VideoWhen Thomas Kuhn first coined the phrase "paradigm shift" in The Structure of Scientific Revolutions, he used it to describe the effect of fundamental changes in scientific assumptions. But such radical deviations have shaped other disciplines, including finance.
Hyperbole? Consider this: 20 years ago, risk management involved buying insurance, not guarding against terrorist attacks. Competition from overseas meant Japan, not China. Two decades back, CFO magazine wrote about the vexations wrought by FAS 87; these days, Sarbanes-Oxley can make pension accounting look like a walk in the park. And finally, the idea of a finance executive being a strategic partner was just that — an idea.
Presented on the following pages are the 20 events that most altered the practice of corporate finance since CFO magazine first began reporting on it in 1985. Taken together, they offer powerful evidence of just how much, and why, the CFO's world has evolved.
9/11
A World Transformed
The tragic events of September 11, 2001, forced companies to reckon with the now-imaginable risk that a terrorist act could affect their employees and operations. CFOs rewrote their companies' disaster-recovery plans, while security chiefs prepared for the possibility of bombs and bioweapons. Office buildings were walled off with Jersey barriers and outfitted with state-of-the-art surveillance systems.
Business travel became an ordeal, as air passengers lined up to be patted down. International supply chains slowed as Customs sought to secure the country's borders. The new Department of Homeland Security issued color-coded terrorism alerts, adding to the general unease. Meanwhile, the Iraq war, deeply unpopular in Europe, did nothing to calm transatlantic trade tensions. As the deadly occupation dragged on, the price of oil soared to a record $50 a barrel.
No further terrorist attacks have occurred on U.S. soil. But Americans may never again feel as secure as they did before that sunny September morning.
Offshoring
From Here to There
Companies have been offshoring — loosely defined as relocating domestic jobs to lower-cost overseas locations — for decades. In the 1990s, U.S. manufacturers sent assembly work to Mexican maquiladoras. They also outsourced back-office functions to other U.S. firms. But not until the Y2K crisis did the two trends mesh. The skill of the Indian programmers who fixed code — not only round-the-clock, but cheaply and efficiently — set the stage for a wave of IT offshoring.
The offshoring trickle has since become a steady flow. Two years ago, Forrester Research predicted that 3.3 million U.S. service jobs would be sent offshore by 2015; now, many consider that a conservative estimate. To general alarm and political outcry, companies are shipping out more than just manufacturing and IT.
As one finance chief told us last June: "[Offshoring] is only more significant now because white-collar workers are being affected."
Still, there is no reversing a trend that 42 percent of CFOs say saves them more than 20 percent on average. Before long, finance departments themselves will feel the change. A full 21 percent of CFOs who offshore, or plan to, say they are sending finance and accounting jobs overseas.
Complying with Sarbanes-Oxley
Fox in Sox
Working in haste to appease voters appalled by corporate fraud, lawmakers raced to enact the Sarbanes-Oxley Act of 2002. No law since the Securities Act of 1933 has had such a dramatic impact on Corporate America. CEOs and CFOs are now criminally liable for signing off on misleading Securities and Exchange Commission filings. 10-Qs must be more extensive and completed quicker. The 232-word Section 404 has proved to be the real bear: thousands of man-hours have been logged documenting internal controls, and no company yet knows if it will pass its audit.
The dollar cost is another burden, especially for smaller companies. So it's no surprise that two-thirds of those surveyed by Foley & Lardner said Sarbox compliance is excessive. Even the SEC must see a problem; it recently began studying how the law is affecting smaller companies.
China, Not Japan
Hu's on First?
Pop quiz: Which nation produces the lion's share of the world's cameras, televisions, and air conditioners?
Twenty years ago, the answer would have been Japan. But a prolonged economic slump has reduced the Rising Sun to a setting star — one quickly being eclipsed by China. Economists predict that China will surpass Japan as the second-largest economy by 2020.
When CFO began, of course, U.S. executives were screaming for protection from Japanese rivals like Sony and Toyota. Now China presents a different dilemma. U.S. companies lust after China's consumer market and its abundant unskilled workers. What they fear, however, is that businesses in the People's Republic of China may someday ship top-notch, branded products of their own.
The scenario assumes that China's renminbi revolution rolls on. Toward that, Beijing would do well to learn from Japan's experience: protectionist policies, unchecked real estate speculation, and a clannish banking sector can gut any economy.
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