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BUDGETS: WHAT’S ON THE TABLE

As Seen in CFO Studio Magazine Q1 2017 Issue

CFOs SAY ELECTION, OTHER ISSUES COMPLICATE YEAR-END PLANNING

-BY MARTIN DAKS-

In late Q3 2016, as CFOs worked on their capital budgets for the upcoming year, they faced a trifecta of uncertainties: a so-so economy, lingering concerns about possible interest rate hikes, and an election that presented a choice between two starkly different candidates. Of course, that was on top of the usual concerns about competition, regulation, and other issues that keep CFOs on their toes. To see how financial executives are dealing with these multiple issues, CFO Studio spoke with chief financial officers from businesses that represent three significant industries: technology, health care, and consulting. From taxes to strategy, they shared their thoughts about 2017.

“Fortunately, the state of the economy has not affected our capital planning,” says Dave Pearson, CFO of Holmdel, NJ–based Vonage, a leading provider of cloud communications services for consumers and businesses. “We’re continuing to commit capital into our unified communications cloud segment. We’re basically putting in as much capital as we can effectively deploy.”

Vonage’s expanded focus from Internet-based telephone services to cloud communications services for both the consumer and business markets gives the company new capital needs. Pearson notes that Vonage’s consumer network doesn’t consume much cost, “Since it’s already in place and we can basically maintain it,” so the cash it generates frees up funds to invest on the business side. “Currently, the cloud unified communications market has less than 20 percent penetration, so there’s a lot of room for growth,” he adds.

Health Care, Borrowing

Pearson’s budget-planning plate is filled with a variety of other issues, including rising health care costs, which continue to be a big issue for many businesses. He says Vonage is trying to rein them in with the company’s first-ever self-insurance plan. “We implemented it in 2016—with a backstop insurance plan that kicks in after a certain level —and so far it seems to be the right way for us to go. We plan on continuing the self-insured health plan in 2017.”

He’s also tracking interest rates, noting the likelihood of at least a slight increase in the benchmark prime rate in 2017.

“We’re prepared for that to happen,” Pearson says. “We have not hedged, but we are borrowing at LIBOR [a benchmark interest rate index] plus 3 percent, so we feel good about floating right now. We do expect further rate hikes and have built that scenario into our capital plans.”

He doesn’t believe that the outcome of the presidential race will change Vonage’s day-to-day operations, either. “I don’t think that the difference between a Democrat or Republican as president will be too dramatic for businesses,” Pearson explains. “I do hope, though, that Congress and the next president can work together on general business issues, particularly on a plan that would reduce the tax rate on repatriated foreign earnings [which are currently taxed at about 35 percent].”

Challenging Times Globally

When Bill Baldwin, CFO of the Princeton-based multinational management consulting firm Kepner-Tregoe, worked with his team on the 2017 capital budget, they took a global view.

“As CFO I work with the CEO, and with five regional worldwide managing directors, each of whom works with five worldwide controllers,” he explains. “We also work with service focus leaders who oversee services, operations, and general training. We get input from key functional leaders in information technology, marketing, and product development. So there’s a comprehensive feed of information, which is important.”

Kepner-Tregoe’s initial 2017 budget plans were distributed to key executives in mid-September 2016. They have been reviewed and refined—and will continue to be worked on until mid-December, when the final proposals will be presented to the Board of Directors for their consideration.

During that review period, Baldwin and CEO Chris Geraghty visited the company’s remote offices to review and polish the firm’s three-year financial and strategic plans.

“We continue to see challenging times,” he says. “It’s not just the U.S. presidential election, but there are issues with economies throughout the world, including the British exit from the European Union, and unrest in Southeast Asia.”

Thus, his firm has to consider a variety of global political, social, and economic factors. “Of course, it’s not just us,” he adds. “In 2017 and beyond, the clients that we work with also have to deal with issues like the changing workforce, as baby boomers retire and millennials enter the ranks of management.”

Addressing the Workforce Mix

These and other kinds of change mean that companies have to be prepared to innovate when it comes to their own work and management practices, and Baldwin says Kepner-Tregoe is gearing up to help them.

“We’ll probably add some people, but as part of our budget considerations we continue to fine-tune our workforce,” he reports. “We’ve been balancing the mix between full-time employees and independent contractors. We used to have more full-timers, and expect to add to them in 2017 and beyond, but we are continuing to balance the mix.”

As a professional services firm, Kepner-Tregoe is not as capital-intensive as some other categories of businesses. “Most of our hard assets are laptops and software,” explains Baldwin. “But because we maintain leased offices around the world, we’ve been reviewing our real estate footprint.”

In a bid to reduce lease costs, he says the firm may consolidate space, adding that one option is to let more employees, especially those in support functions, work from home.

Rising health care costs prompted Kepner-Tregoe, in 2011, to move its 48 U.S. employees into a PEO, or professional employment organization, a third-party firm that becomes the employer of record, maintaining employee benefits, payroll, workers’ compensation, and other services. “Becoming part of a larger firm enabled us to obtain better benefits and overall pricing,” Baldwin says. “We pay 85 percent of our employees’ health care premiums, but we had to find a way to reduce the costs.”

GDP and Election

Baldwin is also concerned about the sluggish pace of economic growth —Gross Domestic Product rose at an anemic rate of 1.1 percent in the second quarter of 2016, according to the most recent data released by the federal Bureau of Economic Analysis. “Businesses need to be more innovative to grow,” says Baldwin. “But many industries have not been embracing innovative change. We need tax and regulatory reforms to help create growth and drive innovation.”

He would also like to see a reduction in the federal corporate tax rate, which he notes “is much higher than international rates.” He suggests a lower rate would spur more companies to repatriate profits and increase their domestic investment. It’s an issue of growing concern, since published reports indicate that U.S. companies have parked more than $2 trillion overseas to shield the profits from high U.S. taxes.

Baldwin believes the outcome of the presidential election will likely have a big impact on the economy.

Both candidates suggest more action on the corporate tax front. In a bid to bolster the economy, Republican candidate Trump has proposed a low, 10 percent tax on corporate profits that are repatriated back into the U.S. According to Clinton’s website, Hillary will close tax loopholes like inversions that reward companies for shifting profits and jobs overseas, but her proposals do not address repatriated profits directly.

“The candidates’ approaches to business and economic stimulus are starkly different,” Baldwin asserts. “A Democrat as president will continue some or many of Obama’s current policies. The question is whether you’re happy with the performance of the U.S. economy over the past seven or so years, or do you want change to stimulate economic activity?”

Wellness Emphasis

Despite the uncertain economy, Morristown, NJ–based Atlantic Health System— a not-for-profit health care organization that comprises six medical centers and hospitals, in addition to Atlantic Rehabilitation, and Atlantic Home Care and Hospice — continues to “make investments in our services, facilities, and employees to develop the infrastructure necessary to be successful for the future,” according to Kevin Lenahan, Senior Vice President and Chief Financial and Administrative Officer. “Our capital and budget plans are developed with the objective of creating a trusted network of caring to serve our communities and ensure every patient can access the right care, in the right place, at the right time, at the right quality, and at the right cost.”

But, even health care providers have to keep a close eye on their own health care costs, he adds.

“Internally, we are aligning our benefit structure with an emphasis on wellness. Our successful and nationally recognized Atlantic Accountable Care Organization is making strides to better manage and reduce the overall cost of care.”

As the company plans for 2017, Atlantic Health “will continue to manage its cost structure and look for opportunities to grow as health care reimbursement transitions from fee-for-service to value-based care,” Lenahan details. “We are building an economic engine able to support the infrastructure needed to provide high-quality, outcome-focused care. We will continue to recruit and retain highly qualified, talented staff.”

Head Count, Interest, Taxes

Atlantic Health System’s 2017 budget provides for more internal investment, he adds. “Our workforce planning analytics from 2013–2015 shows a steady increase in the number of hires. In 2015 we showed a 14 percent increase from 2014. For 2016, based on our hires to date and anticipated hires for the rest of the year, we project a slight increase. We continue to steadily recruit for new and replacement positions across the system. In addition, our internal hires continue to be strong and are trending about the same or a slight increase from 2015.”

Still, he’s concerned about the prospect of higher interest rates in the near future.

“I think interest rates will go up in 2017,” reports Lenahan. “Atlantic is preparing for an interest rate increase by taking advantage of current rates and going to market for a $225 million bond refinancing [in September].”

Lenahan is also closely monitoring tax issues in New Jersey, where hospitals have been roiled by cash-strapped municipalities’ and private citizens’ challenging their tax-exempt status — Atlantic Health System’s Morristown Medical Center among them.

“Atlantic Health System had supported the proposed legislation which would have provided much-needed clarity on the fair-share community service contribution from New Jersey’s not-for-profit hospitals to their host communities with predictability,” he says, referring to failed proposals like a fee-based formula of $2.50 per day per bed, or $250 per day for satellite facilities, in lieu of traditional property tax assessments. “We continue to work closely with legislators and the New Jersey Hospital Association to define a clear path on how hospitals and host towns can agree on a fair-share community service contribution. However, in its absence, Atlantic Health System has opted to begin this process with its own host communities, and has reached agreements in both Morristown and Newton.”

For CFOs who are annually asked to be their organizations’ financial navigators despite limited visibility, challenges like these simply represent the latest in a long list of obstacles they’re expected to overcome. But most CFOs would probably agree with Kepner-Tregoe’s Baldwin, who says the review, forecast, and planning that go into a year-end budget are a significant part of the task of creating positive growth.

Tackling Systems Head-on

As Seen in CFO Studio Magazine Q1 2017 Issue

DAN CRUMB, CFO OF THE KANSAS CITY CHIEFS FOOTBALL TEAM, WANTED THE SPORTS FRANCHISE TO BENEFIT FROM A MORE EFFICIENT AND TRANSPARENT BUSINESS PLANNING SYSTEM – SO HE BUILT ONE

-BY JULIE BARKER-

The most exciting part about being a chief financial officer, says Dan Crumb, the Kansas City Chiefs CFO, is the ability to play a strategic role in the organization. “We touch every department,” he says. “We’re involved in the overall business, from budgeting to business planning.”

For him, the years 2015 and 2016 have provided exhilaration, not so much because of the way the team performed (and the Chiefs did have a great 2015 season, turning in 10 consecutive wins and landing a wild-card berth in the playoffs), but because Crumb pushed for and oversaw the design of a business planning system that is now used by the entire Chiefs organization. Its capabilities and dashboard give him what a football scout might call “arm talent” — in the finance world, it’s an ability to be strategic.

Up until the 2016 fiscal year, Crumb received business plans from the 20 departments (IT, retail, marketing, security, corporate partnerships, and ticket sales & services, among them) that support the team, each plan in a separate three-ring binder. The plans used no uniform software program—Microsoft Word and Excel and Adobe Acrobat were all employed — in describing the departments’ objectives for the year, how they planned to accomplish the objectives, the capital and operating budgets, and other resources that every department would need.

Each department head would then have three binders assembled: one for Crumb; one for the ball club’s president, Mark Donovan; and one to keep. It was an ungainly process.

Crumb wanted the mission statement and long-term goals to be top-of-mind during the entire planning operation. He believed the best way to do this was to ask that the department’s objectives link directly to the strategic goals that support the mission statement. An automatic prompt should ask, “ ‘What goal does this objective support?’ ” says Crumb.

So he set out his objectives: Make the business planning process more uniform, make it more strategic, make it more visible, make it more efficient.

No off-the-shelf product gave Crumb all he needed. “We’re sort of a specialized business,” he says. “There are only 122 professional sports franchises in America.” So, he looked at the Chiefs’ internal resources.

The SharePoint Solution

The company uses Microsoft’s SharePoint in most departments for content sharing and collaboration. Crumb, who oversees IT, knew he had a couple of good programmers on staff, so he gave one of them the vision and the assignment. He also okayed hiring an outside consultant who, like the programmer, had experience with the Microsoft application.

“We’ve got the resources, and [the software application] gives us a really good platform, so I felt we could do this,” says Crumb.

The programmer created a prototype. Crumb asked department heads to provide feedback. And the final prototype debuted for all to review and critique at the annual planning colloquium. The entire process took around four months.

“We knew exactly what we wanted this to do … and I think having the other department heads weigh in and help out in the process was critical,” he says.

Besides eliminating the stacks of binders, one of the things Crumb is most excited about is the “accountability layer” via a dashboard that gives Crumb and the Chiefs considerable visibility into where department heads are at any particular stage in the planning cycle, and insight into how well they are doing in accomplishing their objectives.

In December 2015, the new system launched. It was used throughout the process of creating and approving FY2016 business plans (the sports franchise’s fiscal year began April 1). Crumb has checked the dashboards quarterly to see how departments’ plans have met reality.

A Personal Connection

Dan Crumb watched Super Bowl IV on television back when he was just shy of six years old. He has a sharp recollection of that event because it was the first football game he can recall watching, and it was being played at Tulane Stadium in his hometown of New Orleans. He remembers the team that won: the American Football League’s Kansas City Chiefs, by a lopsided score (23–7) over the National Football League’s Vikings. It was 1970, the last year the two leagues held a playoff game; they merged a few months later under the NFL organization.

Forty years on, Crumb was CFO of the National Basketball Association franchise, the New Orleans Hornets, when the Chiefs came calling, looking for a chief financial officer. The team “ultimately made me an offer, and it was an offer I could not turn down,” he says. In no small part, he was excited to be working for the Hunt family and to work for an organization that “has such a rich tradition, such a rich history as the Kansas City Chiefs.” The late Lamar Hunt founded the AFL and the Chiefs, as well as Major League Soccer, and coined the name “Super Bowl,” among other accomplishments.

Crumb, who earned a Bachelor’s degree in Finance from the University of New Orleans and an MBA from Tulane, initially worked for KPMG, and has since had six successive CFO positions, prior to joining the Chiefs. He says the most challenging part of the CFO’s job is that with technology constantly advancing, it is difficult to identify “where to put your technology investment.” Both from a financial and a personnel perspective, the CFO has to determine which technology will best support the organization in achieving its objectives as both the technology and the organization evolve. It’s a tough call.

At the Chiefs, he has made significant investments to upgrade connectivity at Arrowhead Stadium, which was built in 1972 and is leased by the Chiefs. “We put in a complete Wi-Fi system, and we put in a DAS — a distributed antenna system— for cellular coverage,” he says, adding, “People want to be able to post photos, they want others to know they’re at Arrowhead Stadium watching a Chiefs football game, so we had to deliver that.”

A husband, father of two, and a community volunteer, Crumb is also an avid historian, a horseman, and an amateur welder. He gets a kick out of working in operational jobs, and it’s more fun when no one knows his true identity. He once went “undercover,” making balloon animals and tossing T-shirts to the fans during a Hornets game; he has also wielded his welding torch incognito in the repair shop of another company where he was CFO. Recently, he sold tickets in the Chiefs’ 50/50 raffle. “It’s a good way for me to understand the business,” he says, adding that taking on such initiatives can be very helpful in getting to know some of the people in the organization.

While in his CFO role Crumb gets a charge out of throwing himself into “looking at ways to improve.” Rethinking the business planning system, he says, was very appealing because it involved “how to improve processes and be more efficient. Those are things that I’m passionate about.”

Best-laid Plans

As Seen in CFO Studio Magazine Q1 2017 Issue

ON A WELL-DESIGNED CAREER PATH, A FINANCE EXECUTIVE MAKES SMART CHOICES TO CONTROL HER FUTURE – BUT ENCOUNTERS AN UNEXPECTED TWIST

-BY JULIE BARKER-

-PHOTOGRAPHY BY MATT FURMAN-

There’s an irony at the top of the Finance ladder, as Alison Cornell learned two years ago. Up to that time, in an almost 30-year career, she had been steadily accumulating the skill set and accomplishments she would need to hold a CFO position at a publicly traded company — a role where she envisioned herself advising and guiding the CEO, joining in counsel with the board and investors, and being a top — if not the top — valued member of the corporate decision-making team. When she reached that culminating moment, the surprise was finding that there’s another horizon beyond.

Starting as an AT&T intern in 1983 and progressing through roles with increased scope and responsibility (moving to a different position approximately every two years), Cornell ultimately achieved the title of AT&T’s Financial Vice President, Forecasting Performance & Investment Analysis, a leadership role for a $30 billion business unit. There, she was actively involved in helping the AT&T leadership team realize cumulative savings of over $3 billion between 1999 and 2003, by identifying and implementing a series of recommendations to reduce operating deficiencies and associated costs and to streamline processes.

Then, after almost two decades in Finance at AT&T, Cornell left to pursue her dream of securing a position as the CFO of a publicly traded company.

It took about one year and 75 interviews to find the right opportunity. During that time (2003– 4), Cornell achieved her Certified Treasury Professional designation, a Six Sigma Green Belt, and helped her cocker spaniel puppy become a show dog. (No slouch himself, Cornell’s cocker spaniel went on to attain his Championship and then receive an Award of Merit at Westminster the following year.) Then, while interviewing for the job of VP, Finance – Late Stage Development Services at drug-development services organization Covance, Cornell told that company’s CFO that her goal was to have his job someday —which she secured eight years later, in 2012. (“As it happened, they were looking for a potential succession candidate for that role,” she says. “It was somewhat serendipitous.”)

But barely two years after she’d achieved that career goal, as she was in the midst of considering the merits of executing an acquisition — the target having been chosen — or doing a share buyback, a suitor from North Carolina, LabCorp, approached, and made an offer for the Princeton, NJ–based Covance.

It fell to Cornell, the Corporate Senior Vice President and CFO, in a tense roughly month-long period in the fourth quarter of 2014, to give the LabCorp team a thorough enough understanding of Covance financials so LabCorp could do its own financial modeling. What she needed at her fingertips was not just the current and forecasted numbers for eight business units, but “what’s going on in each of the different markets.”

On November 2, LabCorp entered into a definitive agreement to acquire Covance, and in February 2015, in a $5.7 billion transaction, completed that acquisition.

“What really became pronounced were the principles of duty of loyalty and duty of care that the Board takes in making all decisions in their capacities as Corporate fiduciaries,” Cornell says. “It was up to me to present the best set of information possible, a comprehensive set of analytics, so that the Board could weigh everything possible to make the right choice. My job became informative.”

She knew, of course, that there was a likelihood that the acquiring company wouldn’t keep her as CFO, and yet she immersed herself in gathering research and information to facilitate the decision. And so in her last weeks as Covance CFO, “The role pivoted,” Cornell says. “It became more about helping [the board members] do their best job.”

Reputation as a Go-to Person

Cornell has always used her positions to make a meaningful impact. When she was at AT&T, as CFO of the Business Network Services unit, she delved into the sales figures, so the company could understand its customer-level profitability, then introduced a sales-contribution model, and linked that to the business plan. “It changed the way we ran the sales force,” she says.

In the late 1980s when AT&T sold computers, she was forecast manager for the marketing and sales operations in the Data Systems group. She noticed that inaccurate demand forecasts, based on sales projections, were hurting profitability, because they were used for manufacturing. She developed a forecasting process after gaining an understanding of what the right drivers were, and “we increased our forecast accuracy to 99 percent.”

At Covance, she spearheaded a project to significantly improve profitability and Days Sales Outstanding (DSOs) for the Late Stage Development unit.

In 2015 Cornell received the prestigious CFO Innovation award from CFO Studio, having been selected by an independent panel of judges. Her noteworthy achievement was introducing a “cash neutral” approach that convinced Covance’s drug development customers to provide advances, a practice that was not the customary standard for the clinical trials the company managed for them.

The cash neutral plan was radical, and might not have occurred to an industry insider. “Sometimes it’s helpful not to be from the industry, as you have a fresh perspective and don’t take things as a given,” says Cornell, who sold the idea to customers on the merits of its fairness. “If you have a conversation with a businessperson that essentially says we should get paid for the work when we do it, it’s very hard [for them] to argue, especially someone who’s your customer and wants you to be successful [in delivering services to them],” she says. “[The plan] essentially laid out the math and showed them that absent the advance, we would have been “in the hole” for the trial cash-wise. With the advance, we were just neutral.” Industry practice changed as a result, she says.

“For me, it’s all about making a difference wherever you are. And every day,” says Cornell. When she wasn’t driving the Finance agenda, she was the Executive Sponsor to a maternal and infant health program sponsored by the Covance Charitable Foundation and operated by CARE Nepal, which established 15 birthing centers and five school bathrooms within the poorest regions of Nepal.

With verve and solid accomplishments, she has navigated a career path through three diverse industries, her most recent CFO post being at a multinational firm in the chemical/ consumer products industry. She leveraged her past experience and expertise, taking up several initiatives including obtaining 500 million Euro Bond financing at a substantially lower rate, and identifying opportunities to build upon her Finance organization’s strengths.

“Each industry and company has a culture of its own,” she says. “You need to be adaptable while maintaining your authenticity.”

Lifelong Learner

Raised in Sayreville, NJ, the daughter of an Army major and a stay-at-home mom, Cornell amassed extra-credit points and predominately straight A’s all through school — receiving her undergraduate Psychology and MBA degrees at Rutgers University — both with honors. Approaching college graduation, she had an internship at AT&T’s Center for Education and Training, but the company had a hiring freeze. She got into Finance by pure chance: When the freeze was lifted, the first job to open up was Financial Systems Analyst. Cornell applied and was hired.

She did not realize until after she left AT&T that during her time there she “developed skills that could be used anywhere: leadership, multitasking, process design, execution, project management, influencing, problem solving — all applicable to be successful as a Finance leader,” Cornell says.

Still, it takes a particular type of individual to build a career on the opportunities presented. Cornell needed to leverage her hard work and every bit of networking; furthermore, she had to develop teams to help her “get the right things done,” as Peter Drucker put it, describing the archetypal effective executive.

One of her longtime practices is to discuss with each team member individual career plans in her first meeting with him or her. She told CFO Studio magazine in 2015, “Each person needs to own their career and have an individual development plan in place that you need to help enable. An individual development plan should be a living document, not just ‘check the box,’ but very thought-out and well planned.”

When she moved into her Corporate VP – Global Financial Planning & Analysis role at Covance, “it just so happened I had 365 people in my group. That was the inspiration for [taking 365 days and] meeting literally everybody [live or by phone]. In my prior jobs, I always made it a point to talk to a lot of people. The 365 went above and beyond. It helped me understand them as individuals, what their challenges were, what I could do to help.”

And then she shifts to a more personal tone, speaking about helping fulfill the aspirations of people who have worked on her team. “I think people tend to pigeonhole other people,” she says. “They think, ‘Oh, you’re in Finance, you don’t care about people things.’ ” But she does; she was a psych major, after all. She says she has spent “a ton of time with people talking about what their career aspirations were, about how do you even think about a career plan. I created my own template on how to do that and walked people through it.”

In her own career, she says, she was fortunate to have “great internal teachers who were willing to answer my million questions.” But learning answers to questions isn’t enough. She had to prove herself again and again as she moved through the career path she had envisioned.

And she’s still learning. “I do a kind of self-assessment every day.”