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Behind a Turnaround

As Seen in CFO Studio Magazine Q3 2016 Issue

THE RIGHT PEOPLE ARE THE KEY TO BRINGING A STRUGGLING BUSINESS BACK TO LIFE

CFO Andreas Rothe was prepared to talk to a roomful of financial executives about a number of ways to revitalize a business that is struggling, but the discussion kept circling back to this one point: The people. “Finding the right people to steer the ship, especially one that is sinking, is paramount,” said Mr. Rothe, who currently works in the Matawan, NJ, office of Fragomen Worldwide, the world’s largest immigration services provider, but has played a key financial role in the successful turnarounds of three companies that were floundering.

Mr. Rothe spoke on Achieving Best-in-Class Financial Performance with Limited Resources —Lessons from Turnarounds, at a Middle Market Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently at Blue Morel in Morristown, NJ. Mr. Rothe opened the dialogue with the words, “First who, then what,” quoting business author Jim Collins, whose best-seller Good to Great advised corporate leaders, “Get the right people on the bus, then figure out where to go.” Mr. Rothe elaborated, saying, “Tomorrow you can decide what you’re doing with the people, even trying them out in different positions. Today, get them in the door.”

He moved the discussion along by asking if this can be accomplished if “you’re driving an old, unattractive school bus.” The answer, several in the group said, is a yes: “There will always be people who are interested in a tough environment because they see it as an opportunity to make the biggest impact.” These individuals are firm believers in the saying, “You can only go up.”

But this doesn’t mean, Mr. Rothe and others cautioned, that leaders of struggling companies should clean house in one fell swoop. Instead, “take small steps, attempt quick wins.” And, while acquiring the right people for managerial positions and some key functions is indeed possible, “you’re not going to find the right person to play every role.” That, he and others said, is where those in charge must work to retain existing staff when attempting to turn around a difficult business situation.

“You need to accept and work with some of the people who are already there, or they will leave and you will have nothing.” And it is imperative that managers make every effort to be inspiring, to motivate their teams, and to celebrate the successes of both new and current hires, alike.

Mr. Rothe then attempted to move the conversation toward a couple of other ways to breathe new life into a business that is slipping away, such as focusing on structure, processes, and technologies, but the group went right back to the question of personnel, particularly how to attract and keep the right people when the compensation that the company can offer is not competitive and the outlook uncertain.

Gregory Choi, Senior Vice President of Middle Market Banking at Capital One Bank in Edison, and a CFO Studio Business Development Partner, said he was impressed with one participant who managed to secure a top performer though the salary being offered was quite low. “This executive purposely hired someone who had the academic credentials he wanted, but was rough around the edges; a real ‘diamond in the rough,’ so to speak.” Mr. Choi went on, “He admitted it was someone he thought might have fewer options, and in a perfect world, he might not have given him a shot.”

Mr. Choi said this manager thought: “If I can see through his rather blunt and gruff exterior, I might get someone who can really make a difference.” As it turned out, that’s exactly what he got. “This new hire has brought all the desired intellectual firepower to the party, and is proving himself to be invaluable.”

Mr. Rothe applauded this move and reiterated the need to “focus on a few stars, but to be always thinking of new and unique ways of keeping everybody on board motivated and working toward the same end.” However, a good mix among people, processes, systems, and organizational structure, he continued, will help lead suffering companies to a successful turnaround, and “one that is sustainable over the long haul.”

In an interview after the dinner, Mr. Rothe expressed his pleasure and surprise over how the discussion centered entirely around people, but was never repetitive. “Everyone had the same personnel concerns, but each brought a slightly different flavor to the exchange.” He laughed, saying, “We could’ve talked about people all night.”

Ownership Issues

As Seen in CFO Studio Magazine Q3 2016 Issue

A PRIVATE-EQUITY-CONTROLLED CFO JOB IS NOT AN EASY POST, BUT IT CAN PAY OFF

In general, being a CFO is a lot harder than it used to be,” says Howard Reba, Finance Director – Portfolio Operations at Marlin Operations Group, Inc., an exclusive consulting firm affiliated with Marlin Management Company, LLC, based in Hermosa Beach, CA. “CFOs today have their hands in so many things that used to be relegated to other people, and over time, the job has become much more complicated.” And this holds especially true, he points out, for the CFO of a company that is owned by a private equity firm.

Mr. Reba spoke on The Private Equity CFO —Challenges and Opportunities, at a Small Market and Emerging Growth Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently at Roots Steakhouse in Morristown, NJ.

He began the discussion by asking the attendees what they felt were some of the different challenges the CFO at a private-equity-backed company faces. By an overwhelming margin, the response was the “virtually insatiable demand for information and insight” from the private equity group (PEG), he reports.

Attendees questioned what PEGs do with that high volume of facts and figures, and were surprised by the simplicity of his answer: “PEGs use the information they receive from their portfolio company CFOs to make decisions and pull different levers, much the same as any company does.” The group seemed to be hoping for a more complex explanation, so Mr. Reba added, “[A PEG] can only pull the same levers any company can, though it does bring additional resources, experience, and insight to help evaluate alternatives and make decisions.” As a matter of fact, Mr. Reba shared that he insists the reporting to the PEG and to the management team be aligned because they should both be interested in the same things.

Short Time Horizon

Another difference discussed related to how strategic planning is particularly tricky in the private equity environment where CFOs deal with a shorter or more defined time horizon. “[PEGs] typically target selling their portfolio companies after four or five years, which greatly impacts decisions involving investments, especially in infrastructure matters,” said Mr. Reba.

The challenge of having “two bosses” was discussed, as private-equity-backed CFOs are usually accountable to both the CEO of the portfolio company and the Board, which is typically controlled by the PEG. Mr. Reba advised CFOs in this spot to be “always conscious of the potentially competing priorities of the CEO and the Board.” While many companies have matrixed organizational structures today, CEOs in the small-cap private equity space are often the original company founders, who are very entrepreneurially oriented, and unaccustomed to not having total control of the company. The CFO often finds him- or herself addressing the CEO’s emotional adjustment.

Finally, the group brought up the topic of job security. “I was surprised it took so long to get to this,” remarked Mr. Reba, as the CFO is usually in the most tenuous role, particularly at a private-equity-backed company where management and other changes occur every four or five years. He explained, “Whenever an ownership change occurs, there is a chance of a change in management, and often it is a new CEO or a new PEG who wants to have their person in the CFO role. But that is no longer as automatic as in the past. “I am thrilled when a decision is made to keep a strong management team in place,” said Mr. Reba.

Still, for many, the risk of having to look for a new job after only four or five years is outweighed by the reward that comes with a successful exit for the PEG. “Usually the CFO has been incentivized with a piece of equity and can realize a nice payday,” said Mr. Reba. The cash compensation/equity ownership tradeoff with accompanying risks and rewards is more commonly seen in the private equity space than in other arenas.

Furthermore, Mr. Reba added, “If you did a good job, if you were successful and increased value, an active private equity firm may likely have another opportunity for you.”

Mr. Reba noted that over the course of his career he has worked in private, public, and private-equitybacked organizations and particularly enjoys working in the small and middle markets when a PEG is involved. “In addition to the financial leader sitting in a prime position to create value for the company, the ability to leverage the financial and operational capabilities of a strong PEG makes coming to work every day a fun assignment for the CFO.”

Rules for Success

As the discussion wound down, Mr. Reba took a moment to share his rules for being successful as a CFO at a company that is owned by a PEG. “First and foremost,” he said, “transparency.” He continued, “If there is bad news, inform the PEG immediately. It won’t get better with time, and nobody likes surprises.”

Second, Mr. Reba said, “keep an eye on the amount of cash and watch bank covenants.” Finally, Mr. Reba encouraged CFOs at companies with private equity owners to be on top of their numbers. “Be aware of how you are tracking against the plan and the trends in key performance indicators. Are you where you’re supposed to be?” He pointed out that getting back on track can take time, so measure constantly and adjust quickly; don’t wait.

In closing, Mr. Reba reiterated, “While the challenges and risks of the private equity CFO job are great, the rewards and opportunities can be far greater. “The CFO of a small company is often an island unto him- or herself, whereas the CFO of a company that is backed by the right PEG has much greater resources at his or her fingertips.” And that, he said, is indeed a bonus.

The CFO as Chief Service Officer

As Seen in CFO Studio Magazine Q3 2016 Issue

THE CFO AS CHIEF SERVICE OFFICER

Fifteen CFOs, mostly from tax-exempt organizations, gathered at the Community FoodBank of New Jersey where they sorted and repacked food for distribution to more than 900,000 hungry people in New Jersey. What made this volunteer endeavor particularly impactful was that it was held two days before Thanksgiving. They came together as part of the CFO Studio Executive Dinner Series, and though this one was held in an unusual location, it featured excellent conversation and food for thought for CFOs of tax-exempt organizations — as well as an impressive dinner prepared by a culinary team that is part of the Community Kitchen, the FoodBank’s Food Service Training Academy.

Bob Barry, Chief Financial Officer of the Community FoodBank of NJ, led a tour of the facility, explaining all that goes into running such an expansive operation, and then hosted the dinner. Cheryl Marks Young, Chief Financial Officer of Easter Seals New Jersey, led a lively two-hour discussion of “The CFO as Chief Service Officer —Balancing Internal and External Customers, Partners, and Other Beneficiaries in Tax-exempt Organizations.”

“In our roles as CFOs, we are not just number crunchers, we are not just data crunchers,” said Ms. Marks Young in an interview. “We are human beings who serve others. The numbers and the data help us tell a story about the impact we make on the consumers we serve. That’s the story we have to get across.”

The group discussed all that goes into becoming a charity of choice. Mr. Barry gave specific examples from the Community FoodBank. He explained that Kathleen DiChiara, who started the organization by feeding the hungry out of the trunk of her car in 1975, instilled in the staff the fact that “no” is not an option.

Ms. Marks Young’s mantra is similar. “There is no room for failure in our roles because we need to continue to provide quality services to those most in need.” Since 2006, Ms. Marks Young has overseen all of the financial functions for Easter Seals New Jersey, ensuring its resources are properly allocated to achieve its long-term strategic goals.

Easter Seals New Jersey is a 501(c) (3) not-for-profit organization that since 1948 has enriched the lives of people living with disabilities and special needs, and those who care about them, by providing opportunities to live, learn, work, and play in their communities. Annually, nearly 9,000 people or families in New Jersey affected by developmental disabilities, including autism, physical disabilities, and mental illness, participate in programs designed to help them address life’s challenges and achieve their personal goals on the path toward independence.

Among Ms. Marks Young’s accomplishments is boosting funding for services by $22 million, enabling the organization to increase by nearly 20 percent the number of people with disabilities or special needs served. She has also served as a consultant and advisor to other Easter Seals affiliates across the nation by sharing her expertise in cash management, financial systems, and financial leadership.

“In my discussions, I use the numbers to tell the story about how what we do impacts those we serve and support,” she said. “It’s the lives touched that is most important. We all have state-specific and regulatory issues to contend with as well as business model issues. At the end of the day, it’s not really about all that. It’s about how we, in all of our individual businesses here, serve that end-consumer.”

Many in the group admitted not-for-profit work was not on their radar while they were in school. “My goal was to be the CFO of a Fortune 1000 company making money for shareholders,” said Mr. Barry. “Here I am in a not-for-profit for 30 years, working for shareholders who are the people we serve. We have to be there to help our respective organizations remain financially viable so we can continue serving those who are impacted by our mission.”

The participants agreed that running a not-for-profit can be a balancing act. A solid infrastructure is vital, as is balancing overhead costs. Transparency is key as well. Open communication with donors, the executive leadership team, staff, and board of directors is important, but there are many more populations that must be addressed.

Many in the room referred to the book Uncharitable: How Restraints on Nonprofits Undermine Their Potential, by Dan Pallotta, which examines the constraints put on not-for-profits by the public. A parallel theme in the book and at the CFO Studio Executive Dinner was that not-for-profits must be allowed to use the tools of commerce to thrive and accomplish their missions.

A successful Chief Service Officer doesn’t just talk the talk but walks the walk, said Ms. Marks Young. “Bob [Barry] shared a story about his staff coming in on a weekend to make sandwiches during Hurricane Sandy. That’s being of service internally to the staff as a role model and externally to the consumer we all service,” said Ms. Marks Young. “That’s what it is all about.”

She said it is important to focus on the population being ministered to. “It’s about how we serve our end-consumer or customer to live their best life, to have what it is they need, what brings value to them, and that holds true whether you are for profit or not for profit.”