VideoWhen Cisco Systems Inc. reported financial results for its fiscal year, some on Wall Street chided it for "managing earnings." One analyst complained in the Wall Street Journal that, for the eighth straight quarter, the San Jose, California, company had topped Wall Street's expectations by precisely one cent per share--and suggested that accounting games were being played. So what does CFO Larry R. Carter think about such an accusation?
"I take it as a compliment," he says. After three years spent trimming the finance department's month-end closing process from 10 days to 3--with the goal now in sight of a "virtual close" that permits error-free numbers accessible on demand--there's not much guesswork going on when he talks with analysts. "The close is no longer viewed as a single monthly event," explains Carter, who is also senior vice president, finance and administration, and secretary. "Instead, it is now considered a continuous process that builds over the course of a month."
Cisco's astounding record in shortening closing times, though, is just one of many successes in the program Carter began in 1996 to tighten corporate processes. In an array of areas, from bill payment to tax planning, Carter has led the effort to improve productivity, reduce cycle times, increase the flow of accurate information, and boost profits. And the effort ultimately won him the 1999 CFO Excellence Award for Developing an Efficient Finance Organization.
In Carter's view, the long road to finance efficiency has been paved with three big advantages: a dearth of "legacy issues" at the fast-expanding networking concern; employees wise in the ways of the Internet; and the same frenetic acquisition drive that some might consider an obstacle to process improvements. In reality, he says, "it forces you to be more efficient."
In the end, the results speak for themselves. Net income surged 55 percent in the fiscal year ended July 31, to $2.1 billion, on a 43 percent jump in revenue to $12.2 billion. And much of the credit goes to Carter's team, says Cisco's senior vice president, manufacturing, worldwide operations, Carl Redfield. Finance, he explains, "plays an important role in improving the cost structure and affecting the productivity, asset utilization, and gross margins for the entire company."
Speed Demon
If the absence of corporate legacies spares Cisco from tired old traditions, Carter's own legacy gives him a personal boost. Now 56 years old, Carter spent 19 years at Motorola Inc. before moving on to Advanced Micro Devices Inc. as controller, and eventually to VLSI Technology Inc. as CFO. "The combination of working for a large company like Motorola and smaller companies like VLSI provided an excellent training ground," he says. Motorola made formal instruction paramount, "but in a smaller company, there's such an entrepreneurial environment"--the kind of environment he tries to emulate, even as Cisco expands at its rapid clip.
It was precisely that clip that hurt Cisco's efficiency in the first place, however. When Carter joined in 1996, Cisco was acquiring midsized companies and integrating them well, but barely keeping up with the management of its own internal finance processes. "Maintaining the status quo was simply unacceptable," says Carter, who initiated a hiring program to add finance managers with experience in large-scale process-improvement projects.
Speed was of the essence, of course, both in making the corporate changes and in setting the framework for finance planning. "We don't make a lot of three-year and five-year plans," he says. "It's an exercise in futility" for a company growing like Cisco. And not surprisingly, the Internet and other technologies became cornerstones of Carter's improvements. "Everyone here is very Web- adaptive and PC-adaptive," says Carter, adding, "It's all very natural" for a company built on making networks run smoother.
Take the improvements in purchasing and accounts payable. To increase their efficiency, Carter put those two departments under a single manager in 1996--one who was encouraged to introduce his own vision for reengineering the procurement cycle into a single process. Soon, networked commerce with suppliers had become the standard. Cisco eliminated many of its paper-based transactions as it reviewed document flow and assessed supplier relationships. And it created three separate procurement strategies to fit the different needs of its high-dollar, high-volume inventory and service suppliers; its low-dollar, high-volume repetitive purchases; and its low-dollar, low-volume transactions.
In the wake of these improvements, Cisco's A/P headcount per $100 million of disbursement has fallen sharply over three years, for a 55 percent productivity gain in the area. And the shrinking corporate-purchasing headcount per $100 million of purchasing has led to a 33 percent productivity boost.
The impetus for much of the change: Each unit's finance department "developed a balanced scorecard that focuses simultaneously on productivity improvement, cost savings, timeliness, quality, and client satisfaction," says Carter. "In addition, a business-process- improvement department was created in the corporate controller's office to provide centralized leadership and resources."
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