance professionals who have experience with the shared-services model.

Before deciding where to set up a shared-services center, companies should decide which regions they want the cen-ter to support, which functions staffers at the center should perform, and what the time line will be for making the transi-tion to the new structure. Davidson can tick off a number of countries where he would not want to put a shared-services center—and why. The risk of political instability and the lack of broad language skills are high on his list of concerns in cer-

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56 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 • c f o . c o m

Answers: 1–A; 2–C; 3–D; 4–B; 5–D; 6–C; 7–B; 8–D

Deal with ItAs we report in this month’s cover story (“Who’s Out There?” page 44), companies can no longer afford to ignore social media. A recent IBM survey found that most companies are, in fact, doing something in the social media realm. But not always the right thing. See whether you fall into the perception vs. reality gap:the qu

iz

2

3

Of companies with a social media presence, the percentage that solicit customer reviews is:

A. 13%B. 29%C. 35%D. 48%

Asked which function is responsible for managing and implementing the company’s social media strategy, what percentage of companies said “Finance”?

A. 0%B. 7%C. 14%D. 21%

Asked to identify their top three social media challenges, companies cited “estab-lishing ROI strategy” as the top challenge. Coming in second was:

A. Negative brand exposureB. Monitoring employees’ use of social mediaC. Lack of analyticsD. Industry regulation

According to a 2011 study from the Univer-sity of Maryland, the “Facebook Apps Econ-omy” created, at a minimum, how many jobs in 2011?

A. 30,000B. 90,000C. 120,000D. 180,000

6

7

8

1

4

5The percentage of consumers who have a presence on a social media site ranges from 72% (baby boomers) to 89% (Gen Y). The percentage of surveyed companies with such a presence is:

A. 79%B. 68%C. 55%D. 41%

Asked why they go to social media or social networking sites, how did consumers rank “interact with brands” (that is, companies) among a list of the 14 most commonly cited reasons?

A. 5th

B. 8th

C. 10th

D. 14th

When they do interact with companies via social media, the top reason cited by consumers is to pursue coupons or other discounts. Asked why they think consum-ers follow them via social media, companies ranked that reason:

A. 5th

B. 8th

C. 10th

D. 12th

Almost three-quarters of companies say they think consumers’ top priority in fol-lowing the company via social media is to learn about new products. What percentage of consumers cite this as a reason to inter-act with companies via social media?

A. 34%B. 51%C. 70%D. 88%

Source: Ibm, “from

Social media to Social c

rm”

Page 59: CFO Mag Jan-Feb 2012

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IntroducIng two new ways to read CFO magazIne.In addition to print and online, you can now download the free digital edition, and have an exact replica of CFO magazine delivered right to your inbox or tablet device. subscribe online at www.cfo.com/subscribe. Plus, you can download the new cFo mobile app for easy reading on your mobile device. Simply visit your mobile app store on your iPhone®, Android™ or other mobile device to download. Best of all, CFO magazine remains free of charge for finance executives.

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