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Business As Usual, No Matter What

As Seen in CFO Studio Magazine Q1 2017 Issue

STIMULATING FINANCIAL GROWTH IN THE FACE OF ECONOMIC UNKNOWNS IS THE KEY TO SUCCESS

Most executives would agree: In order to stay in business and outpace competitors, companies need to grow and expand, regardless of what is going on in the world market, or their own backyard. How that’s accomplished, however, is a “challenge and a good question that may not have one definitive answer,” according to Jason Mulliner, CFO of Edmund Optics, a supplier of optics, imaging, and optomechanical components, based in Barrington, NJ.

Mr. Mulliner spoke on “Driving Domestic and Global Growth Despite Currency Swings and Economic Uncertainty” at an invitation-only dinner discussion attended by CFOs from middle-market companies in the Philadelphia and New Jersey areas. The event was held recently at Morton’s The Steakhouse in Philadelphia and is part of CFO Studio’s Executive Dinner Series.

Mr. Mulliner began the discussion by acknowledging how “economic uncertainty can be very much domestic in nature.” For companies based in the U.S., he said, “there are so many things that can create uncertainty — like what’s going to be the gross domestic product growth for the upcoming year, and what might the Fed do with interest rates?” He continued: “How about the unemployment rate and its effect on the cost of employees?” And, naturally, he didn’t stop short of mentioning the veil of ambiguity that typically surrounds a new president in the Oval Office.

With those questions dangling in the room, Mr. Mulliner then posed the most important one to his fellow financial executives in attendance: “How do you budget and plan for the upcoming year in the shadow of so much uncertainty?” That question was answered with more questions, and an observation agreed upon by all: “It’s a considerable, yet exciting challenge.”

Most companies, Mr. Mulliner noted, begin budgeting for the next year in September, with such calculations continuing until December. Any good plan, he said, “probably needs to be amended every three or four months anyway, which is a good thing when so much is up in the air.”

At a time like this, Mr. Mulliner suggested “rolling forecasting” could be considered a best practice: “You always have a 12-month plan ahead of you, as opposed to working with a plan that is very calendar-year focused,” which forces everyone to be constantly thinking ahead.

While it sounds positive, he called the process of creating a rolling forecast an “arduous, but important task” that takes a huge amount of time and resources, as “every organization within the company has to sit down about once a month to think through the plan and project out.” A fair deal of grumbling is often the result of such “reforecasting,” but Mr. Mulliner opined that “only good can come from repeatedly going back to the drawing board during unclear periods.”

Michael Muccio, Partner at CFGI, a finance and accounting consulting firm with offices in Boston, New York, and Philadelphia, and a CFO Studio Business Development Partner, discussed his dilemma over whether or not to slow hiring in the New York market or change the strategic direction. “Our New York office is experiencing rapid growth, including an increase of more than 200 percent in head count over the last 18 months.” Mr. Muccio said that while there is concern about the growth trajectory of this market, “it’s difficult to pump the brakes and pass up good talent.”

Responsible for growing CFGI’s New York office, Mr. Muccio admitted his nerves were calmed by the overall sense of optimism in the room for sustained growth: “CFOs in attendance felt an economic slowdown or significant change were not likely on the horizon even with a new president, and more of the status quo is expected.”

Globally Speaking

Mr. Mulliner moved the discussion to a global focus. “It’s been a very interesting time, as the U.S. dollar has had one of its largest moves ever in terms of strengthening against all currencies.” However, for global companies based in the U.S., “this has added incredible volatility to their financial statements.”

He explained: “As you’re selling in other countries in different currencies other than the U.S. dollar, you’re basically getting fewer dollars for every foreign currency that you sell, so on your financial statement it looks like you’re selling less or contracting as a company, but that may not be the case at all.”

For companies with both sales and expenses (manufacturing, salaries, etc.) overseas, a shift in the currency can also “artificially take away growth” on their financial statements. Mr. Mulliner said financial instruments like forward hedging contracts can help preserve natural growth, and can remove volatility from the reports. “Such agreements allow businesses to purchase a foreign currency at a pre-established and fixed rate based on the current market.” He continued, “So if the currency moves during the prescribed period in the hedging contract, the hedge will mitigate the actual financial gain or loss occurring in the company resulting from the currency move.” This will decrease volatility in the company’s financial statements, he said, “which is typically a good thing.”

The Bottom Line

In the end, the group agreed with Mr. Mulliner that “if you want to grow, despite currency swings and economic uncertainty, you have to fund growth.” To do this, he said, “Companies typically need banks.”

Elaine Cheong, Senior Vice President and Senior Relationship Manager at Bank of America Merrill Lynch, and a CFO Studio Business Development Partner, offered: “Part of a company’s risk-management strategy should be negotiating with their lenders realistic covenants that reflect earnings fluctuations due to cyclicality of business conditions.”

In terms of a budget plan, Mr. Mulliner said the banks understand that it’s just a plan and it will change, but “they like to see that some rigor, thought, and strategy have been put into it, and that it’s consistent with past performance and you’re not just making things up.”

And he added: “Don’t surprise your banker.” Constant communication and “a good relationship with your banker can help a business weather most any kind of storm.” Whether you know one is coming or not.

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.”