Category: Nature of the Job

Overhead! – Every CEO’s First Response to Subpar Performance Results


Profit DropOf course, it would be obnoxious to generalize my observations to include the entire class of business owners and chief executives (maybe they are not all the same), but every single CEO, with whom I've ever dealt, displayed the same behavioral pattern at the first sound of "bad news."

It's one of the most unpleasant experiences many financial professionals go through from time to time. The fiscal period (month, quarter, year) is closed and you look at the bottom line that is way below the company's target, or worse – the numbers are in red. You cannot help feeling singly responsible, simply because you are the first person to stare in the face of this unfortunate reality.

Yet, while it's true that a holistic CFO, the rightful member of an executive team, shares the P&L responsibility with the rest of the decision-making crew, unless she uses extravagantly expensive capital resources, her direct responsibility for the poor performance is highly unlikely. In fact, she probably anticipated this outcome and was doing everything in her power to prevent it: fought for better informed procurement decisions, higher efficiency, sensible distribution methodology, more selective sales, and so on.

Nevertheless, here are the results. The gross profit is too low, eaten away by sub-par sales. Some of new products couldn't make any money at all due to the lack of marketing and distribution efforts. There is a delinquent debt write-off on an account blessed by the boss for open terms. All these operational losses that you tried so hard to thwart.

And now it's time to present the results to the CEO. Frustrated by the company's poor performance, worrying about the impact the loss may have on the cash-flow, formulating the bullshit you will have to feed to the bankers to spin the disappointing news, you go through the established reporting protocol, whatever it is in you company: KPI tables, graphic dashboards, formal financial statements. As I said, in my experience the delivery of the news causes the same reaction: "We have to reduce our OVERHEAD!!!"

Overhead? We've kept our general and administrative expenses (G&A) stable for years! While we doubled our volume (triple, quadruple – whatever is your case), we managed to do so with a mere 10% increase in non-operating expenses. It's the gross margin we should be discussing. Alas, your reasonable arguments will break against the wall of stubborn conviction that overhead is the source of all evil.

Afterwards, the useless exercise of scrutinizing every single category of G&A will commence. You will have very expensive meetings with highly paid executive staff, including yourself, devoting their valuable time to discussions of $5,000 monthly Federal Express charges and $500 spent on various subscriptions. While you do that, another transaction bound to lose $250,000 will materialize, and then another, and another…

Why does it always happen like this? The answer is simple: only a handful of people are capable of facing their own failures without flinching away. It is very difficult for chief execs , who are frequently involved in operational management, sales, and business development, to admit that they don't really handle their side of the business too well. So, instead of dissecting the real causes, they jump on something they rarely control. And it's really funny, because a significant portion of the overhead is created by them. You know – travel, dinners, drinks, limos, perks, etc.

The Trade Finance Prison


Images-1Theoretically, you can imagine an international business operating without a trade finance facility – no letters of credit, document negotiations, confirmations, etc. Your suppliers would be more than happy if you always pay in advance. On the other side of the equation, there are some desperate for product customers that you may be able to coerce into pre-payment plans, but, if you want to grow your volume, you will most likely end up extending them unsecured credit terms instead.

Let's pretend for a minute that we don't see the elephant in the room – the cost of working capital, which, under this stretched cycle of paying way before the product is received and collecting long after, turns into a painful burden on the profit margin. Let's ignore it and agree that yes, it is possible to conduct business in this way, especially if the company is cash-rich. It's possible, but dangerous and stupid for reasons too numerous to elaborate in one blog post. I'd say that the top 5 hazards of such modus operandi are as follows:

1. Risk that a foreign supplier will not deliver the product at all.

2. Risk that he doesn't comply with the terms of the purchase contract and delivers wrong goods of unacceptable quality and origin, in random quantities, too late or too early.

3. The danger of not receiving sufficient and correct set of documents that would allow you to claim the ownership.

4. Customer non-payment risk, which is always there when you give open terms, but especially if the payment is anxiously expected to come from abroad.

5. The overwhelming difficulties and costs of international litigation to recover your losses.

To mitigate these risks you need instruments that will protect you and an intermediary that will defend your trading fort. And that's when the trade finance divisions of various banks and financial institutions come into the picture with their Letters of Credits and related services. They can step in and be your guardian against the risks.

A Letter of Credit defines all conditions of purchase/sale, including documentary requirements; and only if these conditions are met, or when discrepancies are accepted, the money will exchange hands. So, the reality is that, you can have $100 million of free cash on your operating account, but if your business has an international exposure, you will end up engaging in Trade Finance relationships one way or another.

The trouble is that the banks know you need them and their benefits come with a price and many strings attached. Even if you only accept your customers' LC's, the cost of advising and processing services may be as high as 0.5% of the transactional value. If you buy product with LC's, then the costs could be as high as 2% (banks love this lucrative business). Yet, that's not the most strenuous part of the arrangement.

When a bank issues a Letter of Credit on your behalf, it takes an obligation to pay to the supplier even if your company goes bankrupt. Therefore, trade finance facility is essentially a credit line (most are utilized by LC's and advances alike). Obviously, to obtain any sizable credit line you must go through a grueling due diligence and you have to pay for it too: field exam, the bank's and your own attorneys' charges, closing fees – $10-12 million facility may end up costing around $150-$175K.

And even that is not the most painful part of the deal. The trade finance Credit Agreements are full of covenants and conditions that restrict your capital distribution, debt acquisition, treasury, operational management, and even dictate how the business is conducted. The banks demand collaterals and guarantees, including personal pledges from owners and their spouses. There are strict and voluminous reporting requirements.

And yet, we work very hard to get ourselves into the Trade Finance prison in order to facilitate our employers' commercial activities. The only thing we can do to ease the pain is to bitch and moan about the banks – a regular exercise of international-business CFO's around the world.

I Dream of “Star Wars,” or Darth Vader’s Management Style


At the risk of exposing myself to the readers’ harsh judgement, I have to admit that there are moments when even my long-time experience of controlling emotions in the work environment is not enough to tame the feeling of… ENRAGEMENT some people manage to ignite inside my being. Hell, even the Page of Frustration doesn’t help.

Some dense employees endlessly making the same errors, or chiefs of irrelevant operating sectors creating disasters behind your back, or (most likely) all of them causing damage simultaneously – these people can make you feel the urge to physically harm them in restitution for the emotional turmoil you experience: bite them, or kick them in the shins, or hit them with a monitor, whatever. Of course, you don’t do any of that. You go and curse at the toilet bowl instead (one of my Personal Tools of Frustration Relief).

During such moments my mind frequently carries me to phantasmagorical events that took place “a long time ago in a galaxy far, far away;” to the image of a person (can we call him a person?) with no tolerance for poor work performance, unlimited managerial authority, and extraordinary motivational tools – Darth Vader. This was an executive who gave no time for excuses and perfected the methodology of frustration release to the point when he didn’t even have to touch the failing underlings. He destroyed them telepathically!

“You have failed me for the last time…” Ta da! And the offender of the high work standards is grabbing the invisible fingers at his throat. “I find your lack of faith disturbing…” – same result! This definitely puts the audience on alert: every time there is a discussion of the Galactic Empire’s failures or setbacks, you start wondering, will Darth Vader have to choke a bitch again?

People’s opinion of George Lucas’s writing and directorial mastery varies, but we cannot deny the fact that his ideas are brilliant and his intuition about mass audience response patterns can be matched only by someone like Steven Spielberg. Notice, how he populated the “Good Side” with heroic, largely self-sufficient overachievers, who would sacrifice their lives before they allow themselves to fail. It makes perfect organizational sense: if they were as fallible as the Dark Side’s middle management, who would reprimand them? Yoda? Obi-Wan Kenobi? It would never work – they are too soft.

Yoda spent so much time training Luke Skywalker for his intended position as a destroyer of the Empire. Yet, the boy wasn’t quite grasping it. So, who did Lucas choose to show the young warrior what’s what? Who else? Darth Vader: my son, my son, you still kinda suck at this. Let me raise the bar a bit. Whoosh! Luke’s hand goes bye-bye. Now, try to overcome your weaknesses and harness the Force!

I sincerely apologize to the worldwide community of the “Star Wars” nerds, but, even though I admire it as a revolutionary breakthrough in filmmaking, I have to admit that the soap-operatic nature of the material always seemed silly to me. Yet, when the frustration rages in my head, remembering Darth Vader’s chocking scenes is extremely satisfying.  Try it!


Response to a Reader’s Question: Take a Position Abroad or Stay Home?


One of my readers, a fellow female CFO, have sent me an email asking for an advice on the following dilemma she is trying to resolve for herself:

"Hi Frustrated CFO

Please advice.

I'm at a crossroad between choosing to work as a group cfo in overseas subsidiary in US or stay in home country (malaysia) and becomes a group cfo of a division.

Both has its merits and demerits but i'm a woman and study shows that most women do not end at top spot without sacrifice. My family and I would have to sacrifice more if i choose to go overseas. My husband need to put his business on hold and becomes a house husband for a while until we settle down. Its good for the kids as they will go to international school and gain mastery in english language.

Staying in home country is not bad either. I will be in a familiar condition, i will gain new exposure, nothing need to change and i can send my kids to good schools at a higher fee.

Most people will say that experience abroad will change how people perceive you as a leader and thus this will give you greater opportunities within or outside the group.

What do you reckon?

Thank you.

Rgds
Anonymous"

Honestly, it is apparent to me that deep in her heart Anonymous knows very well that, professionally speaking, the best thing to do is to take the job overseas. I always said that a career CFO or a Controller needs to view every job as a line on her resume. Nothing more and nothing less. And what can make a better resume entry than a position showing that your knowledge and expertise are viewed to be unmatchable by a local talent pool in a foreign location? This is a great stepping stone in anyone's career development.

Men don't even think twice about opportunities like that, family or not. But women are naturally more considerate creatures. Many of us try to achieve an impossible balance between professional careers and personal lives. This requires a lot of trade-offs – you cannot possibly have everything. You want spend more time with your kids than you can. You don't want to be too tired for your husband. But, at the same time, your career is a source of income and, more importantly, social independence. The last thing a strong woman wants is to give that up.

I am also a strong believer in exposing children to foreign cultures. It broadens their horizons and sets them apart. Most professional parents do it through traveling and student-exchange programs, but here is a fortunate opportunity of a complete immersion. It would be a shame to pass on that.

So, the only real difficulty is the husband. Is it fair to ask someone to put their business endeavors on hold for the sake of perpetuating your own career? It's really a very private issue that depends on individual personalities, and it can be blown into a very complex problem. However, in my opinion, at the end of the day, it comes down to two major considerations:

1. What will guarantee better financial future for your family as a whole? We are financial professionals – we know how to count. Estimate the future values of each possibility.

2. What will secure the psychological stability of your family? If you are excited about the overseas opportunity, but decide to stay home for the sake of your husband, will you subconsciously hold it against him? Will you let the resentment corrode your marriage?

If you can honestly answer these questions, it will ease your decision-making process. I promise.

I invite other readers to express their opinions on this subject in their comments.

Showtime’s “House of Lies” Showcases “Big Business”


ImagesShowtime methodically continues expanding its gallery of likable bastards – you know, those characters who consistently behave badly, violate conventional "morality" in every other screenshot, show complete disregard for their "fellow humans," and yet entice the adoring audience to watch their screen-capades every week, sins and all. Brian Kinney ("Queer as Folk"), Nancy Botwin ("Weeds"), Hank Moody ("Californication"), Jackie Peyton ("Nurse Jackie"), the Gallaghers ("Shameless") – they all have devoted followers who adore them despite their multiple faults and vices.

Now comes Marty Kaan (Don Cheadle), the ruthless management consultant who, together with his younger team members, would stop at nothing to rake more billable hours and expenses into their employer's purse. To make the main characters more or less palatable to the audience, and at times even lovable and pitiful, the show goes beyond the beaten path of showing their human side in personal situations – it pitches them against the somewhat two-dimensional, but decisively abhorrent, cast of clients who, in the viewers' minds, "deserve" to be taken advantage of, if for no other reason but to restore the sense of "social justice."

This means that the show doesn't go after small businesses – that could be risky as the viewers might feel compassion for the struggling owners, and, more importantly, it would demand from them a sufficient familiarity with commercial specifics. Moreover, even people with no exposure to actual business activities understand that no small company can afford Marty's team's first-class airfare and stretch-SUV limos.

In fact, the clients are all large businesses that seem to be plucked out of the media coverage, which makes them not just the Big Bad Wolves, but the familiar ones as well. These are the entities that, at the very least, come into the peripheral vision of the general public. You've got your proverbial bank, tainted by sub-prime mortgages and riding the bailout wave; an obnoxious teenage high-tech billionaire; a national budget-hotel chain helmed by racist Mormons, etc.

Not-businessy people ask me if the show reflects the reality of the every-day business life. My answer is, "No." And it's not because there are no consulting firms, businesses, engagements, and people like the ones we see in the show, or that the writers get the terminology wrong. Actually they get a lot of things right and I wouldn't be surprised if the writing staff compiled by Matthew Carnahan for this show has at least a few people with MBA's in their past. At times they even go too far in their realism: I wonder, for example, what percentage of the audience understands what KPI's are.

The reason the show has nothing to do with the life most business people live is that the Big Business's actual existence is unreal and makes no common sense. Their paper-financed operations, the influence on the government, the executive compensations, the excessive spenditures on… mmm… everything, the actions they get away with – they are surreal and grotesque. But, I guess, that makes it even more fitting for entertainment purposes.

That said, there were a few observations within the first 5 episodes of the show that not only rang very true to my ears, but some were already addressed in this blog's posts:

1. Within the first 10 minutes of the pilot, Marty explains to the audience how the "afterwork" is attained: make them feel like their business is going to fail without you and tons of billable hours will be generated (see 05/14/2011 post Case Study: The Marketing of Fear).

2. The member of Kaan's team responsible for crunching numbers and analyzing clients' financials looks timidly and acts awkwardly in social situations, representing the classical Hollywood stereotype of an accounting professional (see 10/26/2010 post He Looks Like an Accountant…).

3. The core substance of dynamics between various CEOs and CFOs so frequently discussed here (just go to the "Bosses" category) is accurately captured in a very schematic way, which actually manages to make it almost biblical in its generality: a prim-spined, heartless bully, bent on doing the things his way, whether it's good for the business or not (the Boss), on one side and a somewhat hunched, practical, reasonable, subordinate, but still powerful in his own sneaky way schemer (CFO) on the other.

4. Finally, the ultimate truth I have an occasion to repeat at least once every day: everything in this world is a matter of perception, or, as Marty Kaan puts it, "Data dump is the key; everything else is horseshit, except PERCEPTION, which is horseshit you can leverage."