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CFO

JULY/AUGUST 2012 | WWW.CFO.COM

Unfinished
Business
No one ever thought
implementing Dodd-Frank
would be easy

At Exelis, Defense
Never Rests
Lessons From
JPMorgans
Botched Hedge

FINANCE
TRAINING THE
DELL WAY
THE 2012
WORKING
CAPITAL
SCORECARD
RECIPE
FOR PROFITS
AT POPEYES

Since 1912, our mission has been


to help build businesses. And our
passion has been to help sustain
our communities.

At Zurich, we have a rich history of helping our customers succeed.


Yet were equally proud of the work weve done to help our communities
ourish. Whether its organizing a blood drive, building homes or
donating our time, we care. And to celebrate our 100th anniversary in the
U.S., more than 16,000 employees in over 100 ofces are lending a hand in
100 Ways our charitable initiative to further help the areas in which
we live and work. Its all part of a company-wide philosophy to help
make our communities, and the greater community of America, stronger.
Insuring success since 1912. Visit zurichna.com/100

In the United States, insurance coverages are underwritten by individual member companies of Zurich in North America, including Zurich American Insurance Company. Certain coverages are not
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provided by Zurich Services Corporation.

contents

Features
July/August 2012
Volume 28, No. 6

38

DoDDk
fran
act

Unnished
Business
Two years after the passage
of the Dodd-Frank Act, the
laws implementation is
far behind schedule, and its
success is still in doubt.
By Randy Myers

46

Too Much Of
A Good Thing

34

Working capital is piling up at


Americas largest companies.
By Russ Banham

Our business has four key


areas that align well with
where our government customers are headed, based
on their public comments.

51 The 2012 Working


Capital Scorecard
The best and worst performers
in 20 industries.

Peter Milligan, cfo of Exelis

People to Watch
34 On the Record

60 Take-Away

Defensive Maneuvers

Recipe for Profits

Defense contractor Exelis


is ready to adjust to an era of
reduced Pentagon spending,
says CFO Peter Milligan.

Popeyes Louisiana Kitchen


CFO Mel Hope talks about
collaborating with franchisees
to grow the business.

Interview by Edward Teach

Mel Hope

Cover photo-illustration by Stephen Webster. This page, clockwise from top


left: Matthew Furman, David Plunkert, Stan Kaady

Interview by Marielle Segarra

cfo.com | July/August 2012 | CFO 1

Up Front

contents

July/August 2012
Volume 28, No. 6

4 From the editor


7 letters
11 topline The Supreme Court upholds the Affordable Care Act FASB and
the IASB approve two accounting methods for lease expenses most
CFOs expect employees to delay retirement CEO turnover rises companies have cash but wont spend it, says a recent survey and more.

15 | Accounting & tAX

23 | huMAn cApitAl

Renewed Concerns
About Renewables

Training at Dell: Here,There,


And Everywhere

Key tax credits for investments in


renewable-energy projects could soon
begin to expire. By Kathleen Hoffelder

The computer giants financial-education


programs rely on a mix of long-distance
and local learning. By David McCann

The Second-Greatest Risk

26 | risk MAnAgeMent

CFOs of multinational companies rank


transfer-pricing risk just behind global
compliance. By Kathleen Hoffelder

The Hedge That Wasnt

18 | cApitAl MArkets

Finding Life after Debt


An acquisition saves a software
company from crushing leverage.
By Vincent Ryan

Private Equitys
Picky Appetite
PE firms are craving service and healthcare targets, according to a new survey.
By Vincent Ryan

18

21

JPMorgan Chases $2 billion trading


miscue is a costly lesson in how not to
protect against potential losses.
By Vincent Ryan

29 | strAtegy

Hawaiians Big Apple Venture


How Hawaiian Airliness CFO prepared
for the launch of an ambitious new
route. By David Rosenbaum

23

Euro Slide Sparks


M&A Interest
The weakening currency makes
European assets more attractive.
By Andrew Sawers

21 | growth coMpAnies

Hands-On Growth

32 | technology

The finance chief of Make Meaning says


the start-up has what it takes to bring
customers through the door. Can it keep
them coming back?
By Marielle Segarra

Unstructured data is piling up in corporate computers, making compliance


and other tasks far more difficult.
By David Rosenbaum

Digging Out from Big Data

32

By the Numbers 2.5%


55 business outlook
Duke University/CFO Survey Results

Muddling Through
CFOs continue to hire, but are less
optimistic. By Kate OSullivan

2 CFO | July/August 2012 | cfo.com

The average by
which U.S. CFOs
say they will
expand their
full-time domestic workforce
over the next
12 months.

58 FielD notes
Perspectives from CFO Research

Putting Social Networks to Work


Companies are finding real economic value
in cooperation and social media.
By Josh Hyatt

From top to bottom: Miguel Davilla, courtesy Make Meaning, Bloomberg/Getty Images, Gordon Studer

It only takes a second for


an accident to happen.
Why should it take forever to fix it?
Business responds faster because
data does more in the AT&T network.
In here, intelligent data automates all the right
actions, at all the right points, all at the same time.

REPAIRED

WRECKED

Details of the accident are collected and distributed.


Insurance claims are filed and reviewed. Parts are
preordered; paint colors are premixed.
In here, wrecks get repaired faster because the same
data that reports an accident is already at work fixing it.
Its the AT&T networka network of
possibilities teaching data how to do more.
To learn more, visit att.com/business

2012 AT&T Intellectual Property. All rights reserved. AT&T, the AT&T logo and all other AT&T marks contained herein are trademarks of AT&T Intellectual Property and/or AT&T affiliated companies.

from the

editor

dodd-frank at two

On July 21, 2010, President Obama signed into law


the Dodd-Frank Wall Street Reform and Consumer
Protection Act. Two years later, regulators are still hard at
work putting the mammoth law into effect. Although they
have written thousands of pages of rules, they are far from
finished, as contributing editor Randy Myers reports in our
cover story, Unfinished Business (page 38).
There have been numerous accomplishments (however controversial),
including the establishment of the
Financial Stability Oversight Council,
the Consumer Financial Protection
Bureau, say on pay shareholder voting, and hedge-fund registration and
reporting. But some of the thorniest
provisions of the law remain on the
drawing board, such as the Volcker
Rule, which would limit banks proprietary trading. One seasoned observer
told Myers that implementing DoddFrank wouldnt be finished until at
least well into 2013.
Even partial progress on DoddFrank is too much for those who continue to insist that the law is unnecessary or worse and should be repealed,
either in whole or in part. One prominent critic of the Volcker Rule has been
Jamie Dimon, the superstar CEO of
JPMorgan Chase. It was more than a little embarrassing for Dimon, therefore,
when JPMorgan revealed in May that
its chief investment office had lost at
least $2 billion on an ill-advised trade
(The Hedge That Wasnt, page 26).

There have been many criticisms of


Dodd-Frankit goes too far, it doesnt
go far enough, its too complex, its a
brake on the economy, and so on. But
as Myers reminds us, its hard to fault
the motivation behind this sweeping
overhaul of the nations financial system. After all, it wasnt long ago that
the government was forced to pump
trillions of dollars into the system to
keep it from failing, while millions of
people lost their jobs, their savings,
and their homes.
Elsewhere in this issue we offer the
latest installment of one of our most
popular features, the annual working
capital scorecard, done in cooperation
with REL Consulting (Too Much of a
Good Thing, page 46). See how your
company stacks up against some of the
best (and worst) performers in working capital management in Corporate
America. CFO

leadership

General Mills CFO Don Mulligan


will explain how to build topnotch finance teams at CFOs
CFO Rising: The Future of Finance conference in Las Vegas,
September 30October 3, 2012.
See www.cfo.com/conferences.

accounting

If you want expert advice on


presenting financials in an
easy-to-comprehend way, check
out Painting with Numbers, by
former high-tech CFO Randall
Bolten (John Wiley, April, $39.95).
Among other things, youll learn
why pie charts are bad, why
a natural P&L is good, and
why you should never, ever be
sleazy about the vertical axis.
See www.johnwiley.com.

Edward Teach
Executive Editor

CFO, Vol. 28, No. 6 (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: jkaletha@fostereprints.com; website: www.fostereprints.com. Subscriptions: U.S. and possessions: 1 year
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are $15 per copy, prepaid, and VISA/MasterCard orders only. Mailing list: We make a portion of our mailing list available to reputable firms.

4 CFO | July/August 2012 | cfo.com

EdITORS PICkS

global business

British economist Roger Bootle won the 250,000 Wolfson


Economics Prize in July for his
analysis of how countries could
leave the euro with the least
amount of fuss. See How to
Break Up the Euro on cfo.com.

Kory Addis

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Direct access to $10 billion of senior debt and mezzanine
financing in 2012
1,000 middle-market company relationships locally and
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seasoned expertise and local knowledge consistently provided
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To learn more about diversifying your sources of
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2012. *As of 3/31/2012. Prudential Capital Group is a unit of Prudential Investment Management, Inc., a registered investment adviser and a Prudential Financial company. Prudential,
the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc., and its related entities, registered in many jurisdictions worldwide.

LETTERS
No Dire Straits
For Boomers
In regard to the worry
over baby boomers leaving the workforce, the
institutional-knowledge
challenge is being solved
in many ways, and is creating less turmoil than projected by many business analysts
(When the Boomers Go, June). Many people age 50 and
over are staying on because they need, or want, to continue
working. Jobs, and the skills needed
to perform them, are also changing,
so some jobs are becoming obsolete;
others are having some or all of the
tasks automated; and many jobs have
expanded the use of technology, thus
requiring workers to perform them in
new, and different, ways.
The anticipated drama of the baby
boomers exit hasnt really materialized, thanks in equal measure to the
poor economy, delayed retirement
plans, and unprecedented opportunities for older workers. While the age
wave may be hitting some industries
harder than others, the earlier concerns simply havent come to pass. In
fact, many older workers have fared
better in the down economy than their
younger counterparts.
Dr. Katherine L. Y. Green
Green Consulting Group LLC
Chevy Chase, Maryland

w The Bright Side of the Cloud


Cloud computing is a way that small
companies can allocate much-needed
resources to other, more beneficial top
drivers, such as sales and marketing
(Made for Each Other, June). When
smaller companies begin to realize that
software as a service is the best way to
manage data, they will see the inherent
benefit that the cloud presents.
Darrin Marion
Via E-mail

Stephen Webster

develop an integration process for the


postmerger period, a failure due to:
(1) not understanding how to achieve
revenue and cost synergies; (2) not retaining key employees and customers;
and (3) not understanding the corporate culture of the acquired company.
Can a company right a poor postintegration process? The answer is yes,
but it will cost a heck of a lot of shareholder value. Although there remain
questions about the value of M&A,
companies today need to continue
making acquisitions in order to stay
competitive.
Richard Summo
Via E-mail

w How to Succeed at M&A


In my experience, the main reason for
merger failures is poor management
in the postmerger integration phase
(Do Mergers Add Value After All?
Strategy, June). Most companies fail to

w Another Burden
The other burden, besides taxes, that is
even more significant to those affected is audits (Small Businesses Spend

Its the Equity Risk Premium,


Stupid
There are plenty of justifications companies can give
for why they arent allocating capital to new projects
or buying assets, but most of them tend to be pretty
vague. Uncertainty, whether due to the state of the
global economy, the European sovereign debt crisis,
Best of
or federal regulatory creep, is my least favorite excuse
the Blogs
that CFOs give.
The truth is, theres a far better apologia that comVincent
Ryan
panies could present for not investing, and its rooted
in a classic principle of corporate finance. Im speaking of the equity risk premium, a key ingredient in the calculations finance
departments make to decide whether to invest in a project. As Professor
Aswath Damodaran of New York University defines it, the ERP is the extra return that investors collectively demand for investing their money in
stocks instead of holding it in a riskless or close-to-riskless investment.
A key point is that the value of the ERP is affected by the entire stock
market, not just the individual companys shares. So the overall risk aversion of equity investors affects the ERP.
And therein lies the problem. In the wake of the financial crisis, the
Facebook IPO debacle, and developments in high-frequency trading, the
perceived risk of holding an equity portfolio has increased. Investors want
a higher return to compensate for the risk. The equity markets, as embodied in the ERP, are dampening business investment.

Go to The Real Reason Companies Arent Investing on cfo.com to see how


readers responded to this post (and to add your own thoughts as well).

cfo.com | July/August 2012 | CFO 7

LETTERS

More Time on Taxes, Topline, June).


Sales-tax audits can be brutal, and
IRS audits can take months, a year, or
moreand large amounts of employee
and tax-attorney time.
Ronald J. Cappuccio, J.D., LL.M. (Tax)
Via E-mail

COLI Is A-OK
Your story Key-Person Insurance: A
Cash-Flow Caveat (May) provided
important information on this increasingly popular tactic.
Corporate-owned life insurance
(COLI) has long provided numerous
benefits to shareholders and highproducing, quality executives who
help to maximize shareholder value.
COLI provides nonqualified plan sponsors with a cost-efficient asset that
offsets the liability of the participants
account balances on the plan sponsors
balance sheet. For example, plan sponsors can use COLI policies to mirror
the rate plan that participants earn in
their voluntary nonqualified deferredcompensation plans. As a result, COLI
helps companies reduce future liabilities, with an asset that should consistently grow in value. And with nonqualified retirement plans increasingly
important for many executives earning more than $150,000 annually, COLI
facilitates effective asset-liability management.
Contrary to what is stated in the
articles last two paragraphs, there
was no 2004 regulation that led to the
COLI market being essentially dead
from 2004 to 2010. By contrast, COLI
has continued to grow in popularity
since that time. In 2004, the COLI Best
Practices Provision was first proposed
and later became law as part of the
Pension Protection Act of 2006. The
measure and its high standards were
widely supported by the industrys
leading practitioners.
Mike Powers
Executive Director
The Todd Organization
Cleveland

8 CFO | July/August 2012 | cfo.com

CFO
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CFO Research

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please include: Your full name, title, company name, address, and
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How a car dealer is driving a safer business.


As the world becomes more interconnected, threats and risks are growing exponentially. Fortunately, on
a smarter planet, we have the tools to help protect critical data and business continuity. Gruppo Intergea is
a midsize company with about 460 employees that sells cars in Northern Italy. They wanted to improve the
security of their IT infrastructure a critical part of their daily operations. With help from IBM and its Business
Partners, Gruppo Intergea implemented a smart security solution that can proactively scan their data across
their network to identify threats and block them before they can damage business operations. So Gruppo
Intergea can be protected not only from known security threats, but also from other vulnerabilities that may
not have been on their radar. As a result, their network can stay up, and their data stays safer. To see how IBM
and its Business Partners can help your midsize business work smarter, visit ibm.com/engines/auto.
Lets build a smarter planet.

Midsize businesses are the engines of a Smarter Planet.

IBM, the IBM logo, ibm.com, Smarter Planet and the planet icon are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Other product and service names might be
trademarks of IBM or other companies. A current list of IBM trademarks is available on the Web at www.ibm.com/legal/copytrade.shtml. International Business Machines Corporation 2011. All rights reserved.

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0202597-00001-00

Topline

StatS
of
the
month

369K

health care

High Court Upholds


Health-Care Reform

Annual rate of sales


of new homes in
May, the highest
monthly rate since
April 2010.

The Supreme Courts ruling leaves companies with decisions to make.


employers currently pay
for providing health insurance. Employees that do not
receive insurance through
their companies may be able
to purchase it through fedProtesters and supporters gather in front of the U.S. Supreme
Court as they await a ruling on
the Affordable Care Act.

The U.S. Supreme


Courts ruling that
upheld the constitutionality of virtually
the entire Patient Protection
and Affordable Care Act will
have major repercussions
for businesses as they weigh
whether to change their employee benefit plans over the
next two years.
Many companies expected the court to strike down
the individual mandate, a
decision that could have unraveled the entire law. But
in a 5-4 decision issued on
June 28, the court ruled that
the mandate, which requires
most U.S. citizens to obtain

Kevin Dietsch/Landov

some health coverage if they


dont have it, is constitutional because it falls under
Congresss taxing powers.
The court did strike down
part of the law, ruling that
states have the option to
keep their current Medicaid
funding even if they decline
to expand their Medicaid
programs.
Starting in January 2014,
firms with more than 50 employees that forgo providing
health insurance to full-time
employees will be required
to pay a no coverage penalty. That per-employee
penalty, however, will be
less than what virtually all

erally subsidized insurance


exchanges in each state.
While the courts decision creates some certainty
for companies, CFOs initial reaction to the law was
largely unfavorable. Some
worried that the law opens
the door for more federal
regulation, which they said
is preventing businesses
from investing in expansion.
They also said the complexity of the law will make it
hard to calculate the cost of
hiring additional employees
as they enter into the budgeting process for 2013.
Despite the ruling, the
Affordable Care Act is sure
to remain a contentious issue both in Congress and
in the upcoming November
elections. vincent ryan

22%

Rise of new auto


sales in June from
a year earlier.

1.1%

Increase in orders
for durable goods
in May, after two
consecutive monthly
decreases.

Sources: U.S. Census Bureau,


Autodata Corp.

cfo.com | July/August 2012 | CFO 11

Topline
bookshelf

leasInG

Two Ways about It


FASB and the IASB have agreed to allow two approaches to
accounting for lease expenses on the balance sheet.

the best is
yet to come

Do you ever throw


down your newspaper or
iPad in disgust after reading the latest news about
jobs or budget deficits
and fret about the inevitable decline of the United
states? stop worrying,
advises Daniel Gross, the
economics editor of Yahoo
finance. In his new book,
Better, Stronger, Faster:
The Myth of American
Decline...and the Rise of
a New Economy (simon &
schuster, $26), Gross assures us that our current
economic slump is just a
temporary setback. Were
not Japan or the british
empire, he says, nor is
China quite the juggernaut
that its cracked up to be,
for that matter. bad things
have happened to the U.s.
economy many times before, yet it always emerges from the experience,
well, better, stronger, and
faster.
Restructuring is a core
national competency,
Gross declares, pointing
out that the United states
rebounded faster from the
Great Recession than its
peers. Drawing on his extensive travels in the U.s.
and abroad, Gross presents much evidence of
new green shoots of prosperity. CFO

12 CFO | July/August 2012 | cfo.com

at the joint board meeting,


After months of heatFASB originally opted for a
ed debate, the Fitwo-method model and the
nancial Accounting
IASB favored a one-method
Standards Board and
model. But after a second
the International Accountvote, both boards agreed on
ing Standards Board split
the dual approach.
their differences in June,
Several market particideciding to allow compapants say they would welnies to account for lease
come the combination of
expenses on the balance
the two approaches. I besheet using one of two apI believe it is the
lieve it is the approach that
proaches, depending on
approach that will
will appeal to the greatest
the type of lease. The two
appeal to the greatest
number of people affected
methods the standardsnumber of people afby the standard, says Dee
setters agreed on were the
fected by the standard.
Mirando-Gould, a former
right of use approach
Dee Mirando-Gould,
formerly of the PCAOB
associate chief auditor with
(Approach A) and the
the Public Company Acwhole-contract method
counting Oversight Board and now direc(Approach D).
tor at MorganFranklin, a business consultThe two approaches differ greatly
ing and technology solutions firm. The
from each other, but together they seem
two-lease model is closer to the economto satisfy a variety of constituents, as
ics of leases in that some leases transfer
well as the boards. Approach A takes the
ownership rights [for which the wholeright-of-use asset of a lease and amorcontract method is best], while others
tizes it in a straight-line fashion, while
merely transfer a right of use, adds Bill
Approach D lets the lessee allocate lease
Bosco, president of lease-accounting firm
payments evenly throughout the lease.
Leasing 101 and a member of a FASB/
The boards decision clarifies how to
IASB working group that provides input
account for equipment leases and real esto the boards.
tate leases: equipment leases should fall
FASB and the IASB will publish a joint
under the right-of-use approach, and real
exposure draft on the topic in the fourth
estate leases should fall under the wholequarter of 2012. kathleen hoffelDeR
contract method. In earlier discussions

in
search
of the
next
big
thing

Is a percentage of your firms


budget invested in pursuit of
major innovations?

How much of the innovation


work is your firm doing?

24%

39%

61%

Yes No

If yes, what percentage?

15%

32%
44%

Transformational
Moderate
Incremental
Source:
Duke University/
CFO Magazine
Global Business
Outlook Survey

HuMAn CAPITAl

More
CEOs Go
CFOs looking for a promotion
may take heart from the latest
annual survey of CEO succession from consultancy Booz &
Co. Last year, the percentage of top
bosses who departed the worlds 2,500
largest companies rose to 14.2%
thats 355 CEOs who moved outfrom
11.6% in 2010.
The improved outlook for the economy may be partly responsible for the
acceleration in CEO turnover. Boards
are increasingly seeking new leaders
to help drive growth in a recovering
global economy, the survey authors
write. But theres at least a hard bargain, if not a catch: the need to ride the
upswing places a distinct burden on
those newly elevated CEOs to prove

The bad news: insider


promotions are harder
to get. In 2011, 22% of CEOs
were appointed from outside, up 8% from 2007.

CASH FlOW

themselves early in their


The Insiders Edge
Median shareholder returns of companies
tenure.
where the outgoing CEO had been promoted
Overall, 2.2% of CEOs
from within vs. recruited externally.
lost their jobs because of
merger-and-acquisition ac6%
5.1%
tivity, 2.2% were forced out
4.4%
3.9%
for other reasons, and the re4
3.6%
maining 9.8% planned their
2.2%
departures.
2
Good news for CFOs
0.5%
with their eye on the CEO
0
role: so-called insider CEOs,
-0.6%
those promoted from with-1.3%
-2%
in the firm rather than ap00-02
03-05
06-08
09-11
pointed from outside, serve
Insider Outsider
longer and, more important,
create more value for shareSource: CEO Succession Report: 12 Annual Global
CEO Succession Study (Booz & Co.)
holders. From 2009 to 2011,
these CEOs firms outperthe keepers and who are the leavers in
formed local market indexes by 4.4%,
compared with 0.5% for external CEOs. the first few weeks.
And therein lies a warning: CFOs
The bad news: those insider promowho dont get the top job themselves
tions are harder to get. In 2011, 22% of
should quickly cement their relationCEOs were appointed from outside,
ship with the successful CEO candicompared with just 14% back in 2007.
date. In fact, recent research by recruitThe Booz survey makes no mention
ing firm Korn/Ferry suggests that 28%
of the role of CFOs in succession planof CFOs leave their company within
ning. It does, however, carry advice to
two years of an external CEOs apnewly appointed CEOs from Andrepointment. If another internal candiMichel Ballester, CEO of the Italian
date gets the CEO role, there is only a
company Sorin Group: The first is10% chance the CFO will leave for new
sue is to create a leadership team very
pastures. AndrEW SAWErS
quickly, making decisions on who are
th

from last year.


But not all is doom and
gloom, according to Jim
Morrison, CFO of plastics
said they were hesitant to
compounding firm Teknor
deploy their excess cash, an
Apex and chair of the
increase from 20% who felt
AICPAs Business Industhat way last quarter. Only
try Executive Committee.
12% said they would actuMorrison does not conally use it.
sider the 2-point drop that
The reluctance to spend
dire, considering the index
cash may stem from an
has dropped 9 to 10 points
overall negative take on
of those surveyed
in some years. We might
said they were hesithe economy. The AICPAs
have been in a holding pattant to deploy their
CPA Outlook Index dropped
tern for a while, but we are
excess cash, up from
two points, to 67 from 69,
going to resume growth,
20% last quarter.
from the first quarter of
Morrison says. It may not
2012 to the second. Similarhappen right away. Theres
ly, expectations for revenue, profit, and
still optimism that over the next year, we
employment growth slid this quarter,
will be on a growth pattern rather than a
though they were essentially unchanged
downward spiral. K.H.

Have Cash, Wont Spend

A majority of executives surveyed by


the American Institute of Certified Public
Accountants in the second quarter said
their companies have enough cash or
have increased their cash this year, but
they remain reluctant to deploy it.
Forty-three percent of the 1,250 senior
executives in the AICPA Business and
Industry Outlook Survey said their companies have about the right amount of
cash currently, while 36% said cash assets have increased from the first quarter to the second quarter of 2012. Almost
half of those surveyed were CFOs, while
22% were controllers. Sixty-nine percent
represented privately owned firms.
But 24% of the total respondent base

Thinkstock

24%

cfo.com | July/August 2012 | CFO 13

Topline

retirement plans

Retirement:
A Recalculated Risk
Even employees who have traditional pensions will be working longer than they planned
and their bosses know it.
In a recent survey conducted by CFO Research in
collaboration with Prudential
Financial, about 70% of senior
finance executives said they
believe their companies employees will be forced to delay retirement because of insufficient
savings. (CFO Research and Prudential conducted similar surveys in
2009 and 2010.) The 186 finance executives surveyed work at large
and midsize companies, all with defined-benefit (DB) pension plans
with assets of at least $250 million. Employers also said that employee benefits are critical to attracting and retaining talent, with threequarters agreeing that employee satisfaction with benefits is important to the success of their company.
So whats a CFO to do? The survey suggests that finance executives are exploring new ways to manage those financial risks that
pose threats to both a companys bottom line and an employees
nest egg. This years survey found an increase in the percentage of
companies likely to transfer DB plan risk to a third-party insurer.
Because pension plans are guaranteed, employers have to pay extra
if the investments underperform. With that in mind, we are figuring out a way to move future risks off of our companys balance
sheet, said the CFO of a health-care company. While only 5% of
respondents had transferred DB plan risk to a third-party insurer,
43% said they were likely to do so within two years, up from 30%
in 2010.
Finance executives in the study also said they will explore products that can dampen the markets volatility and encourage employees to keep their own investments in defined-contribution plans
intact. These executives are becoming more interested in exploring
how using strategies such as target-date funds, stable-value products, and guaranteed-income products might help bolster employee
retirement investments. Josh hyatt and david owens

Anticipating
Delays
More than
two-thirds of
CFOs expect
employees to
have to put
off retirement.

80%

A Refreshing
Change
Q: Ive discovered that
some of the underlying
data in my pivot table is
wrong. After I correct a
Bill Jelen

Ask
MrExcel

number, the pivot table


does not appear to include
the change. Why does this
happen, and how do I hold
on to my updates?

A: There is an important concept to understand


about pivot tables: When you create a pivot
table, all the data is loaded into memory to allow
Figure #1

it to calculate quickly. Changing the


data on the original
worksheet does not
automatically update the pivot table.
You need to select a cell in the
pivot table. The Piv-

otTable ribbon tabs will appear. On the Options


tab, click the Refresh icon to recalculate the pivot
table from the worksheet data (see Figure 1). The
result should be that the pivot table is updated.
One word of caution: Making changes to the
underlying data could cause the table to grow.
For example, if you reclassify some records from

69%

the East region to the Southeast region, be aware

60

that clicking the Refresh button will cause the


table to grow by one column. If there happens to

40

be other data in that column, Excel will warn you

20
0%

Yes

17%

14%

No

Dont Know

and ask if it is okay to overwrite those cells.


If you would like to submit a question to Bill
MrExcel Jelen, go to CFOs Spreadsheet
Community Center at www.cfo.com/spreadsheets.

To download the report, The Future of Retirement and


Employee Benefits, go to www.cfo.com/research

14 CFO | July/August 2012 | cfo.com

Thinkstock

accounting
& tax

Renewed Concerns
About Renewables
Key tax credits for investments in renewable-energy projects could
soon begin to expire. By Kathleen Hoffelder

If long-standing renewable-energy credits expire as


scheduled starting this year, companies that have
taken advantage of those hefty tax breaks for wind and solar
financing will have to consider new alternatives.
Wind-project developers or solarfacility owners typically have tax-equity partnerships with large-company
investors such as Google or Chevron,
where both sides benefit: the developers get necessary capital and the investors get big tax write-offs. Corporate
investors in wind, geothermal, and bioenergy projects are currently eligible
for the production tax credit (PTC),
which provides an income-tax credit
of 2.2 cents per kilowatt hour for up
to the first 10 years a facility is open.
They can also take the investment tax
credit (ITC), a one-time tax break of
30% on their investments, or an equivalent cash payment from the U.S. Treasury Department.
But sooner or later, that could all
change. The PTC for wind projects,
which companies can exchange for a
cash grant, is set to expire at the end
of this year, while the geothermal and
other bioenergy PTCs expire at the
end of 2013. Treasurys 1603 grant,
which provides cash payments worth
30% of the total cost of a renewable
project, is also phasing out. Named
after Section 1603 of the American
Recovery and Reinvestment Act of
2009, the grant is now available only
to projects that began construction in
2011. Solar ITCs, meanwhile, are set to
expire in 2016.
The uncertainty surrounding the
renewable-project market is already
slowing project development. Some

Ferran Traite Soler

participants are hopeful that Congress


will extend the credits at the 11th hour,
but typically, when lawmakers do renew these credits, they tend to extend
them for no more than a year or two.
Demand for tax-equity financing
already exceeds the supply of funds
available. Only $3.6 billion in tax-equity
funds will be available for renewableenergy projects in 2012, but the demand
for renewable-project financing in 2011
was $7.5 billion, according to an American Council on Renewable Energy
survey last year. That source of capi-

tal that is helping the industry grow


is going to slow down if those incentives are not there, says Brent Stahl,
principal and partner at law firm Stahl,
Bernal & Davies. In fact, thats already
happening, as only those wind projects
already under way are
still receiving the tax
credits.
Investors have
been lured to the
projects in the past
few years, when the
tax savings increased
dramatically. The
cash-on-cash return
that a firm is paying
a tax-equity investor
may be 3%, but in substance the tax-equity
investor is earning a
very high return because its using these
tax attributes to shelter or reduce the tax
burden on [its] other
income, says Mark
Regante, a partner at
The uncertainty surrounding the
renewable-project market is already
slowing project development. Some
are hopeful that Congress will extend
the tax credits at the 11th hour.

law firm Milbank, Tweed, Hadley &


McCloy. In the case of accelerateddepreciation deductions, the benefit is
like an interest-free loan from the government.
Before the recession, investors in
solar facilities were earning a 6% to
8% aftertax internal rate of return;

cfo.com | July/August 2012 | CFO 15

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accounting & tax

Financing
shortFall

now they can reap an IRR


of more than 10% on the
renewable deals. If the tax
credits expire, however,
other alternatives for investing in renewable projects could become more
popular. For example,
market participants have
started to discuss a master
limited partnership as a financing vehicle, similar to
the model for pipeline businesses, says Stahl. The concept would be a first for the
renewables sector.
Already-existing tax-

$7.5
billion

Demand for
renewable-energy
project financing
in 2011

$3.6
billion

Tax-equity financing available for


renewable-energy
projects in 2012
Source: American Council
on Renewable Energy

The SecondGreatest Risk


CFOs of multinational
companies rank transferpricing risk just behind
global compliance.

Multinational CFOs are increasingly looking to avoid the double taxation that can occur from manufacturing a product in one jurisdiction and
selling it in another. Transfer pricing,
the movement of goods and services in
order to allocate profits, has become
a high-ranking concern for finance
chiefs of multinational companies, according to a survey by Alvarez & Marsal Taxand.
Thirty percent of the 60 largecompany senior finance executives
surveyed ranked transfer pricing as
their greatest risk, just behind global
compliance, at 32%. Transfer pricing

Verbatium

equity structures could


also draw new interest.
Sale-leaseback structures,
where a developer sells
a project to an investor,
could prove useful for investors with short-term
horizons. And invertedlease structures that let
an investor lease a project directly from a developer could also become
more popular, say market
participants. Similarly,
accelerated-depreciation
federal-tax incentives, including credits for solar-

was also the second-highest risk for


the respondents from 158 smaller companies with less than $1 billion in annual revenue, with 20% saying transfer
pricing was their greatest risk, compared with 23% who named global
compliance.
Once something goes wrong in
the transfer-pricing area, it becomes a
huge controversy very quickly, especially if there are two countries involved, says Kent Wisner, managing
director of international tax at A&M
Taxand. Even in a lower tax jurisdiction like Ireland, they need tax revenue
just like the United States does.
Staying one step ahead of the tax
penalties that may accompany trade
distortions involving tangible or intangible assets, for example, is a key
concern of businesses today. The risks
become more pronounced as mergerand-acquisition activity picks up.
Once a physical transfer-pricing

project investments that extend over


a five-year period, are not expiring yet
and could be more appealing with the
traditional credits going away, Stahl
says. So far, relatively few companies
have taken advantage of these incentives.
Interest in these alternatives varies
by market. The wind sector may need
more investor support, but the solar
industry is better equipped to stand
on its own because of its retail appeal,
says Milbanks Regante. There are
more tax-equity investors in the solar
market now than a year ago, he says,
and developers are finding ways to get
their projects financed. CFO

Even in
a lower tax
jurisdiction like
Ireland,
they need
tax revenue
just like the U.S. does.
Kent Wisner, A&M Taxand

structure is in place at a company,


however, keeping it operating often
becomes less of a burden to financial
executives, according to A&M Taxands survey. Only 7% of the largestcompany executives surveyed saw
transfer pricing as a burden to their
ongoing operations. The survey included responses from more than 300
financial executives, with more than
70% representing smaller companies.
K.H.

those lovely intangibles


The fact is that it is simply very difficult to identify or measure intangible
assets. High market-to-book ratios may provide indications of their existence
and value. However, after the excesses of the dot-com bubble, there is understandable reluctance to record them on the balance sheet.
hans hoogervorst, IASB chairman, in a June 20 speech

Thinkstock

cfo.com | July/August 2012 | CFO 17

capital
Markets

Finding Life after Debt


An acquisition saves a software company from crushing leverage. By Vincent Ryan

Acquisitions have killed many companies, but Infor


may be one of the few saved by one. Leveraged to the
hilt two years ago, the company, which makes enterpriseresource-planning software, has returned from the brink of
a major restructuring. A merger with fellow ERP software

approaching 10 times was off the table, says Samuelson.


By December 2010, Infor had a new
management team and profits were
growing again. But that didnt solve
the capital-structure problem: Infor
was still more than nine times leveraged. The company considered several options for right-sizing its capital
structure and chose one true to its history: acquire a company that Infor and
Golden Gate could overequitize and
combine with Infor to bring leverage
levels down, Samuelson says.

Lawson to the Rescue

vendor Lawson Software, combined


with an injection of equity capital, was
the key factor in Infors revival.
I think a lot of people thought
the endgame would be bankruptcy or
some kind of negotiated restructuring
with existing lenders, says Infor CFO
Kevin Samuelson. But Infor avoided
that outcome.
How did Infor get so deep into
debt? In 2006, it was a four-year-old
company owned by private-equity firm
Golden Gate Capital and humming
along at a good clip. But that year it
spent $2.5 billion on acquisitions in a
short period of time. The credit markets had opened up to software firms,

18 CFO | July/August 2012 | cfo.com

recalls Samuelson; the debt was incredibly inexpensive, and we could get
as much as we wanted. So Infor went
from financing acquisitions almost entirely with equity to a more traditional leveraged-buyout-type capital structure, he says.
The companys pro forma leverage after the 2006 deals was 6.5 times
EBITDA (earnings before interest,
taxes, depreciation, and amortization).
Then the economy nose-dived, and
Infor suffered large declines in EBITDA and profits, pushing its leverage to
10 times EBITDA. Although servicing
debt was never an issue, the ability
to refinance debt certainly at anything

Publicly held Lawson Software, with


$800 million in revenues, had the scale
to help fix Infors capital structure. But
a take-private transaction for Lawson
still would not have brought Infors leverage down to a level that was palatable in the capital markets, says Samuelson. And as the company was trying
to close the deal in 2011, the earthquake
in Japanese occurred and the eurozone crisis flared up, making the debt
markets difficult again.
As a result, Golden Gate Capital
financed the $2 billion Lawson unsolicited takeover separately and kept
the company a stand-alone entity. But
the PE firm eventually combined the
companies this year, after it and Summit Partners kicked in $1 billion of new
equity. Infor used $600 million of that
sum to pay down debt. At the same
time, Infor obtained a $3.4 billion firstlien bank loan and raised $1.9 billion
in a public bond issue, one of the largest post-credit-crunch refinancings in
high tech.
Those transactions lowered the leverage of the combined Infor-Lawson
to 6.5 times EBITDA. The addition of
Lawsons cash flow also helped. Infor

Miguel Davilla/theispot

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capital markets

Where the Deals Are


PE firms say service and
health-care companies are the
best bets for 2012.

now has a window of six years before any meaningful maturities and
$350 million to $400 million of free
cash flow after debt service. The company is now looking to spend heavily
in international markets in the next 18
months, and going public is also on its
radar screen. With the proceeds of an
[initial public offering], we could pay
down debt and get to a more normalized public-company debt level, says
Samuelson. For Infor, at least, there is
life after debt. CFO

Private Equitys
Picky Appetite

PE firms are craving


service and health-care
targets, according
to a new survey.

Private-equity firms have been


choosy investors this year, expressing a preference for service and healthcare companies for potential takeovers
and greater portfolio exposure. According to financial sponsors, both industries will provide superior value in
the current economic climate.
The second-quarter Rothstein Kass/
CFO Midsize Private-Equity Firm Barometer surveyed PE firms with assets

Editors
Choice

of $150 million to $1 billion and found


that 52% of deals these firms completed
so far in 2012 were in the service sector.
Health care, including pharmaceuticals
and biotech, came in second, at 31%.
A substantial chunk of the 85 PE
firms polled said they were weighing
service-industry deals, particularly
in the IT services, financial services,
and insurance subsectors. When asked
about catalysts for service-sector value
creation, 41% of survey participants
said service firms will get a lift from
the recovering economy this year. The
service sector is also offering reason80%
able
valuations and plentiful deal opportunities,
participants said.
60
On the health-care front, a major40 the PE managers (61%) said they
ity of
had20
either increased their holdings in
health care, were weighing deals, or
0%investigating future investment.
were
By subsector, 34% of those surveyed
cited instruments and supply companies as targets; about 28%, diagnostics;
just under 24%, home health care; and
about 22%, appliances and equipment.
The PE managers surveyed were
mostly unified about what will spur
value creation in health care: the aging
populace. Health care is rapidly evolving, with advances in everything from
cancer-fighting drugs to noninvasive
diagnostics and health-care analytics,
says Jeff Somers, a principal in the
private-equity group practice at Rothstein Kass. These diverse and innovative companies offer a wealth of opportunities to PE firms looking to take
nascent technologies to the next level.
Of course, by focusing too much on
services and health care, PE firms could
sow the seeds of lower returns. Somers
warns that a clustering of deals in

Top three reasons service companies


will provide value in 2012
80%
60
40

80

41%

38%

33%

20
0%

0
Lift from
improving
economy

Reasonable
Plentiful
valuations opportunities to do
deals

Top three reasons health-care


companies will provide value in 2012
80%

66%

60

33%

40
20

22%

0%
Aging
populace

Innovation in Health-care
drugs, treat- legislation
ment, or
diagnostics

Source: Second-quarter Rothstein Kass/CFO


Midsize Private-Equity Firm Barometer

services or health care could have an


impact on deal flow and valuations.
While PE firms are optimistic about
opportunities, the deals in front of
them obviously havent been compelling enough to move them off the
M&A sidelines. The vast majority of
the 85 funds in the Rothstein Kass
survey have closed one or no deals to
date in 2012. Thirty-five percent have
closed two to three deals, and 11% have
done four to five transactions.
Rothstein Kass, a provider of professional services to alternative investment firms, polls PE fund managers
quarterly. V.R.

big dogs in derivatives


Six financial-services firms account for
an excess of 75% of derivative assets and
liabilities carried on the balance sheets
of a cross-industry sample of 100 U.S.
companies, according to Fitch Ratings.

20 CFO | July/August 2012 | cfo.com

The firms are JPMorgan


Chase, Bank of America,
Goldman Sachs, Citigroup, Morgan Stanley,
and Wells Fargo.

The notional amount


of all derivatives held
by the 100 companies
was about $300 trillion
at year-end 2011.

Stephen Webster

GROWTH
COMPANIES

Hands-On Growth
The finance chief of Make Meaning says the start-up has what it takes to
bring customers through the door. Can it keep them coming back?
By Marielle Segarra

When Wayne Lipschitz was controller of Wolfgang


Puck Worldwide, the firm grew from 12 units to more
than 20. As controller of The Cheesecake Factory, he helped
the chain grow from 19 restaurants to over 40. And during
his time there as CFO, the Coffee Bean & Tea Leaf chain
grew from fewer than 100 stores to more than double that.

dles. And thats the whole point.


There is a big difference between
doing something for the experience,
which really is kind of the potterystore model, versus doing something
with a commerce objective in mind,
and basically letting you personalize
your product, says Sucharita Mulpuru, retail analyst at Forrester. It
sounds like these guys are about activity first and commerce after.

Crafting a New Business

Now, Lipschitz is hoping his winning streak will continue at Make


Meaning, a start-up experiential retail chain where he is finance chief. At
Make Meaning stores, customers design, decorate, and make the products
they buy, whether candles, jewelry,
stationery, soap, or other crafts.
Experiential retail, says Lipschitz,
draws customers to stores by providing a hands-on, interactive experience
that they cant get elsewhere, including (and especially) the Internet. The
idea isnt new; many chains have incorporated experiential retail into
their stores for years. Customers at

Images courtesy of Make Meaning

L.L. Beans flagship store in Freeport,


Maine, can take kayaking, archery, and
fishing classes. Children marvel at the
lifesize toy soldiers and giant floor piano at the FAO Schwarz store on Fifth
Avenue in Manhattan. Other chains
offering experiential retail include
American Girl, Lego, and Apple.
But Make Meaning is taking the idea
a step further. Although its stores do
sell cards, candy, and other products
for children, most of its business comes
from customers crafting their way to
the cash registerwhether putting
decorations on cakes, brushing paint
onto ceramics, or melting wax into can-

Since its launch less than two years


ago, Make Meaning has opened four
storesin Manhattan; Scottsdale, Arizona; and Dedham, Massachusetts, a
Boston suburb. So far it has seen more
than 300,000 visitors, and 12,000 people have signed on as members, at an
annual cost of $36 for individuals and
$149 for families. The firm now has
about 200 employees, and though Lipschitz wouldnt disclose sales numbers,
he says they have
Visitors decorate
exceeded managecakes and watch
ments expectatheir candles
tions.
cool at a Make
Like all growing
Meaning store.
companies, Make
Meaning has had to take risks. One of
the biggest: offering so many activities,
each requiring niche expertise, under one roof. To keep things operating
smoothly, the company has hired toptier consultants, such as Elisa Strauss of
Confetti Cakes, a well-known Manhattan bakery. Make Meaning is also staffing its corporate office with entertainment-industry experts, including vice
president of operations Don Watson,
who held the same title at the House of
Blues chain of music clubs.

cfo.com | July/August 2012 | CFO 21

Growth companies

Are You Experienced?


Other companies have their own versions
of experiential retail.

Shelling out for top talent was critical, says Lipschitz. Obviously, weve
taken a risk by bringing on the best
people, as opposed to growing as a
mom-and-pop, he says. But execution
is about bringing in the right people so
we can grow the concept as quickly as
possible. Where we had a corporate office of a couple of people not very long
ago, we now have an infrastructure
thats ready, willing, and able to support the growth ahead of us.
For now, the company is outsourcing its accounting function, including
bill paying and dealing with vendors,
to a firm that specializes in multiunit
retail businesses. We do not have a big
team, so weve decided to really focus
on what we do best, serving up a customer experience, Lipschitz says. As
the company grows larger, it will bring
accounting back in-house, he adds.

Fundamental Questions
As with any novel, experience-based
concept, keeping traffic and growth
steady could be a challenge for the
company, says Forresters Mulpuru.
The fundamental questions of a business like this are: Can it scale, whats
the frequency of visitation, and whos
going to be their core customer? she
says. It cant be a place where you do
a candle once and never come back.
Its got to keep engaging you.
When it comes to customers, children are a big part of Make Meanings
business, but the company also markets
to an older crowd, Lipschitz says. Our
challenge is to make sure that were offering a lot for adults so that it doesnt
just become a kid concept, he says. To
that end, the company plans to obtain a

Editors
Choice

22 CFO | July/August 2012 | cfo.com

Build-A-BEAr
At Build-A-Bear stores, customers construct their own stuffed animals, choosing the furry exteriors, adding in sound buttons and
hearts, and stuffing and clothing their new pals.
WinE And dEsign
At locations of this Raleigh, N.C.-based franchise, local artists teach
painting and customers bring their own wine. The stores also offer
programs for children, but BYOJB (bring your own juice box).
AmEricAn girl
At American Girl stores, children go on scavenger hunts, have afternoon tea, and take their dolls to the hair salon.
FAO schWArz
Tourists flock to the FAO Schwarz flagship store in New York to see
the life-size toy soldiers, a giant floor piano, and other interactive
accoutrements.
l.l. BEAn
Customers can take kayaking, archery, and fishing classes at L.L.
Beans flagship store in Freeport, Maine.
lEgO
During monthly in-store events, children learn to build miniature
Lego models for free. They can also create their own custom
minifigures throughout the month.

beer and wine license for each store.


Make Meaning also conducts market research to determine what crafts it
should add to its offerings. We can add
and take out experiences all the time,
Lipschitz says. Indeed, the companys
newest addition, cake decorating, was a
result of such research, and it has already driven significant sales since it
was introduced this year, he says.
Lipschitz believes Make Meanings
intricate, specialty-based store experience will act as a barrier to entry to
other companies. There are many
moving pieces, from the time that you
walk in the door and are greeted by our
host to the time that the production
person pulls your glass or your ceramic
out of the kiln, he explains. For anyone to develop this kind of concept,
were light-years ahead of where they

would have to be to be a risk to us.


How far can Make Meaning grow
its own concept? Lipschitz says the
company is eyeing major markets
across the country, particularly those
with high-income demographics and
a solid base of children. Eventually,
he says, it hopes to open at least 800
stores globally. Those are high hopes,
given the state of the economy and the
reluctance of consumers to spend.
But Lipschitz is building Make
Meanings business to be scalable,
something he learned from his previous experience. He says he keeps the
big picture in view, constantly reminding his team, If were doing this
for two units, were going to have to
do it for several hundred, so we need
to make it a much easier and more efficient process. CFO

growth spurts
Private companies average annual sales growth jumped from
7.6% in March to 9.6% at the end of June, according to the Sageworks
Private Company Indicator. Average annual net profit margin also
rose, from 6.6% in March to 7.9% in May and June, its highest point
in at least five years.

Human
capital

Training at Dell:
Here, There, and Everywhere
The computer giants financial-education programs rely on a mix of long-distance
and local learning. By David McCann

Most Fortune 100 companies have substantial formal


programs for educating their top finance talent, and
Dell is no exception. But the Round Rock, Texas-based
computer giant may have a slight edge, thanks in part to its
use of a simple tactic.

learning and development.


The approach supports three education programs, geared toward finance professionals with varying levels of experience. In addition to the
FDP, there is the Financial Rotation
Program (FRP), for top talent with 5
to 7 years experience, and the Global
Financial Excellence Program (GFEP),
generally for those with 10 to 12 years
experience who have just received or
are about to receive their first executive appointments.

Learning Through
Simulations

Almost all companies of Dells size


are globalized, and most try to homogenize their training programs as much
as possible. They generally educate
their employees in one of two ways:
either virtually via the Internet or in
classrooms scattered around the world.
Dell, however, uses both of those methods. For example, for the third and
fourth semesters of the companys Financial Development Program (FDP),
a two-year program for high-potential
recent college graduates and undergraduate interns, teams work virtually
for several weeks and then convene for
a week in Austin, Texas.

Bloomberg/Getty Images

Dells educational effort began in 2009,


though the programs are still considered new in the companys culture.
These are contemporary programs
that deal with the realities of today,
says Gladden. To that end, all three
programs feature simulations, in which
participants form teams that make
business decisions for hypothetical
companies.
The simulations increase in complexity from
I dont know of anothThese are contemone program level to the
er company that combines
porary programs
next. They require particithe two approaches, says
that deal with the
pants to make decisions relTom Conine, founder of
realities of today.
ative to the entire business,
TRI Corp., which helps
Brian Gladden,
about pricing, production,
large companies design,
CFO of Dell
cost, new products, market
develop, and implement
direction, and more. Simufinancial-education prolations are effective because you learn
grams (Dell is a client). Going forby doing, observes Conine. When
ward, decision-makers have to be able
you do that, you make mistakes that
to work both virtually and face-toface, and the team dynamics of the two you learn a lot from. The simulations
are also competitive, and most finanare very different, says Conine. He
cial people thrive around that.
credits the dual approach to Dell CFO
The simulations force participants
Brian Gladden and Alicia Davis, the
to work under four different types of
companys director of global finance

cfo.com | July/August 2012 | CFO 23

educating dell
Financial training at Dell comes in three parts.

1.
stress. They have to deal with time
pressure, limited information, scarce
resources, and divergent opinions from
teammates. When you mix those elements together, observes Conine, it
makes for real-world decision making
under conditions of uncertainty. The
simulator runs the various decisions
made through an econometric model
and spits out hard-number results.
In addition to the simulations, the
FDP calls for participants to rotate
among roles that include segment and
operating-expense analysis, intercompany accounting, cash-management
analysis, pricing, corporate planning,
competitive analysis, financial services,
credit analysis, external reporting, budgeting and forecasting, and logistics.
About 50 employees are enrolled
each year in the entry-level FDP,
which lasts two years. FDP graduates
branch off to internal audit or finance
roles. Within three years, they are eligible for consideration in the Financial
Rotation Program. That lasts for three
years, with three different one-year assignments, many outside participants
home countries. Roles include investor
relations, assistant controllership, procurement (where a person would be an
analyst for a commodity buyer), opex
roles such as supporting the marketing
budget, financial planning and analysis, treasury, foreign exchange, and
cash management.
There is also a tax role, which Davis
calls relatively unique to our rotation,
to understand not necessarily how to
do an accrual but how value-added tax
or transfer pricing works. Participants
dont necessarily choose which assignments they get, she adds, but they can
express a preference.

Editors
Choice

24 CFO | July/August 2012 | cfo.com

Financial Development program. Two-year entry-level program for


high-potential recent college graduates and undergraduate interns.
Areas covered include segment and operating-expense analysis,
intercompany accounting, cash-management analysis, pricing, credit
analysis,external reporting, and logistics.

2.

Financial rotation program. Three-year program for top employees


with 5 to 7 years experience. Consists of three one-year assignments,
often outside participants home countries. Areas covered include investor relations, assistant controllership, procurement,
financial planning and analysis, treasury, and foreign exchange.

3.

global Financial excellence program. For employees with 10 to


12 years experience who have received (or are close to receiving)
their first executive appointments. Participants visit best-practices
companies to see how their CFOs and finance teams handle various
issues.

Studying
Financial Excellence
At the third program level, the Global
Financial Excellence Program, participants do benchmarking work at other
companies, which are selected based
on their reputation for maintaining
best practices. The Dell employees
work with the CFO and finance staff to
understand how the issues those companies are dealing with relate to Dell.
In turn, those companies send finance
staffers to Dell for similar learning.
The GFEP participants also work on
a team project; they deliver the results
to Dell chairman and CEO Michael
Dell. Last years project focused on
purpose-driven companiesthose
companies that execute against strategies that are clear, concise, and branded. Key take-aways included how every team member lives the brand at
Coca-Cola, how the business-integration processes at Stanley Works function, and how executives are involved
in recruiting at Goldman Sachs.
Meanwhile, Dell is developing a
program to provide financial educa-

tion to certain nonfinancial-employee


groups. People from marketing, sales,
research and development, and information technology will take four modules built around the income statement,
the balance sheet, factors affecting
profitability, and key financial ratios.
As a result of the programs, Dell is
now more consistently focused on a
core set of operational financial tools,
says Gladden. A good example is income variance, driving a consistent set
of tools across the firm to measure the
results of our business units, he says.
Can the return on Dells investment
in the educational programs be quantified? Gladden says they pay for themselves through less reliance on recruiters to find talent. Since he came to Dell
as CFO in 2008, Gladden has tried to
instill in his top staff the mind-set that
they are building a 25-year career at
the company, rather than just joining
to get a certain set of experiences to
make you more attractive in the external market, he says. This is about
developing a culture and leadership
capabilities for the long term. CFO

it pays to be public
Three out of four CFOs (74%) received a raise in 2011, according to a survey
by Grant Thornton and the Financial Executives Research Foundation.
The average salary increase was 4%, compared with 3% in 2010. Publiccompany CFOs received an average base salary of $286,500 last year, versus
$197,400 for private-company finance chiefs.

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RISK
MANAGEMENT

The Hedge That Wasnt


JPMorgan Chases $2 billion trading miscue is a costly lesson in how not to protect
against potential losses. By Vincent Ryan

The $2 billion trading loss at JPMorgan Chase that


came to light in May stemmed from fundamental mistakes by risk managersin particular, the belief that a hedge
on credit exposures could both reduce the banks risk and
earn billions of dollars at the same time.

they were flawed, complex, poorly


reviewed, poorly executed, and poorly
monitored. Later that month at the
banks annual shareholder meeting in
Tampa, Dimon added that he couldnt
justify the mistake.

Improper from the Start


It screamed improper credit-risk
management to us from the very beginning, says Matthew Streeter, a
product manager at FINCAD, speaking
The trading positions JPMorgan
Chase took were flawed, complex,
poorly reviewed, poorly executed,
and poorly monitored, according to
the firms CEO, Jamie Dimon.

Thats what experts are saying


about a trading loss that knocked more
than $20 billion off the banks market
value, sparked probes by the Justice
Department and the Securities and
Exchange Commission, forced credit-rating agencies to issue negative
outlooks for the bank, and turned the
spotlight on a bank unit that was set up
to invest excess deposits but also generate a sizable profit.
According to JPMorgan, the banks
chief investment office was investing in a benchmark for credit-default
swaps designed to mitigate the banks
overall credit exposure, especially the
possibility of higher interest rates and
inflation. But the hedge was risky in

26 CFO | July/August 2012 | cfo.com

itself, and the positions in derivatives


were so large that they distorted the
market, experts say.
JPMorgan also may have failed to
fully understand its exposure because
it was relying too heavily on value at
risk (VaR), a common risk model that
estimates the potential loss in value of
a risky asset or portfolio over a certain
number of trading days.
In May, JPMorgan stated that the
trading positionsreportedly on a series of the 10-year Markit CDX North
American Investment Grade index
were riskier, more volatile, and less
effective as an economic hedge than
the firm previously believed. JPMorgan CEO Jamie Dimon admitted that

of when he heard about the incident.


(FINCAD is a developer of derivatives
risk-management software.)
For one thing, the credit-index bets
introduced secondary risk exposures
that JPMorgan executives apparently
didnt take into account, says Streeter.
A key question to ask about hedging,
he says, is whether a hedge exposes
the insured to risk above and beyond
the risk the hedge is supposed to mitigate.
For another, the trades JPMorgan
was making were so large that they
were moving the market for the hedging instrument, concentrating a lot
of risk on one side of the trade. Any
hedge on a $650 billion book will absolutely drive the market, Streeter says.
Also, JPMorgans chief investment
office was doing what Streeter calls
speculative hedging: hedging with
the intention of making a profit. As
Ryan Gibbons, managing partner of
GPS Capital Markets, told CFO two

Jim Lo Scalzo/EPA /Landov

The Real VaR Steps Up

years ago, big gains and losses from


hedging spell trouble (see Seven Pillars of Hedging Wisdom, CFO.com).
When companies make money from
hedging, they tend to forget what their
core businesses are, said Gibbons. At
the high point of the chief investment
offices performance, in 2009, it managed nearly 17% of the banks assets
and generated $3.1 billion in yearly
income.
But a former finance chief at JPMorgan takes the stand that hedging is inherently risky, and that if the firm was
taking a risk, it should have expected
to get paid for it. Who says you dont
earn money on a hedge? Dina Dublon,
finance chief of JPMorgan Chase from
1998 to 2004, asked CFO in May. The
only time hedging is not risk-taking is
when you sell the position you are trying to hedge; anything else, youre taking risk.
Dublon said JPMorgans chief investment office was not a separate
entity when she was finance chief, but
was housed within the banks treasury
function. Whether or not her finance
department hedged credit risk depended on the price of the hedge, she said.
Sometimes you do, sometimes you
dont.

The FDICs
Hoenig would
bar commercial banks from
trading securities or derivatives for their
own account.
Thomas Hoenig, vice chair of the FDIC

Editors
Choice

Thinkstock

What Value at Risk?


When JPMorgan revealed the loss on
May 10, it said its risk measure had
underestimated the portfolios volatility. In the first quarter, JPMorgan was
monitoring its positions using a new
VaR model, which was indicating the
chief investment office unit value at
risk was $67 million. But JPMorgan
scrapped that model and returned to
an older version once the loss was discovered. It restated the VaR for its first
quarter as $129 million.
A VaR of $67 million at a 95% confidence level implies the [chief investment office] should not incur losses of
more than $67 million on more than
three business days during the quarter, wrote CreditSights analyst David
Hendler in a report. But the restatement meant that the office may have
incurred losses in excess of $129 million on three days. Hendler concluded
that the losses put in question not only
the accuracy of JPMorgans VaR models but also the data being input into
those models.
A March 2008 report by a group
of senior global-banking regulators,
Observations on Risk Management
Practices During the Recent Market
Turbulence, noted that many banks
used VaR, but did so in conjunction
with notional limits, stress tests, and
forward-looking scenario analysis.
Firms that avoided significant unexpected losses used a wide range of
risk measures to discuss and challenge
views on credit and market risk, said
the report.
Despite all the tools available, regulators and large, complex banking organizations face a tough task in judging
the riskiness of many nontraditional

Average value at risk


at JPMorgan Chases chief
investment office
5 In $ millions
$150
$129

Restated
May 10

$69

$67

Reported
April 13

4Q
11

1Q
12

120
90
60

$60

$51

$48

2Q
11

3Q
11

30
$0

1Q
11

Source: SEC filings

commercial-banking activities, testified Federal Deposit Insurance Corp.


vice chair Thomas Hoenig to a Senate
committee in May. Trading and market-making are high-frequency activities that can take place between [regulator] exams with little evidence that
they ever occurred, he stated; monitoring trading on a high-frequency
basis would be costly for banks and
regulators.
Hoenig is proposing a strict division of some of the banking functions
conducted by the big universal banks
like JPMorgan. Under his proposal,
commercial banks would be allowed
to perform some investment-banking
activities but would be prevented from
making markets in derivatives or securities and trading securities or derivatives for their own account or a customers.
But there is little enthusiasm on
Wall Street for such an arrangement.
Asked by a Senate committee in June
to comment about whether the DoddFrank Acts so-called Volcker Rule,
which would limit banks proprietary
trading, could have prevented JPMorgans loss, CEO Dimon replied that the
rule was unnecessary. CFO

ESSENTIAL KNOWLEDGE
What skill sets do risk managers need? An intimate knowledge of the
business and industry (cited by 67% of respondents) and a strategic
view of risk and risk managements role (64%) above all, according to
a February survey of C-suite members by the Risk and Insurance
Management Society and Marsh. Only 25% cited insurance knowledge.

cfo.com | July/August 2012 | CFO 27

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strategy

Hawaiians Big Apple Venture


How Hawaiian Airliness CFO prepared for the launch of an ambitious new route.
By David Rosenbaum

In June, Hawaiian Airlines launched its first daily nonstop flight between New York and Honolulu. That may
not seem like much, yet it contributed to Hawaiian growing
its overall capacity by nearly 25%. Starting a new air route is
always a risk, says CFO Scott Topping, especially in un-

certain economic times like these. But


the airline is betting that the lure of
nonstop service to Hawaiicomplete
with a complimentary hot mealwill
pay off.
The airline business is fundamentally a terribly difficult industry,
says Topping, who came to Hawaiian
in 2011 after spending 16 years at nofrills carrier Southwest Airlines. Bankruptcy is common; in the past 10 years
more than a dozen airlines, including
giants like American, United, Northwest, Delta, and US Airways, have filed
for Chapter 11 protection. Hawaiian
too filed for bankruptcy in 2003, but
it emerged 2 years later with, as one
observer noted, a better sense of who
they are.

Image courtesy of Hawaiian Airline

Were focused on being a destination carrier, confirms Topping. We


bring people to Hawaii. We stick to
our knitting.
Launching Hawaiians nonstop
flight between Honolulu International
Airport and John F. Kennedy International Airport, however, entailed some
complicated financial stitching. For
starters, travel to Hawaii, like all primarily leisure destinations, is largely
wholesaler driven; trips to the islands

are usually packaged as part of a vacation sold through retail, says Robert
Mann, president of an eponymous airline analysis and consulting firm. This
means Topping must work closely with
the travel trade. Its an indirect ticket
sale with extensive costs: commissions
to retailers, discounts to wholesalHawaiian
uses Airbus
ers, high marketing
A330s, costing
costs, says Mann.
about $200
Hawaiian also
million each, to
partnered with Jetfly nonstop beBlue Airways to get
tween Honolulu
and New York.
its Honolulu flight
off the ground. Hawaiians planes will fly out of JetBlues
JFK terminal, and JetBlue will handle
some of the ground services, including
baggage handling. Hawaiian also has a
code-share agreement with JetBlue, in
which Hawaiian code is on connecting
JetBlue flights. And the airlines have
a reciprocal frequent-flier agreement,
which goes a long way toward mitigating Hawaiians risk.

Its the Planes


To fly from New York to Honolulu,
more than anything else, one needs to
have big, long-range, expensive planes.
By year-end, Hawaiian will have nine
295-seat Airbus A330 aircraft in its
fleet, at a cost of about $200 million
each, says Topping. Five more A330s
are coming in 2013. Thats not to mention even bigger, more-expensive

Growth Gains Altitude


(in $ thousands)
Operating revenue
Net income (loss)

2011

2010

2009

2008

2007

1,650,459

1,310,093

1,183,306

1,210,865

982,555

(2,649)

110,255

116,720

28,586

7,051

Source: Hawaiian Airlines 2011 annual report

cfo.com | July/August 2012 | CFO 29

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strategy

Euro Slide Sparks


M&A Interest
Hawaiians planes will fly
out of JetBlues JFK International terminal, and
JetBlue will handle some of
the ground services.
planes, Airbus A350s, ordered for 2017.
Topping says one of his biggest duties in supporting Hawaiians growth
strategy is making sure its adequately
funded. We have to be proactive in
trying to line up debt or lease financing
for the 2013 aircraft deliveries, he says.
The funding for three of those five
[planes] is already taken care of. Staying ahead of this is the biggest risk.
Hawaiian took a negative netincome hit in 2011 after purchasing
15 airplanes it had on lease. The transaction was value-creating, but from an
accounting perspective there was a
$70 million one-time charge that hit
the books, says Topping. On the
bright side, if you look at cash flow
from leasing to owning, its positive.
Not surprisingly, given his Southwest Airlines pedigree, Topping keeps
a close eye on costs. But Hawaiian
does serve complimentary hot meals
in flight, making it the only American
carrier currently to do so. Why the
perk? We bring Hawaii to the world,
he replies. We understand hospitality.
The Hawaii vacation starts when you
get on the plane, not when you get off.
Besides, Topping says, its a long
flight. CFO

Editors
Choice

Thinkstock

The weakening currency


makes European assets
more attractive.
With the euro hitting record lows
against the U.S. dollar, currency analysts are getting out their rulers to
see how far they can extrapolate the
downward trend. Corporate strategists, meanwhile, are eyeing ever
more affordable European targets for
acquisition.
The euro touched $1.23 at the
beginning of June, down from this
years high of $1.35 at the beginning
of March. That drop has prompted
some foreign-exchange experts to
say they cant rule out the possibility
of the euro hitting parity with the dollar if Greece leaves the single European currency. (Most experts agree that
parity following a so-called Grexit
would be an extreme scenario. More
likely, they believe, would be a fall of
about 10 cents from current levels.)
David Woo, head of global rates
and currencies research at Bank of
America Merrill Lynch, predicts the
euro will continue to slide to around
$1.20, then start recovering toward
$1.30 by year-end. He argues that
the situation will have to deteriorate
further before either Europe or the
United States issues any aggressive
policies in response. The only thing
that can stem the dollars rise is very
aggressive monetary easing from the
Fed, he says. I dont think thats on
the cards until things get worse.
Still, while the euro may not be a
particularly cheap currency at the
moment, underlying European assets are cheap, Woo says. Not only is
the dividend yield of the Eurostoxx

50 index significantly above that of


the S&P 500, the differential is now
literally two standard deviations
from the historical norm, he says.
Moreover, the fact that Spanish government bond yields are at 6.5% or
more, compared with 1.5% yields for
10-year U.S. Treasuries, means the
market is basically discounting an
almost 60% devaluation of Spain over
the next 10 years, Woo says.
As the price of European assets
continues to slide, U.S. companies are
starting to consider acquisitions in
Europe, Woo says. These assets are
starting to look really attractive, he
says. They can purchase European

The only thing


that can stem
the dollars rise
is very aggressive monetary
easing coming
from the Fed.
I dont think
thats on the
cards until things get worse.
David Woo,
Bank of America Merrill Lynch

companies more cheaply than at any


time over the last 10 years. In March,
for example, UPS agreed to acquire
Dutch group TNT Express for 5.2 billion ($6.5 billion). In April, Watson
Pharmaceutical sealed a deal for Actavis for 4.25 billion from Deutsche
Bank, which took control of the indebted group in 2008.
Of course, if sentiment improves,
or if Europe introduces a policy to reduce the risk premium for European
assets, the euro might get a boost as
money flows in to scoop up European
assets, Woo adds. AndrEw SAwErS
is editor of Cfo european Briefing,
a Cfo online puBliCation.

DIvErSITy DIvIDEND
Companies with more-diverse boards outperform their peers, according
to a recent McKinsey study of 180 publicly traded firms in the U.S., France,
Germany, and the UK. The study found that returns on equity were on
average 53% higher for companies in the top quartile of executive-board
diversity than they were for those in the bottom quartile.

cfo.com | July/August 2012 | CFO 31

TECHNOLOGY

Digging Out from Big Data


Unstructured data is piling up in corporate computers, making compliance and other
tasks far more difficult. By David Rosenbaum

Carter Malone, vice president of compliance at investment bank Crews & Associates, never leaves his desk,
not even for lunch. Malones job is to review the content and
ensure the proper storage of all electronic communications
that come in and out of Crews pursuant to Financial

Industry Regulation Authority rules.


You have to retain electronic communications for six years at least, says
Malone. And FINRA rules require
that you review 20% of the communications. I average about 80%. I dont
want to miss something.
The financial-services industry
is intensely regulated, which is one
reason why Malone is chained to his
desk. According to a recent CFO.com
report, FINRA regulators are paying
closer attention to broker-dealers than

32 CFO | July/August 2012 | cfo.com

ever before, even as the Commodity


Futures Trading Commission is turning up the heat on broker-dealer accounting policies. (See Watchdogs
Put Closer Eye on Broker-Dealer Accounting, CFO.com.)
Another reason Malone stays put
at lunch is the sheer volume of information that streams across his screen.
Before he came to Crews in 2004,
Malone worked at a small firm with
18 employees. There, he simply accessed the companys Microsoft Ex-

change Server and performed keyword


searches for bad words. For me, he
says, a [bad] keyword is guarantee.
I dont want to see that word. I cant
have a salesperson, a stock broker, use
guarantee in a communication. The
other big bad word is complaint. If we
receive a complaint from a customer,
the salesperson is not supposed to
communicate with that customer. The
rule says the complaint has to go to the
salespersons supervisor and escalate
to the compliance department.
As for data retention, at his previous job that meant burning e-mails
and other communications to a CD. It
wasnt bad for 18 people, says Malone,
but when you get to 200 employees,
like Crews, it wouldnt be feasible.
Malone needs more-sophisticated
IT at Crews, which provides underwriting and financial-advisory services
to debt issuers, among other banking
services. Every morning he fires up ZL
Technologiess Unified Archive Compliance Manager tool and keeps it running all day, checking for noncompliant communications that run counter
to company policies and could violate
federal regulations.
Malone doesnt have to search for
the bad words; the software extracts
and highlights them. Using ZL Technologiess eDiscovery product, which
goes beyond keyword searching into
concept searchingexposing patterns
that could signal fraudulent intent,
such as the misspellings spammers use
to confound spam filters or the coded communications that conspirators
tend to employMalone vets about
8,000 e-mails a day.
Businesses are struggling with
surging volumes of content, says Brian Hill, principal analyst at Forrester,

Gordon Studer

an IT consultancy. Much of that content is unstructuredsuch as Word


documents, PDFs, e-mails, voice mails,
video, and, increasingly, social-media
inputs (tweets, Facebook likes, and
so on)and therefore is inaccessible
to traditional enterprise resource planning systems with their stored invoices
and tables of numbers.

Digital Landfills
All that data can cause organizations to
accumulate digital landfills that generate significant costs in storage, tax
IT resources, and clog up a companys
information pathways, creating knowledge-management tangles, says Hill.
It can be difficult to gain access to the
data you need, he says, if your companys information systems have become
a digital dump site.
In the age of Big Data, its critical
for companies to have policies for data
disposal as well as retention, says Hill.
However, disposal needs to be done in
light of potential litigation concerns,
he points out, and needs to be suspended if legal matters are pending. In 2010,
for example, FINRA fined investment
bank Piper Jaffray $700,000 for its failure to produce requested e-mails.
Theres a substantial return on investment for businesses in digging out
from under digital landfills by using
new archiving and discovery technologies, says Hill. The return comes not
only in lower IT costs and improved
knowledge management, but also in
the reduced risk of lengthy, costly forensic data reviews prior to and during lawsuits. Preparing adequately for
that alone can have a very significant
ROI, says Hill.

Editors
Choice

Thinkstock

Companies without
a plan for unstructured
data take on a whole lot
of risk, says Kon Leong,
CEO of ZL Technologies. The Securities and
Exchange Commission,
health-care regulations,
[and] the Federal Rules
on Civil Procedure that
weigh digital evidence
equally with physical evidence are all requiring that everything
be kept forever.
As daunting a task as that may
seem, Leong illustrates its importance
by telling a story about using his own
technology to settle a dispute. We
had a trademark, he recalls. We saw
a competitor use it. We sent them a
[cease-and-desist] letter. They sent
one back claiming they used it first. It
took us 35 seconds to search through
the archive for our earliest use of it.
End of that argument.
Leong goes on to make a larger
point: that unstructured datawhat he
calls the sum total of all human communications within an organization,
[representing] your corporate memoryis a potential source of competitive advantage. If you can harness and
extract value from that, youve gone
from gathering unstructured data as a
defensive measure for compliance, recordkeeping, and litigation support to
an offensive position for competitive,
strategic advantage, says Leong.

A Simple Rule
Hill says a number of software providers offer products for searching, storing, archiving, and retaining Big Data.

In the age of Big Data,


its critical for companies to have policies
for data disposal as
well as retention.
However, disposal
needs to be done in
light of potential litigation concerns.
Brian Hill, principal

analyst, Forrester

They range from large enterprise vendors such as Symantec, IBM, and HP
Autonomy to smaller providers such
as ZL Technologies. As is increasingly
the case, their products are offered in
both on-premise and software-as-aservice flavors, with the SaaS offerings
lowering purchase and implementation costs and making this type of software more accessible to smaller businesses.
But prevention may be as effective
as the cure. At Crews, Malone further
mitigates the investment banks risks
by banning instant messaging for his
salespeople, denying them voice mail,
blocking web-based e-mail, and putting the kibosh on Facebook. There
are software providers that offer technological control over social-media
communications; Forresters Hill
cites Actiance as an example. But he
stresses that companies need to train
people on the permissible use of social media. There needs to be a strong
focus on policies.
For Malone, when it comes to policy, theres a simple rule to follow: I
tell all employees that every time they
write an e-mail, they should think about
reading it in front of a jury, he says.
That, he adds, seems to sink in. CFO

STATE-SPONSORED HACKING
UK spy chief Jonathan Evans revealed in June that a British company suffered
lost revenues of about $1.25 billion because of a state-sponsored cyberattack against its computer systems. The loss involved intellectual property
and commercial disadvantage in contractual negotiations. (See State-led
Hacking Cost Company 1 Billion Euros, U.K. Spy Chief Says, CFO.com.)

cfo.com | July/August 2012 | CFO 33

On the
recOrD

Defensive Maneuvers
Defense contractor Exelis is ready to adjust to an era of reduced
Pentagon spending, says CFO Peter Milligan.

Peter Milligan

Matthew Furman

CFO, Exelis

The defense industry is preparing for leaner


times, thanks to deep cuts in military spending.
Starting in fiscal 2012, the Budget Control Act
of 2011 will reduce the Pentagons budget by
$487 billion over the next 10 years. That number
could more than double because of sequestration, a deficit-reduction mechanism in the act
that will trigger $500 billion more in defense cuts
over the next decade unless Congress changes
the law.
Like other defense contractors, Exelis is bracing for the cutbacks. Spun off from conglomerate
ITT in 2011, the publicly traded McLean, Virginiabased firm relies on the Department of Defense
for about 70% of its revenues, which totaled
$5.8 billion in 2011. But CFO Peter Milligan says
the product portfolio of the diversified defense
electronics company is well suited to the smaller
and leaner military that Defense Secretary Leon
Panetta called for earlier this year. Exelis also
does a growing business with government agencies like the Federal Aviation Administration and
NASA, Milligan notes, as well as with military customers overseas and a small but growing number of commercial customers.
The 44-year-old Milligan came to ITT in 2006
from AT&T, where he headed investor relations.
He became CFO of ITT Defense in 2010, and the following year was named finance chief of the newly
spun off Exelis. In June, Milligan talked with CFO
about the companys strategy for adjusting to
an uncertain new world where the DoD will still
be Exeliss largest customer, but perhaps not as
large as before.
Peter Milligan with an Exelis pointer/tracker,
which helps aircraft thwart heat-seeking missiles.

Exelis has a very diversified mix


of products and services. Can you
briefly summarize it?
We do a broad range of things in what
we call the C4-ISR worldcommand,
control, communications, computers,
intelligence, surveillance, and reconnaissance. We make electronic warfare systems, communications equipment, force protection systems, radar
systems, sonar, night vision, spacebased imaging. Those are some of the
major products. On the services side
we do logistics solutions, training,
security, and support services. Lastly,
were in air-traffic management. So
it is a broad-based, highly diversified
business.
Lets talk about major developments affecting the defense industry, starting with the winding down
of the wars in Iraq and Afghanistan.
What effect is that having on your
business?
We supplied three main product lines
to the DoD in support of those war efforts: tactical radios and communications equipment, night-vision goggles,
and counter-IED [improvised explosive device] jammers. A lot of that has
come down over the last few years.
In 2009 almost a third of our revenue
came from those three products; in
2012, well less than 10%, probably closer to 5%, of our revenue comes from
those same products. So weve already
absorbed a big piece of the impact of
that decline from the product side.
What about the services side?
We dont have any direct service contracts in Iraq at this point, and we had
very little there throughout the war.

cfo.com | July/August 2012 | CFO 35

ON THE
RECORD

Peter Milligan,
CFO, Exelis

We do have a couple of contracts in


Afghanistan.
Another development, of course,
is the huge cuts in the Defense budget, which could reach nearly
$1 trillion over the next 10 years.
Yes, its making us think hard about
what we can do to proactively address
cost. Even though half of our business
is on the product side, we do have a
highly variable cost structure. So when
we see changes in throughputand
usually we have a number of quarters to adjust for that, since we have
a backlog of business that goes back
many quarters in some caseswe can
quickly adjust. We have reduced our
footprint by about 10% over the last
three years. We have kept our employee head count fairly flat, but the mix of
those who are working on the product
side and in services has changed as the
profile of our business has changed.
A couple of years ago, before the
spin-off, the defense unit of ITT underwent a transformation. We consolidated a lot of our divisions, taking tens
of millions of dollars in costs out and
making the business-decision process
quicker and more streamlined. That
was the beginning of the company
positioning itself for what we knew at
some point was going to be a [slowdown in the] top line of the DoD.
The challenge that I have, and that
everyone in my role has, is that when
you dont know which particular program is going to get cut, you cant do
too much in terms of proactive decisions. You have to wait for some definitive answer and hopefully have as few
stranded costs as possible when you
try to adjust.
In January, Secretary Panetta said
he wanted the military to become
smaller and leaner, one that
would be rapidly deployable and
technologically advanced. Is this
an encouraging message for Exelis?
Yes, I think it is. Our business has four

36 CFO | July/August 2012 | cfo.com

like to do more of. I rekey areas that align


cently spoke to a couple
well with where our
of people in Congress on
government customers
certain topics, and Ive
are headed, based on
made a number of trips
their public comments.
to meet some of the seElectronic warfare is
nior Army leadership
an important one; we
with Dave [CEO David
have a very strong poMelcher] and others.
sition there. The ISR
market is another area.
What do you talk
The military collects
about?
massive amounts of
The best ways we can
data, and we make senserve them, quite honsors that help collect
estly. What can we do as
it. We also make softan important supplier to
ware that helps anahelp make their mission
lyze that data. So thats
easier? What can we offer
the second big piece.
to them in terms of prodThe third area is
Green day
ucts and services that will
important not only to
Exelis is a major supplier of
night-vision systems for milimake their jobs easier,
the DoD but also in the
tary ground forces.
and certainly easier and
commercial world, and
safer for the soldiers?
thats composites. The
aerospace market is becoming more
Today, in mid-June, Exeliss stock
and more interested in composites; its
price is around $10, which is a little
lightweight nature makes it more fuel
efficient. The government has a heavy- lower than it was when the company was spun off. Are you satisfied
lift helicopter in development thats
with this? How often do you pay atgoing to be made largely of compostention to the stock price?
ites. We have a position on that with
Sikorsky as the prime [contractor]. We I wouldnt say I obsess over it, but its
certainly something that Ill glance at
are also working hard to expand some
each day. Right now theres just overof our part numbers within Airbus and
hang in the industry. If you think about
Boeing and others.
the whole defense market, equity valThe fourth area is air-traffic manues have come down pretty signifiagement. The FAA has a vision to
cantly over the last 60 days or so. As
update the nations air-traffic conwe get closer to the sequestration, I
trol system. One of the first programs
think there are some investors who are
designed to start that very big, probthinking that defense stock is not the
ably $15 billion to $20 billion, effort
most favored place. We have not been
was ADS-B, for automatic dependent
disproportionately impacted by that.
surveillance-broadcast. Exelis was
In fact, if you look across our peer set,
awarded a $1.7 billion contract on that
our return year-to-date is third in the
program. That has made us a wellrecognized and leading air-traffic man- industry.
Am I happy with where the stock
agement provider.
is? My job is in part to create value for
shareholders, and we do pay a strong
As CFO you spend a fair amount
dividend, but we would certainly like
of time speaking with analysts.
to find a way to have the shares apDo you also talk to people in Washpreciate.
ington?
Yes, and its something that I would
IntervIew by edward teach

Image courtesy of Exelis

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NT PR E DICT
YO U C A

Unfinished
Business
Two years after the passage of the
Dodd-Frank Act, the laws implementation is far behind schedule, and
its success is still in doubt.
By Randy MyeRs
photo-illustration by stephen Webster

Its easy to criticize


the Dodd-Frank
Wall Street Reform
and Consumer
Protection Act of
2010, the controversial legislation
aimed at strengthening the nations
financial system.
At 848 pages, the law
is frightfully obese,
yet crucial details
are missing. Like
most two-year-olds
(July 21 marks the
second anniversary
of its passage) the
law is still wobbly
on its feet, with progress measured in
baby steps. Proponents laud it, while
critics see a law only
its creators could
love. Even many
who appreciate its
mission question
whether it will
ever be achieved.

cfo.com | July/August 2012 | CFO 39

Unfinished
Business

blames not only the size of the task and


regulators budgetary constraints, but
also regulators efforts to make sure that
any rules they do hand down are both
workable and reflective of Congresss
intent. Toward that end, regulators have spent thousands
of hours meeting with business leaders and trade groups
to get their input on rulemaking. While some have blamed
business lobbying for holding up implementation of the law,
Nazareth, who has represented swap dealers, broker-dealers, banks, and the Securities Industry and Financial Markets Association in talks with regulators, sees it differently.
I understand theres lobbying going on, but theres also
a huge amount of educational activity going on, she
says. This is a major exercise, and regulators have to
meet with people to understand what the issues are.
Regulators welcome that;
they really want to get it
Jeffrey Burchill, CFO, FM GlObal
right.

No law can prevent incompetent management or fraudulent management, warns Jeffrey Burchill, CFO of insurance company FM Global. You can penalize people for
gross error or gross misconduct, but its very difficult to
prevent that conduct.
Dodd-Frank nonetheless aims to try. The most sweeping regulatory overhaul of the financial services industry
since the Great Depression, the law created several oversight bodies and a deluge of rules for the industry. Yet because the legislation was drafted so hurriedly, and because
the matters it tackles are so complex, Congress left much
of the heavy lifting to regulators, saddling them with nearly 400 rulemaking requirements and calling upon them to

No law can prevent incompetent management or fraudulent management. You can


penalize people for gross error or gross
misconduct, but its very difficult to prevent
that conduct.
complete dozens of studies.
It didnt happen. By June 1 of this
year, understaffed and overwhelmed
regulatorsat the Securities and
Exchange Commission, the Federal
Reserve, the Commodity Futures
Trading Commission (CFTC), the
Federal Deposit Insurance Corp.
(FDIC), the Office of the Comptroller of the Currency, and elsewhere
had finalized only 110 of the 398
regulations they were tasked with
crafting, according to law firm Davis
Polk & Wardwell. They had missed
148 deadlines, including 21 for which
they had not even issued any proposed rules. They faced another 140
future rulemaking deadlines, including 123 where they had no proposed
rules on the table, and a clutch of
additional rulemaking requirements
for which they had been given no
deadline. Former SEC commissioner
Annette Nazareth, now an attorney
with Davis Polk, says it will probably
be at least well into 2013 before
rulemaking is completed. In some
cases, implementation could stretch
beyond that.
Dodd-Frank was easy to pass in
the aggregate, but implementing it
has been difficult, says former SEC
attorney John Sten, now a partner
at McDermott Will & Emery. Sten

40 CFO | July/August 2012 | cfo.com

Now, as the third year of implementing Dodd-Frank begins, significant pieces of the legislationsome of them arguably the most controversial and hardest to implement
loom on the agenda. They include the so-called Volcker
Rule, which would bar banks from trading with their own
money; regulating the over-the-counter derivatives market; designating systemically important nonbank financial institutions for greater oversight; and calculating bank
capital requirements.

Signature Accomplishments
ll this is not to downplay the signature accomplishments of Dodd-Frank to date. New regulatory authorities have been created, including
the Financial Stability Oversight Council, the
Federal Insurance Office, and the Consumer Financial Protection Bureau. Publicly traded companies must now give
shareholders a nonbinding say on pay indicating whether they support their companies executive-compensation
packages. Whistle-blowers now have incentives to bypass
internal compliance channels and report potentially illegal
or fraudulent activity directly to the SEC.

Hedge-fund advisers are now required to register with


the SEC. Beginning in June 2012, the largest funds must file
reports on the value of their assets under management,
their counterparty risk, their debts, and other key metrics.
Also beginning in June, the nations largest financial institutions must have living wills in place outlining how they
will wind down in the event they fail. In April of this year,
the SEC and the CFTC issued final rules defining the terms
swap dealer and major swap participant, a critical first
step in regulating the over-the-counter derivatives market.
A few of these early initiatives have already had an impact on corporate behavior. In response to say-on-pay, notes
attorney James Hauser of Brown Rudnick, some companies
have been redesigning their compensation plans, revising
change-of-control agreements, eliminating tax gross-ups on
change-of-control payments, linking equity awards more
tightly to total shareholder returns or other performance
metrics, and providing more disclosure in their proxy statements. Many observers surmised that General Electric was
seeking to head off negative say-on-pay votes in April of this
year when it announced that, in the wake of constructive
conversations with shareholders, it would retroactively apply performance measures to stock options it had awarded

On The SeCS AgendA Upcoming rulemaking activity at the Securities and

Exchange Commission for implementing the Dodd-Frank Act (estimated JulyDecember 2012)
Corporate Governance & Disclosure
Section 952: Report to Congress on study
and review of the use of compensation
consultants and the effects of such use.
Sections 953 and 955: Adopt rules regarding disclosure of pay-for-performance,
pay ratios, and hedging by employees and
directors.
Section 954: Adopt rules regarding recovery of executive compensation.

Credit Ratings
Section 932: Adopt rules regarding NRSRO
[nationally recognized statistical rating
organizations] reports of internal controls
over the ratings process, preventing sales
and marketing activities from influencing the production of ratings, providing
for a report to the SEC and look-back
when an entity subject to a rating employs
a person who previously worked for the
NRSRO.
Section 932: Adopt rules regarding transparency of NRSRO ratings performance.
Section 936: Adopt rules establishing
training, experience, and competence
standards, and a testing program for

NRSRO analysts.
Section 939F: Report to Congress on study
on the rating process for structured finance products and associated conflicts
of interest, the feasibility of an assignment
system, metrics to determine the accuracy
of ratings, and alternative compensation
that creates incentives for accurate ratings.

Derivatives
Section 719(d): Joint report to Congress
(with the CFTC) on study regarding stable
value contracts.
Sections 763 and 766: Adopt rules on trade
reporting, data elements, and real-time
public reporting for security-based swaps.
Section 763: Adopt antimanipulation rules
for security-based swaps.
Section 763: Adopt rules regarding the
registration and regulation of securitybased swap execution facilities.
Section 764: Adopt rules regarding the
registration and regulation of securitybased swap dealers and major securitybased swap participants.

Section 765: Adopt rules regarding conflicts of interest for clearing agencies, execution facilities, and exchanges involved
in security-based swaps.

Market Oversight
Section 210: Jointly with other financial
regulators prescribe recordkeeping requirements that will assist the FDIC when
acting as a receiver.
Section 417: Report to Congress on study
on the state of short selling on exchanges
and in the over-the-counter markets.
Section 619: Adopt rules to implement
prohibition on proprietary trading and
certain relationships with hedge funds
and private-equity funds (the Volcker
Rule).
Section 917: Report to Congress on study
to identify financial literacy among retail
investors.

Municipal Securities
Section 975: Adopt permanent rules for
the registration of municipal
advisers.

Source: SEC (updated 6/20/12). Not all planned activity is listed above. Other regulators are also responsible for rulemaking.

Bob O'Connor

cfo.com | July/August 2012 | CFO 41

Regulators are still


hammering out the details
of the Volcker Rule, one
of Dodd-Franks most
controversial provisions.
Former Federal Reserve
chairman Paul Volcker inspired
the rule that would bar
proprietary trading by banks.

to CEO Jeffrey Immelt in 2010.


Elsewhere, many banks have already taken steps to cut
their business ties to hedge funds, as will be required under
the Volcker Rule. And growing numbers of banks and businesses are already clearing more of their over-the-counter
derivatives trades as will be required by Dodd-Frank, even
as they await final rules from federal regulators on exactly
which trades must be cleared.

Preventing Too Big to Fail


till, many of these developments are but a sideshow to the real thrust of Dodd-Frank: to prevent the unwieldy collapse of systemically important, too big to fail financial institutions.
The act attacks the problem from several anglescreating stiffer capital requirements for financial institutions, requiring firms that securitize assets to retain some exposure
to the resulting securities, creating greater regulation and
transparency in the over-the-counter derivatives market,
increasing regulation and oversight of credit-rating agencies, prohibiting speculative trading by banks, and creating the Financial Stability Oversight Council. (The FSOC
brings together the heads of the Treasury Department, the
Federal Reserve, the SEC, and other regulatory bodies to
monitor financial markets and identify potential threats to
U.S. financial stability.)
The FSOC is only getting started on its mission, though,

42 CFO | July/August 2012 | cfo.com

and regulators have made only partial progress on the other


fronts. Few of their tasks have proven more complicated or
controversial than implementing the Volcker Rule, which
prohibits proprietary trading by banks for their own accounts, precludes Fed-regulated financial institutions from
owning or sponsoring hedge funds or private-equity funds,
and gives regulators the authority to impose additional
capital requirements on nonfinancial companies engaged in
proprietary trading. Dodd-Frank provides that the Volcker
Rule statutory provisions take effect on July 21 of this year,
yet regulators at the Fed, the SEC, the FDIC, and the Office
of the Comptroller of the Currency were still debating the
necessary implementation rules heading into this summer,
and it is unlikely that implementation rules will be issued
by the deadline. The regulators issued interim guidance that
will apply until final rules are adopted.
The delay stemmed in part from the complexity of deciding just what constitutes speculative trading and what
qualifies as hedging, which the Volcker Rule expressly
permits. Regulators also have been the target of vigorous
lobbying by bankers opposed to the rule, often led by JPMorgan Chase chairman and CEO Jamie Dimonalthough
JPMorgans announcement in May that it had lost $2 billion
trading credit-default swaps in its own account (with the
chance for that number to go much higher) renewed pressure on regulators to issue final rules with real teeth. Still
at question is whether the JPMorgan Chase trading would
have been covered by the Volcker Rule; the bank insists it

Fang Zhe /Landov

Unfinished
Business

would not, while skeptics wonder whether


it was, in fact, hedging
and not speculating.
Other major initiatives still on the docket include identifying which nonbank financial institutions
will qualify as systemically important
financial institutions, or SIFIs, and
therefore be subject to heightened regulation under Dodd-Frank; and implementing all the rules and regulations
pertaining to the over-the-counter derivatives, or swaps, market, where most
trades will have to be submitted for
clearing to central counterparties. The
FSOC spelled out in April how it will
identify SIFIs, but actually identifying
them is expected to take several more
months.

Regulating Swaps
mplementing Dodd-Franks
swaps regulations has
proved nearly as complicated as parsing out regulatory language on the Volcker Rule, with
much of the controversy centered on
whom, and which types of transactions,
should be covered by the new rules. In
addition to instituting regulation of swap
dealers and major swap participants,
Dodd-Frank prohibits those entities from
receiving any federal assistance, such as
advances from a Federal Reserve credit
facility or discount window, that is not
part of a broad-based eligibility program.
Following the JPMorgan Chase loss,
the CFTC began looking into whether the
swaps regulations should be extended
to cover the overseas units of U.S. institutions, a situation U.S. banks have said
would hurt their ability to compete with
foreign-based rivals. The regulation of
swaps is still a work in progress, says
Sten. It may have a bigger impact on the
affected U.S. institutions than the Volcker Rule.
Elsewhere, the SEC headed into summer still needing to issue final guidance
on how companies should go about reclaiming incentive compensation in cases
where companies restate their financial
results due to material noncompliance
with accounting laws. The Sarbanes-

Larry Downing /Landov

10 years
after:
the
sarbanesOxley act

President George W. Bush signs the Sarbanes-Oxley


Act in the East Room of the White House, July 30, 2002.

July also marks the anniversary of another


landmark piece of legislation: the Sarbanes-Oxley Act
of 2002. Aimed at preventing a repeat of the egregious
accounting scandals that
had felled once high-flying
companies like Enron and
WorldCom, the law mandated rigorous internal control
procedures for publicly traded companies, assigned personal responsibility
for accurate financial statements to CEOs and CFOs, required rapid public
disclosure of material changes in a companys financial condition or operations, and imposed a host of other accounting and corporate-governance
mandates. Like the Dodd-Frank Act of 2010, Sarbox was written hastily and
passed quickly in response to a crisis. Yet at just 66 pages, it was practically
a footnote compared with Dodd-Frank, which clocked in at 848 pages.
Ten years later, it is clear that Sarbox did not completely eliminate accounting fraud or the sketchy use of off-balance-sheet bookkeeping to mask
a companys true financial condition. When commodities trader Refco collapsed in 2005, for example, investigators discovered that its CEO and chairman had hidden approximately $430 million in bad debts from the companys
auditor and investors. And when Wall Street investment bank Lehman Brothers fell in 2008, regulators discovered that it had been using off-balancesheet accounting to understate the leverage on its books.
Nor has Congress been completely satisfied with what it wrought. Earlier
this year, the JOBS (Jumpstart Our Business Startups) Act exempted emerging growth companies, which it identifies as those with annual revenues under $1 billion, from certain provisions of both Dodd-Frank and Sarbox.
Still, it is also true that since Sarbox there has been no rash of accounting
scandals like the ones that prompted Congress to create the law. This held
even in the midst of the 2008 credit crisis, when any corporate executive inclined to shade the truth might have been tempted to whitewash what was
happening to the corporate balance sheet. The law has had value in bringing more integrity and transparency to financial statements, says Carol
Beaumier, an executive vice president with Protiviti, a consulting and internal audit firm.
Whether Sarbox says anything about the future for Dodd-Frank is questionable. They are very different statutes, says Annette Nazareth, a former
SEC commissioner and now an attorney with Davis Polk & Wardwell. I think
Sarbanes-Oxley had a lot of merit, even though there were parts that didnt
work as well and took some time to resolve. Dodd-Frank was much more ambitious, and in a lot of places duplicative, with several provisions aimed at
solving the same problems. Is it going to make our financial system better? We hope so, but its difficult to say. R.M.

cfo.com | July/August 2012 | CFO 43

Unfinished
Business

Oxley Act of 2002 had a


similar but more forgiving clawback provision
that kicked in only if a
restatement was a result
of misconduct. The new law, says Hauser,
will likely require firms to amend many of
their existing compensation agreements.
Finally, banking regulators are still working on some of the rules needed to fully implement the controversial Collins Amendment to Dodd-Frank, which adjusts the way
bank capital requirements are calculated.
One challenge: figuring out how to reconcile differences between the capital requirements spelled out in Dodd-Frank and those
outlined in Basel III, the global regulatory
standard that phases in beginning in 2013.
Getting Dodd-Franks rules wrong could
impose unnecessary costs on the nations
financial system and exaggerate, rather
than mitigate, the risks the law was intended to minimize. But bad rules can be struck
down. Last July, the U.S. Court of Appeals
rejected an SEC rule that would have made
it easier for shareholders to nominate candidates to the boards of public companies,
arguing that the commission hadnt adequately assessed its costs. Cost-benefit
analysis is extremely challenging, observes
Nazareth, who speculates that it could become an issue with other rulemaking decisions, too.

Keeping
TracK
of doddfranK

Keeping track of
regulatory progress on implementing the
Dodd-Frank Act is no easy
matter. As one attorney
recently confessed, No
one really knows what
the hell is going on with
Dodd-Frank.
But there are study
aids. Law firm Davis Polk & Wardwell publishes a monthly progress
report available on its website at www.davispolk.com/Dodd-Frank-Rulemaking-Progress-Report/. For anyone just being introduced to the acts
intricacies, The Dodd-Frank Act: A Cheat Sheet, published by law firm
Morrison & Foerster, is still helpful. It can be found on the firms website
at www.mofo.com/files/Uploads/Images/SummaryDoddFrankAct.pdf.
Meanwhile, many regulatory agencies are doing their best to keep the
public informed as well. The Securities and Exchange Commission has
more rulemaking requirements than any other agency, and it routinely publishes news on its latest activities. To see the page where
it spotlights its progress on Dodd-Frank, go to www.sec.gov/
spotlight/dodd-frank.shtml. R.M.

Will It Work?
ith so much rulemaking yet to be done, it is
probably unfair to ask if Dodd-Frank has succeeded so far in creating a stronger and more
secure financial system in the United States. I
think weve got a long way to go before we can judge DoddFrank, says Carol Beaumier, an executive vice president
with Protiviti, a consulting and internal audit firm.
Still, skeptics, and outright critics, are abundant. Congressional Republicans, who opposed the law, have submitted numerous bills that would scrap all or parts of
Dodd-Frank, while Presidential candidate Mitt Romney has
vowed to repeal the law if he is elected, though most political analysts consider that little more than campaign bravado. Even if they captured the White House, Republicans
would need to muster 60 votes in the Senate, now controlled by Democrats, to repeal the law.
That hasnt stopped the criticism. I think it [DoddFrank] has done little to solve our problems, says Kevin
Williams, CFO of Jack Henry & Associates, a $967 million
provider of information-processing solutions to community banks. In the two years since the laws passage, Wil-

44 CFO | July/August 2012 | cfo.com

Dodd-Frank co-sponsor Sen. Christopher Dodd (right)


retired from Congress in 2011; Rep. Barney Frank (left)
will leave in 2013.

liams notes, the nations biggest banks have gotten bigger,


not smaller, with the six largest holding assets equal to 63%
of the countrys gross domestic product. That makes their
potential failure an even bigger concern than it would have
been in the past, he contends.
Meanwhile, small community banks are being hurt
by the cost of complying with a law written in response
to problems created by large banks, says Williams. That
charge has been echoed by former FDIC chairman Bill
Isaac, now chairman of Fifth Third Bancorp., who has said
he wouldnt be surprised if half of the nations community
banks go out of business if they dont get some relief from
Dodd-Frank.
I think Dodd-Frank was a political response to an economic problem, and history tells us that is not always the
best solution, says Isaac.
If Williams proves prescient, Dodd-Frank will have been
a large, costly, and ultimately misguided effort to strengthen the financial markets. Yet in light of the ongoing devastation wrought by the 2008 credit crisisto the financial
and housing markets and economies around the worldit
is probably unrealistic to expect that policymakers would
not have tried. CFO
Randy MyeRs is a contributing editor at CFO.

Roger L. Wollenberg/Landov

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Too
Much
Of A
Good
Thing

Working capital is piling up


at Americas largest companies.

By russ BAnhAm
illustrAtions By dAvid plunkert

46 CFO | July/August 2012 | cfo.com

the 2012
CFO/rel
Working
CApitAl
sCoreCArd
Its one of the most
important metrics
for gauging a companys efficiency and financial health. So when
a new survey of 1,000 of
the largest public companies in the United
States indicates that
their working capital
continues to be much
larger than is considered prudent, thats
cause for concern.
The annual survey,
conducted by REL
Consulting, reveals an
overall lack of sus-

the 2012 CFO/reL Working Capital scorecard

tained working capital improvement among U.S. companies.


After a predictable decrease in working capital during the
Great Recession, when companies focused more on the balance sheet, working capital performance has leveled off.
Days working capital (DWC)the number of days it
takes to convert working capital into revenuedid decrease
marginally in 2011, from 37.7 days to 37 days. But REL downplays the improvement, attributing it in part to the companies 13% average revenue growth. To have a 1.9% decrease
is a positive, but not by a lot, says Prathima Iddamsetty, senior manager of operations, research, and marketing at REL,
a working capital consultancy.
Cash on hand across the group of surveyed companies,
dubbed the REL U.S. 1,000, increased by $60.3 billion in 2011,
helped in part by companies taking advantage of low interest
rates to issue more debt, up by a record $233 billion year-overyear. Those companies now have a staggering $910 billion in
excess working capital, including $425 billion in inventory,
according to REL. Way too much cash is being left on the
table and not being put toward growth objectives, says Iddamsetty.
There is a wide gulf between top-performing companies
in the upper quartile of the survey and median performers.
On average, top performers have 49% less working capital
tied up in operations, collect from customers more than two
weeks faster, pay suppliers about 10 days slower, and hold
less than half the inventory than median companies. (The
2012 CFO/REL Working Capital Scorecard, which begins on
page 51, shows the best and worst companies in terms of
working capital performance in 20 industries.)
The research indicates little sustainability in working
capital improvement. Fewer than 8% of companies managed
to reduce days working capital over the past three years, and
no company surveyed improved all elements of DWCinventory, receivables, and payablesover the period.
CFOs should care about these results, not just because
working capital is a reliable index of efficiency, but because
the world is getting more competitive. When global investors think about where to put their money, they look for
where theyre going to get the best return for a given amount
of risk, says Kevin Kaiser, professor of management practice at INSEAD, the international business school. Having
capital tied up is an inefficient use of their investments. In a
world where people have choices about where to send their
cash, theyre not going to invest it in companies with inefficient working capital practices.

Gains Not Sustained


REL also attributes the modest improvement in DWC to
companies doing several things (in addition to the revenue
growth already mentioned): collecting faster from customers, getting rid of excess inventory built up during the recession, and tightening production. Although days inventory

48 CFO | July/August 2012 | cfo.com

outstanding fell, the survey indicates that companies turned


inventory over slower in 2011 than in the prior year.
We are more or less back to where we were well before
the recession, says Iddamsetty. The long-term trends indicate virtually no ability to make sustained working capital
improvements.
Many companies that improved working capital during the recession havent continued to do so, says Ashley
Sparks, an REL associate. They made it a priority to get
working capital in order, but now they have so much cash
theyve shifted their focus from the balance sheet to the P&L
statement, emphasizing new products and revenue growth,
she says.
Overall, corporate efficiency declined in 2011: operating
expenses increased by 13%, gross margins decreased by 2.3%,
and profitability fell by 0.4%, according to REL. Sparks notes
that operating expenses are increasing in tandem with revenue growth$1.2 trillion and $1.1 trillion, respectively, according to the survey. Companies are failing to realize the
importance of a sustainable, significant, and reinforcing cash
flow, she says. Revenues are increasing, but so are operating expenses. There is a missed opportunity to limit the

Companies now have a staggering $910 billion in excess


working capital, including $425
billion in inventory, according
to REL. Way too much cash
is being left on the table.
Prathima iddamsetty,
senior manager of operations, reL ConsuLting

Theres no magic to improving


working capital management.
The key is not to take your eye
off the ball.

active phone calls to improve receivables, Drillock says. That took our days
past due from an average of 12 to 15 days
to 5. We then extended terms with vendors from 45 days to 60 days, but promised wed always pay on time. And we decided if a product moves slowly, it should
be made when needed, whereas we could
build inventory for products with a fast
turnover.

Dave Drillock, CFO, Cytec industries

Constantly Chipping Away

Capital Companies
At these companies, working capital is working well.
ix companies top the REL U.S.
1,000 list in terms of sustained
working capital performance:
Colgate-Palmolive, Cubic, Cytec Industries, Deluxe, PH Glatfelter, and Watts Water Technologies. These companies either
improved working capital performance
(days working capital and its three major
elements) or sustained it (performance
did not deteriorate by more than 5%) each
year for three successive years.
Working capital performance is a
critical element of how we define success here, says Bill McCartney, CFO of
Watts Water Technologies, a $1.5 billion
(in 2011 revenues) global manufacturer of
safety and control packages for residential and commercial applications. Half
our growth here has come from acquisitions36 in the last 11 yearsand weve
been able to finance a lot of it through

David Bowman

internal cash flows. Weve been able to


achieve free cash flow in excess of net income the last 4 years, thanks to effectively managing working capital.
Working capital also is a key part of
the cash flow metrics at Cytec Industries,
where it is linked to employees annual
incentive compensation. The firm established a target to reduce net working capital in 2009 and challenged the workforce
to achieve it. We linked 20% of everyones bonus to achieving the metric, says
CFO Dave Drillock. Theyve done it now
three years in a row.
The $3 billion specialty materials and
chemicals manufacturer did it by segmenting inventory to better track slowand fast-moving products, hunting down
late payers, and extending terms with
vendors. We did things like hiring more
collectors and urging them to make pro-

Deluxe, a $1.42 billion provider of marketing tools and web services for small businesses and financial institutions, also has
what CFO Terry Peterson calls a diligent
accounts-receivable process. After a
certain number of days past due, we send
a letter and follow up with phone calls to
collect the balance, Peterson explains.
We also push customers to receive electronic invoices, which shaves several
days off the payment terms. Were also
more careful in extending credit to small
businesses, we reduced the number of
our SKUs, and we enhanced forecasting
with a new SAP tool to get our inventory
in line.
He adds, Were constantly chipping
away to get another inch of progress.
Like the other top-performing companies, $1.2 billion Cubic keeps close watch
on its key working capital metric: days
sales outstanding plus days inventory
outstanding minus days payable outstanding. Were a systems integrator for
government and transportation, so we
dont have products, but when youre in
the services business its all about performance, says John D. Thomas, Cubics
vice president of finance. You make deliveries on time, you get paid on time.
Cubic also links working capital to senior employee compensation. Our managements incentive pay has been very
good of late because of our high return
on net assets, Thomas says. People are
focused when they negotiate contracts,
building in terms they can meet and getting advance payments where they can,
minimizing the amount of capital used per
transaction.
The CFOs were not surprised their
companies topped the REL U.S. 1,000. But
they cant offer any simple solutions for
their poorer-performing peers. Says Drillock, Theres no magic to improving
working capital management. The key is
not to take your eye off the ball. R.B.

cfo.com | July/August 2012 | CFO 49

The 2012 CFO/ReL Working Capital scorecard

amount of working capital it takes to generate revenue.


Kaiser notes that poor working capital performance and
inferior products may go together. A company with a poor
product will provide better payment terms to customers
than its competition45 days instead of 30, he says. It will
keep more inventory to provide that product on the spot to
a buyer. It will pay suppliers faster to make sure the inventory is full. In effect, its working capital deficiency drives its
revenue growth, not the quality of its goods or services. If
this keeps up, it will eventually be overtaken.

Companies have strong


balance sheets, record cash
on hand, and record cash flow
from operations over the
last five years, so theyre
thinking theyll just sustain
things as they are.
Dan GinsBeRG,
associate principal, rel consulting

Hoarding Cash
Why arent companies putting more energy into their working capital management? For the most part, they have strong

Making it
Work
To help create long-term,
sustainable working
capital improvements,
REL Consulting recommends the following best
practices:
e Make working capital optimization and cash flow improvement a strategic priority, with visible senior executive backing.
r Link cash-flow performance and working capital management to the compensation structure.
t Make cash flow one of the key metrics for performance
management within operations and finance.
u Invest in improving demand forecasting and deployment
of effective sales and operations planning processes.
i Standardize customer and supplier payment terms, and
control exceptions through an escalation process.
o Segment customers and suppliers according to value
and risk to support a differentiated approach that applies the companys resources to those customers and
suppliers to improve cash flow.
p Automate and eliminate high-volume, low-value transactions to free up resources to focus on high-value customers, suppliers, and transactions.
a Regularly review trade-receivables allowances according to historical experience, creditworthiness, and age of
the trade-receivables balances.
s Create estimates and judgments for age of inventories
and other relevant issues that could affect the salable
condition of products and their estimated selling prices.
R.B.

50 CFO | July/August 2012 | cfo.com

balance sheets, record cash on hand, and record cash flow


from operations over the last five years, so theyre thinking
theyll just sustain things as they are, says REL associate
principal Dan Ginsberg. This is a common, but shortsighted,
attitude.
Indeed, cash is still king for the REL U.S. 1,000. This is
clearly evidenced by the $60 billion increase in cash on hand
and the $233 billion increase in debt in 2011. Over a threeyear period, cash on hand was $277 billion and accumulated
debt $268 billion.
But using debt instead of efficient working capital management to get more cash into the bank account comes with
a long-term cost: eventually they will have to pay [the debt]
down, points out Ginsberg. Theyll also have to generate a
return on their existing assets that exceeds the interest rate,
which is not what were seeing.
Its better to tap working capital as a funding source for
long-term growth strategies, says Ginsberg. REL Consulting
cites top performers in a broad range of industries, leveraging working capital to open up new businesses in emerging
markets with growing consumer demand, for instance.
Top performers have very tight manufacturing timetables and inventory management practices, in addition to
strict collections and payment systems that are standardized
across all locations, says Michael K. Rellihan, an associate
principal at REL. The cash they generate from this high level
of working capital efficiency is then applied to the growth
agenda. Long-term, the result is a powerful benefit to the
bottom line.
Only process improvements will provide sustainable
cash flow benefits, adds RELs Sparks. This requires working more closely with customers, getting better information
to suppliers, and improving demand forecasting. You need to
have an underlying process in place to manage working capital on a day-to-day basis; if not, it will be difficult to sustain.
Kaiser has a similar view: Building a business with a sustainable competitive advantage insists on working capital efficiency, he says. They go hand in hand. CFO
Russ Banham is a contributing editor at CFO.

Days Sales Outstanding (DSO): AR/(total revenue/365)

How
Working
Capital
Works

Year-end trade receivables net of allowance for doubtful accounts, plus financial
receivables, divided by one day of average revenue.
A decrease in DSO represents an improvement, an increase a deterioration.
Some companies have securitized receivables, which improve DSO through
financing alternatives without improving the underlying customer-to-cash
processes such as credit-risk assessment, billing, collections, and dispute
management. The scorecard eliminates this distortion by adding securitized
receivables back on the balance sheet before calculating DSO.

Days Inventory Outstanding: Inventory (DIO)/(total revenue/365)


Year-end inventory plus LIFO reserve, divided by one day of average revenue.
A decrease in DIO is an improvement, an increase a deterioration.

Days Payables Outstanding (DPO): AP/(total revenue/365)


Year-end trade payables divided by one day of average revenue.
An increase in DPO is an improvement, a decrease a deterioration. For purposes
of the survey, payables exclude accrued expenses.

Days Working Capital (DWC): (AR + inventory - AP)/(total revenue/365)


Year-end net working capital (trade receivables plus inventory, minus AP) divided by
one day of average revenue.
The lower the number of days, the better. The percentage change is marked N/M
(not meaningful) if DWC moved from a positive to a negative number or vice versa.

The 2012 Working


Capital Scorecard
Best in Industry
Worst in Industry

Aerospace & Defense


Northrop Grumman
Lockheed Martin
Raytheon
Goodrich
Spirit AeroSystems
BE Aerospace
Median

Note: Many companies use cost of goods sold instead of net sales when calculating DPO and DIO. Our methodology
uses net sales across the four working capital categories to allow a balanced comparison.
Companies in the survey are categorized using the Global Industry Classification Standard.

DSO
2011

DIO
1-yr. %
change

2010

DPO

2011

1-yr. %
change

2010

2011

DWC
1-yr. %
change

2010

2011

1-yr. %
change

2010

41
48
66
61
19
49
60

-5%
5%
4%
5%
15%
-7%
0%

43
45
64
58
17
53
60

12
19
5
132
197
216
57

4%
3%
-6%
1%
-10%
-14%
5%

12
19
5
131
219
252
54

20
18
22
35
42
29
27

0%
37%
-1%
29%
8%
-7%
5%

20
13
22
27
39
31
26

33
49
49
158
175
236
90

-5%
-4%
5%
-2%
-11%
-14%
1%

34
51
47
162
197
274
88

7
8
13
9
21
11
10

18%
-49%
-47%
-4%
25%
12%
-8%

6
16
25
10
17
10
11

9
12
6
7
5
13
6

28%
-18%
-17%
-7%
2%
0%
-12%

7
14
7
7
5
13
7

25
22
20
11
18
6
17

11%
-23%
-30%
-9%
-8%
-7%
-10%

22
29
28
12
19
6
19

(8)
(2)
(0)
5
8
19
(1)

-8%
-277%
-106%
3%
230%
9%
19%

(9)
1
4
5
2
17
(1)

48
50
47
63
40
64
51

-10%
-6%
-3%
-1%
-12%
-3%
-4%

54
53
49
63
45
66
54

16
19
30
50
65
66
30

-3%
-2%
-11%
2%
4%
16%
-6%

17
19
34
50
63
57
32

52
52
59
41
32
53
47

-7%
-2%
-8%
5%
-24%
16%
-1%

56
53
64
39
42
45
47

13
17
18
73
73
77
35

-10%
-12%
0%
-2%
11%
-1%
-9%

14
19
18
74
66
78
39

45
39
29
42
47
68
45

3%
-4%
-3%
5%
-13%
-23%
3%

43
41
30
40
54
89
43

38
37
52
54
53
53
45

5%
2%
-6%
20%
-14%
-31%
8%

36
36
55
45
61
76
42

38
28
27
33
27
37
31

28%
4%
22%
-4%
-19%
-30%
-5%

29
27
22
35
34
52
32

45
48
53
63
72
84
59

-10%
-4%
-14%
24%
-12%
-25%
12%

50
50
62
51
82
113
53

Airlines
Southwest Airlines
SkyWest
United Continental
US Airways Group
Hawaiian
Republic Airways
Median

Auto Components
Lear
TRW Automotive
Tenneco
Federal-Mogul
Cooper Tire & Rubber
Exide Technologies
Median

Building Products
Masco
USG
Armstrong World Industries
Owens Corning
Nortek
Griffon
Median

N/M = not meaningful, because DWC moved from a positive to a negative number or vice versa.
Based on financial statements of 1,000 of the largest U.S. public companies (excluding the financial
sector), as reported by Capital IQ. Median shown is for the full industry. Source: REL Consulting

cfo.com | July/August 2012 | CFO 51

The 2012 CFO/REL Working Capital Scorecard


Best in Industry
Worst in Industry

Chemicals
TPC Group
CF Industries
PolyOne
Ecolab
Sensient Technologies
OM Group
Median

DSO

DIO

2011

1-yr. %
change

28
16
41
112
56
51
48

-17%
-27%
0%
88%
-7%
8%
-5%

24
47
59
81
87
90
62

DPO

2011

1-yr. %
change

34
22
41
60
60
47
51

12
18
31
59
106
148
51

-37%
-27%
6%
109%
-2%
65%
1%

0%
-11%
34%
-12%
-14%
18%
3%

24
53
44
92
101
76
61

19
6
9
51
48
41
21

18
38
46
66
53
66
52

-41%
-1%
-1%
3%
2%
1%
13%

31
39
47
65
52
66
47

34
33
49
75
61
90
47

-7%
2%
-4%
85%
-3%
58%
6%

55
39
26
39
39
56
39

DWC

2011

1-yr. %
change

2010

2011

1-yr. %
change

19
25
29
28
108
90
51

23
6
38
44
24
41
29

-21%
-26%
0%
109%
-9%
27%
-5%

29
8
37
21
26
32
31

17
28
35
128
138
158
70

-28%
-27%
5%
90%
-3%
51%
0%

24
39
33
67
142
105
70

6%
194%
92%
-2%
-38%
13%
-3%

18
2
5
52
77
36
21

24
27
35
36
33
28
28

-7%
2%
42%
0%
-44%
1%
7%

25
26
25
36
59
27
26

19
26
32
95
103
103
55

18%
-9%
37%
-11%
-14%
22%
-1%

16
29
24
107
119
85
56

3
8
22
59
57
52
22

-56%
7%
7%
16%
-1%
-8%
7%

6
8
21
51
57
56
21

49
69
59
58
29
35
42

-27%
2%
6%
6%
3%
-7%
2%

67
67
56
55
28
38
42

(29)
(22)
9
67
82
83
32

-6%
7%
-20%
11%
-1%
-1%
26%

(31)
(21)
11
61
82
84
26

36
32
51
41
63
57
45

48
42
37
61
46
55
45

-1%
12%
-11%
59%
-6%
24%
-4%

49
37
42
39
49
44
48

59
36
42
53
17
40
37

-2%
11%
-15%
72%
-22%
112%
8%

60
32
49
31
22
19
34

23
39
44
84
89
105
56

-8%
4%
2%
72%
0%
28%
-4%

25
37
43
49
90
82
58

107%
-21%
10%
-2%
-4%
52%
6%

26
49
23
40
41
37
37

N/M
N/M
N/M
3
3
7
-

N/M
N/M
N/M
-11%
-20%
26%
N/M

N/M
N/M
N/M
4
4
5
-

63
36
14
25
14
25
25

90%
-14%
-8%
13%
2%
69%
62%

33
42
15
22
13
15
16

(8)
3
12
18
28
37
14

22%
-59%
44%
-19%
-9%
38%
-34%

(7)
7
8
22
31
27
21

19
26
22
46
26
24
26

-56%
-1%
3%
2%
38%
15%
1%

44
27
22
45
19
21
26

10
13
15
55
65
167
42

-55%
-1%
8%
-12%
26%
7%
4%

23
13
14
62
52
155
40

12
21
15
30
18
20
23

-65%
-9%
5%
-17%
25%
2%
-14%

35
24
14
36
14
19
26

18
18
22
71
74
171
45

-45%
9%
5%
0%
30%
9%
14%

32
16
21
72
57
157
40

52
45
42
81
68
69
64

-5%
8%
7%
6%
-9%
2%
0%

54
42
40
76
75
67
64

39
46
40
59
71
76
49

6%
-4%
-6%
-5%
-17%
-6%
4%

37
49
42
62
86
81
47

30
27
11
16
16
12
16

-1%
32%
46%
-16%
-26%
5%
-7%

30
21
7
19
22
11
17

61
64
71
123
124
133
97

0%
-8%
-4%
4%
-11%
-3%
3%

61
69
75
119
140
137
94

28
35
37
41
44
70
38

12%
7%
-3%
-21%
-5%
-1%
-1%

25
33
38
52
46
71
39

33
27
29
50
74
51
39

11%
-2%
14%
-34%
8%
-10%
1%

30
28
25
75
69
57
39

35
31
30
35
26
23
30

6%
6%
3%
-21%
-3%
-2%
5%

34
29
29
44
27
23
29

25
32
36
55
92
99
47

21%
0%
5%
-33%
4%
-6%
-3%

21
32
34
83
88
105
49

2010

2010

2010

Communications Equipment
Qualcomm
Juniper Networks
EchoStar
Netgear
Ciena
Tellabs
Median

Computers & Peripherals


Apple
Dell
Western Digital
Imation
Diebold
NCR
Median

Containers & Packaging


Crown
Graphic Packaging
Greif
Rock-Tenn
AptarGroup
Sealed Air
Median

Diversified Telecommunication Services


Level 3 Communications
Frontier Communications
TW Telecom
AT&T
Verizon Communications
Windstream
Median

Food Products
Darling International
Dean Foods
Flowers Foods
Hain Celestial
J. M. Smucker
Seneca Foods
Median

Health-Care Equipment & Supplies


Invacare
West Pharmaceutical Services
Idexx Laboratories
ResMed
Teleflex
Zimmer
Median

Household Products
Procter & Gamble
Church & Dwight
Clorox
Spectrum Brands
Central Garden & Pet
Energizer
Median

52 CFO | July/August 2012 | cfo.com

N/M = not meaningful, because DWC moved from a positive to a negative number or vice versa.
Based on financial statements of 1,000 of the largest U.S. public companies (excluding the financial
sector), as reported by Capital IQ. Median shown is for the full industry. Source: REL Consulting

Best in Industry
Worst in Industry

Machinery
Paccar
Deere
Navistar International
Terex
Kennametal
Joy Global
Median

DSO

DIO

2011

1-yr. %
change

23
41
32
66
68
73
56

-3%
-23%
7%
2%
7%
5%
-3%

12
23
21
50
58
57
32

DPO

2011

1-yr. %
change

24
53
30
65
63
70
58

21
71
45
99
94
111
57

-23%
5%
-5%
-18%
14%
40%
1%

27
67
48
120
82
79
57

26
93
56
43
34
38
32

-58%
-17%
-10%
2%
18%
-2%
-9%

28
28
24
49
50
57
35

43
54
40
108
132
149
56

5%
-6%
6%
1%
35%
-9%
-4%

41
58
38
107
98
163
58

N/M
N/M
N/M
4
N/M
68
-

N/M
N/M
N/M
20%
N/M
-11%
N/M

N/M
N/M
N/M
3
N/M
77
-

49
52
48
88
87
40
62

3%
2%
-4%
4%
-1%
4%
-6%

27
15
43
31
47
33
32

12%
2%
3%
-13%
-3%
-18%
-16%

24
14
41
35
48
41
38

35
44
37
52
50
46
45

57
49
40
98
93
58
61

0%
2%
11%
-16%
62%
2%
6%

57
48
36
117
57
56
58

16
27
34
93
101
110
67

14%
-21%
66%
8%
14%
17%
-3%

16
6
6
9
N/M
18
6

40
13
29
57
76
37
40

DWC
2010

2011

1-yr. %
change

-5%
-3%
1%
-9%
39%
24%
1%

28
96
56
47
24
30
32

18
19
22
122
128
146
82

-23%
-23%
-3%
-11%
5%
23%
-1%

23
25
22
137
121
119
83

20
39
23
35
38
37
23

-2%
-3%
9%
-3%
36%
-7%
-6%

21
40
21
36
28
40
24

35
38
39
124
153
168
65

-28%
-16%
-4%
2%
28%
-7%
-7%

49
45
41
121
120
181
69

48
51
50
84
88
38
66

29
26
16
21
14
32
25

-7%
-2%
-3%
5%
21%
-4%
9%

31
27
16
20
12
33
23

20
26
32
70
73
76
37

23%
6%
-5%
5%
-4%
-7%
-14%

16
24
34
67
76
82
43

9%
10%
-4%
-6%
-3%
-24%
-1%

32
40
39
55
51
61
46

23
16
35
25
38
12
24

-17%
11%
-5%
1%
1%
-49%
-9%

28
14
37
25
38
24
26

39
43
45
58
58
67
53

37%
6%
4%
-12%
-6%
-13%
-7%

29
41
43
66
61
77
57

24
17
38
35
71
92
38

5%
-1%
-9%
-8%
10%
4%
-11%

23
17
41
38
65
89
42

45
13
16
35
60
22
21

20%
-18%
39%
-32%
173%
-27%
-3%

37
17
11
51
22
30
22

36
53
62
98
103
128
77

-15%
8%
-6%
-5%
3%
11%
-1%

43
49
66
103
100
116
78

14
34
21
86
89
94
68

N/M
8
8
N/M
N/M
N/M
1

N/M
-30%
-22%
N/M
N/M
N/M
4%

N/M
11
10
N/M
N/M
N/M
1

12
18
23
5
5
5
9

-19%
-14%
155%
-36%
25%
34%
-9%

15
21
9
8
4
4
10

4
17
19
88
96
105
58

-571%
-30%
-13%
13%
13%
16%
-1%

(1)
24
21
78
85
90
59

16%
2%
-15%
-17%
N/M
-16%
11%

14
6
7
11
N/M
22
5

N/M
111
1
88
158
208
52

N/M
-2%
-28%
4%
-3%
8%
-2%

N/M
114
1
84
163
192
53

41
125
13
19
30
11
23

0%
3%
-21%
-12%
-15%
5%
-4%

40
121
17
22
35
11
24

(25)
(7)
(7)
77
128
215
35

-8%
4991%
-25%
5%
1%
6%
1%

(27)
(0)
(9)
73
128
203
34

-18%
14%
-39%
-1%
3%
-13%
-15%

48
11
47
57
74
42
47

51
37
46
65
79
127
56

-29%
1%
-29%
1%
2%
13%
-10%

72
37
65
64
77
112
62

52
10
35
15
32
36
25

17%
-3%
-21%
-21%
0%
2%
1%

45
11
44
19
32
35
24

39
39
41
107
122
128
71

-49%
6%
-40%
4%
3%
7%
-16%

76
37
68
103
119
119
85

2010

2010

2011

1-yr. %
change

2010

Metals & Mining


Cliffs Natural Resources
Alcoa
Sims Metal Management
Allegheny Technologies
AM Castle
Carpenter Technology
Median

Multiline Retail
Family Dollar Stores
Dollar General
Dollar Tree
Belk
Saks
Nordstrom
Median

Paper & Forest Products


Verso Paper
Louisiana-Pacific
International Paper
PH Glatfelter
MeadWestvaco
Clearwater Paper
Median

Pharmaceuticals
Bristol-Myers Squibb
Allergan
Forest Laboratories
Endo Pharmaceuticals
Watson Pharmaceuticals
Hospira
Median

Software
Intuit
Take-Two Interactive Software
Electronic Arts
VMware
Parametric Technology
salesforce.com
Median

Specialty Retail
Aarons
AutoZone
Rent-A-Center
Mens Wearhouse
Zale
Tiffany
Median

Textiles, Apparel & Luxury Goods


Skechers USA
Coach
Liz Claiborne
Wolverine World Wide
Columbia Sportswear
Hanesbrands
Median

N/M = not meaningful, because DWC moved from a positive to a negative number or vice versa.
Based on financial statements of 1,000 of the largest U.S. public companies (excluding the financial
sector), as reported by Capital IQ. Median shown is for the full industry. Source: REL Consulting

cfo.com | July/August 2012 | CFO 53

77
77

We
asked.

You
answered.

Download these reports now at cfo.com/research

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FINANCE-DRIVEN.
JUST LIKE YOU.

CFO CFO

Business
Outlook

Duke University/CFO Survey Results

Muddling Through
CFOs continue to hire but are less optimistic, according
to the latest Duke/CFO Business Outlook Survey.
By Kate OSullivan

Even as the global economy


continues to send signals ranging from mixed to downright
alarming, U.S. finance chiefs
say they still plan to hire at a relatively strong pace, according to the
latest Duke University/CFO Magazine Global Business Outlook Survey,
released in June. U.S. CFOs say they
will expand their full-time domestic
workforces by 2.5% on average over
the next 12 months, a bump that could
lower the unemployment rate to 7% by
the end of the year.
Of the more than 400 U.S. CFOs
surveyed in this 65th consecutive quarterly survey, nearly 30% say their employees are maxed out, and 60% are
looking to add staff. Finance chiefs will
also increase their hiring of temporary
employees by just under 1% and expand their offshore outsourced workforces by 4%.

Tom Fitzsimmons, CFO of TMP


Worldwide, a New Yorkbased communications firm focusing on recruitment advertising programs, says his
company is hiring, mostly on the technology side. Fitzsimmons also has a
good window into overall hiring based
on clients plans. While TMP is seeing
some growth in its business, we can
attest that were not seeing rapid expansion in the private sector, especially
in larger corporations, he says. Wellmanaged companies are continuing to
acquire talent and expand slowly. But
theres no sense of pressure on corporations to fill their open jobs.
The survey data supports Fitzsimmonss impression: at companies with
more than $10 billion in annual revenue, there are no plans to hire in the
next 12 months. Midsize companies
will be the most active recruiters, with
those with $500 million to $999 mil-

2.5%

The average by which U.S.


CFOs say they will expand
their full-time domestic
workforce over the next
12 months.

lion in revenue planning to expand


their staffs by 6% on average in the
next year and those with $100 million to $499 million in revenue planning to add 4%. Technology, software, and biotech companies will add
more staff than any other sector, with
CFOs at those companies forecasting
a 5% increase in full-time workers.
Still, despite generally positive
hiring plans, the CFO Optimism In-

On the Home Front

Taking a Dip
CFOs rate their optimism about their domestic or
regional economy compared with last quarter.*

CFOs rate their optimism about their companies


financial prospects compared with last quarter.

National/regional economy

Own company

70

70

60

65

50

U.S.

60

U.S.
Europe

Europe
40

Q3 11

Q411

Q1 12

Q2 12

Asia

*CFOs were asked to rate their optimism about the economy on a scale of 0100,
with 0 being least optimistic.

Asia
Europe
US Duke University/CFO Magazine Global Business Outlook
Source for all charts:
Survey of 773 CFOs444 from the U.S., 102 from Europe, and 227 from Asia.

55

Q3 11

Q4 11

Q1 12

Q2 12

Asia

CFOs were asked to rate their optimism about their companies on a scale of
0100, with 0 being least optimistic.

Asia
Europe
US

cfo.com | July/August 2012 | CFO 55

Business
Outlook
Selective Spending

Wages: Little Movement

12-month % change predicted by U.S. CFOs

12-month % change predicted by U.S. CFOs

10%

3.0%

Capital
spending

2.5

Technology
spending

2.0

R&D
spending

Marketing
& advertising
spending

0%

Q3 11

Q4 11

Q1 12

Q2 12

1.5
1.0%

Q3 11

Q4 11

Q1 12

Q2 12

TOp COnCernS OF CFOs


A&M S

Wages

About the
macro
economy:
R&D
S
TS demand
e Consumer
CS
r Federal-government
agenda/policies

Price pressure from


competitors

t Global financial

About their own companies:

e Ability to maintain
OTheR COnCeRns inCluDe:
national employment outlook
Federal budget deficit
Cost of fuel
Credit markets/interest rates
state/local government
budget deficits

margins

r Attracting and retaining


qualified employees
Ability to forecast
results

t Cost of health care

instability

OTheR COnCeRns inCluDe:


Working capital
management
Maintaining morale/
productivity
supply-chain risk
Balance-sheet weakness
Managing iT systems

Note: Concerns that received identical scores are grouped together.

dex fell in the second quarter, as the


773 finance chiefs surveyed around
the globe grew gloomier. U.S. CFOs
rate their optimism about the domestic economy at 56 out of 100, compared
with 59 last quarter. The optimism of
Asias CFOs dropped notably, falling
from 65 last quarter to 58 in May. That
marked the first time in the history
of the survey that Asias CFOs, traditionally more optimistic, fell in line
with their U.S. counterparts. They cite
consumer demand, government policy, price pressure from competitors,
and global financial instability as top
concerns. Meanwhile, at 52 out of 100,
optimism in Europe lags more than in
other regions, not surprisingly given
the ongoing debt crisis.
U.S. CFOs cite consumer demand as

56 CFO | July/August 2012 | cfo.com

their top concern, followed by worries


about price pressure from competitors
and federal government policies. Global financial instability also continues to
weigh on finance chiefs.
Fitzsimmons says the continued
softness in the housing market is producing emotional problems for the
economy. As long as people continue
to feel less wealthy, there will be caution in consumer spending, he says,
noting that deflated home prices mean
that many people have less personal
wealth than they did 10 years ago. We
also have a significant number of unemployed or underemployed, he adds.

Still Spending
Finance chiefs in the United States
do continue to plan to spend money

in critical areas, however. Technology leads the major spending categories, with CFOs reporting a planned
increase of 8% on tech spending over
the next 12 months, up from 6% last
quarter. CFOs also say their companies will increase capital spending
by 5% on average in the coming year,
down from 7% last quarter. Researchand-development spending and marketing-and-advertising spending will
both rise by 3%, in line with last quarters plans.
As they look for growth, 39% of
finance chiefs say their companies
are spending money on the pursuit of
major innovationinvesting in projects that, if successful, would have a
significant impact on the business. On
average, CFOs say their companies are

Pricing Parity

Staffing Up, Slowly

Change in prices of own-company products

12-month % change predicted by U.S. CFOs


6%

5%
No. of offshore
outsourced
employees

4
2

No. of domestic
full-time
employees

0
-2%

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2010

2011

No. of domestic
temporary
employees

1
0%

2012

Q3 11

CaSh: Still King


Number of offshore outsourced employees

Is it likely that your firm will begin to deploy its cash reserves
Number of domestic temporary employees
during the next 12 months?
Number of domestic full-time employees

No 52%

Yes 48%

0%

IF YES

20

40

On what would cash


reserves be spent?

60%
41%
27%
25%
20%

Capital spending
Acquisitions
Pay down debt
Increase hiring
Marketing &
advertising

Note: Multiple responses permitted.

spending about 15% of their total budget on innovation efforts.


Even with plans to spend, CFOs
continue to keep a careful watch on
cash, with cash holdings as a percentage of total assets rising from 16% to
17% over the past year. Slightly fewer
than half of respondents say they plan

60

IF NO

80

Q4 11

Q1 12

Q2 12

Inflation

7 Of those surveyed, the


amount of cash and marketable securities that their firms
held as a percentage of total
assets was 17%.

100%

the global view


Why not?

45%
42%
32%
19%
4%

Need cash as
a liquidity buffer
Lack excess cash
to deploy
Holding cash until
economic
uncertainty declines
Few attractive
investment
opportunities
Want to avoid
repatriation tax

to deploy some cash in the next 12


months, with capital spending winning
the largest share of the dollars, followed by spending on acquisitions and
debt payments. Most of the finance
chiefs who plan to continue to hold
cash point to economic uncertainty,
saying that they need a liquidity buffer.

In Europe, finance chiefs say hiring,


R&D, and advertising spending will
all be relatively flat over the next year,
while capital spending and earnings
are both expected to decline. European
CFOs plan to hold cash, citing liquidity
concerns and economic uncertainty in
the region, as well as a lack of attractive investment opportunities.
Asias finance chiefs plan to increase capital spending by 7% on average over the next 12 months, and expect to increase R&D spending by 4%.
Forty percent of Asias CFOs say their
companies are spending a portion of
their budgets on major innovations, in
line with their U.S. counterparts. Competition for workers in the region continues to be fierce, with finance chiefs
planning to boost wages by 7% on
average over the next year. CFOs also
plan to expand their full-time workforces in Asia by 3% over the same
time period. CFO

cfo.com | July/August 2012 | CFO 57

Field
Notes

Perspectives from CFO Research

Putting Social
Networks to Work
Companies are finding real economic value in
cooperation and social media.
By Josh Hyatt

For some time now, executives


have been touting teamwork as
a competitive tool. The complexity brought on by globalization, they argue, creates challenges so
grand they can be addressed only by
multiple minds. And the rise of internal
networks and social-media tools makes
far-flung collaboration increasingly feasible. Indeed, the knowledge that employees already devote so much time to
websites like Facebook and Twitter has
surely made more than one CFO wonder: Why cant we work this way?
That turns out to be a better idea
than anyone may have realized. Two
years ago, in The Rise of the Networked Enterprise: Web 2.0 Finds Its
Payday, McKinsey & Co. found that
companies that used internal and ex-

Social Studies
Which social-media platforms
are priorities for large
companies?
100%
80

94%
77%

60

42%

40
20
0%

Facebook Twitter YouTube


Source: Booz & Co./Buddy Media, 2011

58 CFO | July/August 2012 | cfo.com

ternal networks outperformed their


rivals financially. Such capabilities
correlated, for instance, with rising
market share and thickening operating
margins. Twenty-seven percent of the
3,200 global executives in McKinseys
survey reported that they had gained
real economic value through collaborative and social-media tools.
Those results were explored earlier this year in a CFO Research study
sponsored by Ariba, the maker of business software. Based on interviews
with 18 executives, academics, consultants, and authors, the study examined
how companies have embraced the network model of doing business, embedding technological advances in every
job and using it to generate increased
productivity. Technology is serving
as the enabler, says Walter Wallace,
instructor in the department of managerial sciences at Georgia State Universitys Robinson School of Business.
Businesses now have the tools to take
trust to a whole new level.
Part of this development is due to
the emergence of easier-to-use technological tools for internal networking
tools that mimic the capabilities of, for
example, Twitter. A lot of the stuff
that is happening out on external social
networks is influencing the collaboration systems that are being developed
for the inside of enterprises, says David Armano, executive vice president
of innovation and integration at Edelman Digital, the interactive arm of the

To be effective, you
need to embed the
use of social media
across the fabric of
the company.
Richard Binhammer, director of
social media and community, Dell

public-relations firm. As those evolve,


they will change the way employees
will work together and the level at
which they collaborate.
Companies are also shifting their
goals for the technology, from merely reducing operating costs (travel,
for example, or communications) to
boosting capabilities such as time to
market and rate of innovation through
collaboration. The notion is that collaboration can be a competitive advantage, says Bruce Weinberg, professor
of marketing at the Isenberg School of
Management at the University of Massachusetts Amherst. Its beyond having a social-media strategy; it means
infusing the company with the kind of
collaborative spirit that can give the
business an edge.

Becoming Socially aware


Adopting collaboration technology
typically starts with the awareness of
its value as a marketing or customerservice tool. Richard Binhammer, who
is now director of social media and
community at Dell, recalls that he first

Thinkstock

Making Connections
Users of Web 2.0 technologies report the following internal benefits:

77%
began responding to online posts (in
blogs, forums, and so on) about the
computer giant in 2006, when such
posts numbered about 4,000 a day.
Today, that figure is up to 25,000. The
company now offers formal socialmedia training to employees.
We came to a very early realization
that the discussions that go on on the
Web touch every part of the business,
says Binhammer. To be effective, you
need to embed the use of social media
across the fabric of the company.
Chuck Hollis, vice president for
global marketing and chief technology
officer at data-storage company EMC,
says that about six years ago, he realized that you could take just about
any fundamental process you might
care about and you could envision it in
a social-media world and how it might
look different and better. For example, using social-networking tools to
identify the top candidates for a position is cheaper than pursuing traditional routes. And an internal social
network can help new employees get
up to speed much quicker than weeks
of training can.
We do a lot of R&D and project
development, which is basically smart
people working together, says Hollis.
More and more those smart people
are scattered around the world, and
may or may not be badged employees of the company. So how do we
start doing collaborative product development with the very best ideas
out there? This other theme, around
our core business processes, began to
emerge.
Fortifying a businesss value propo-

Editors
Choice

Increasing
speed of access to
knowledge

41%

Increasing
employee
satisfaction

60%

Reducing
communication
costs

52%

Increasing speed
of access to
internal experts

40%

Reducing
operational costs

44%

Decreasing
travel costs

29%

28%

Reducing time
to market for
products/services

Increasing number
of successful
innovations in new
products/services

Source: McKinsey & Co. survey of about 3,200 executives, reported


in The Rise of the Networked Enterprise: Web 2.0 Finds Its Payday,
McKinsey Quarterly, December 2010.

sition through social-media tools requires patience, flexibility, and adaptability. New applications and tools
are constantly emerging (have you
pinned anything lately?). But by
sharing informationboth internally
and externallya company can tackle
problems more readily, collaborate
more freely, and compete more flexibly.
Does all that teamwork slow things
down? Quite the opposite: Collaboration speeds you up and gets you to
market. It gets you into the race faster
and better and cheaper, says Zachary Tumin, a senior researcher at Harvard Universitys Kennedy School of
Government and co-author of a recent
book, Collaborate or Perish! Working Across Boundaries in a Networked

World. Its always been true that collaboration has given people tremendous advantage. Today that advantage
is really decisive.
Thats because the pace of competition is constantly accelerating. Its
like the [wording] you see on the rearview mirror of your car: Objects may
be closer than they appear, says Joel
Babbit, co-founder and CEO of Mother
Nature Network, which supplies environmental news. Its much closer
than you think, and its coming up right
behind you at a speed much faster than
before. CFO
The full report on which this article
is based, Collaborate to Win, is available for downloading at www.cfo
.com/research.

More froM Cfo researCh:


To read the full report cited in this article, go to the research page
on www.cfo.com. Our research team regularly polls senior finance
executives on core aspects of financial management. Youre certain to
find insights that are relevant to your most pressing concerns.

cfo.com | July/August 2012 | CFO 59

TAKE
AWAY

Recipe for Profits


nAmE

Mel Hope

poSITIon

CFO of Popeyes Louisiana Kitchen

SVP of finance and chief accounting officer


of AFC Enterprises, the parent company of Popeyes; CFO of First
Cambridge HCI Acquisitions, a real estate investment firm in
Alabama; accounting, auditing, and business advisory professional
for PwC.

prEvIouS poSITIonS

Being finance chief of the worlds second-largest


fast-food fried-chicken chain. Popeyes has more than 2,000
restaurants in 45 states and 25 other countries.

noTAblE for

The Popeyes system is about 98% franchised. We have to be


attentive to our franchisees and their needs in order for the whole company
to thrive. We make money by capturing a royalty from their revenues. Some
companies might simply drive revenues by doing a lot of low-price offerings that
dont make a lot of money for the franchisees. But that works against you in time.
You might get a temporary bump by running a deeply discounted promotion,
but it would cost you a lot in terms of your credibility with your franchisees, and
you certainly wouldnt be
able to sustain it as a business model. So weve focused on making our franchisees more profitable.
We started analyzing
their P&Ls and picking out areas where they
could do better on
electricity, food, and labor
costs. Weve stripped out
about $32 million to $34
million of costs over the
last two to three years.
Saving our franchiseesthat money is a good
expression of our commitment to a partnership.
HIS TAKE-AWAY:

Popeyes CFO Mel Hope

60 CFO | July/August 2012 | cfo.com

interview by
marielle Segarra

Stan Kaady

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