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Hard Lessons

One year after the Wall Street meltdown, CFOs say business will never be the same.
Alix Stuart, CFO Magazine
September 1, 2009

When Anthony Dombrowik was promoted from controller to CFO of the Red Lion Hotel Group in 2008, he knew the role would be challenging. What he didn't know was that his first year would essentially be a trial by fire, requiring him to navigate through some of the most daunting times ever faced by American business. During Dombrowik's first 16 months on the job, Red Lion's revenues have dropped some 13%, with no recovery in sight. The company has cut 10% of its workforce, including finance staffers, and has combed its operations for any and all cost-cutting ideas, even switching to cheaper guest-room soaps. Dombrowik is thankful that none of the commercial mortgage-backed securities (CMBS) that finance the bulk of Red Lion's business have come due recently — there's no chance of rolling them over when they do — but soon he will have to find a new source of outside funding. At the same time, he is looking for opportunity in the ashes, hoping to grow the business by acquiring or franchising distressed hotel properties that may come up for sale.

Since September of last year, when the bankruptcy of Lehman Brothers triggered the near-meltdown of the nation's financial system, the CFO's role has been reshaped in new and sometimes unnerving ways. Thanks to the post-September credit crunch and steep falloff in consumer demand, thousands of finance chiefs like Dombrowik have restructured their businesses, executed layoffs, hoarded cash, and begged for financing. Many such actions are standard operating procedure in tough times, and some will be reversed when the economy finally turns around. But this recession — the longest and nastiest since the Great Depression — also promises to leave a lasting impact on business in general and corporate finance in particular.

Indeed, more than 85% of finance executives responding to a new CFO magazine survey say they don't expect their companies to return to business as usual after the economy recovers. They predict that substantial adjustments will be necessary, whether that means shuttering business units, responding to new competitive challenges, or dealing with new (and generally unwelcome) regulation.

Ironically, even though the vast majority anticipate what some refer to as a "new normal," nearly half expect their current business model to serve the company well going forward; a substantial number, however, expect their firm's strategy to change once they can shift their attention away from short-term survival (see the full results at the end of this article).

In some ways, the so-called Great Recession is both the best and the worst of times to be a chief financial officer. "You can have much more impact on your business than you could if things were stable and capital was cheap," says Starwood Hotel CFO Vasant Prabhu. On the flip side, "you can destroy a lot more value if you make a mistake." About a third of survey respondents say that the increased work and stress have also brought greater respect and visibility; another 28% say the change has altered the very nature of the job. Current conditions also seem to have bolstered CFOs' job security, as turnover declined by 42% for the first half of 2009 compared with 2008, according to Liberum Research.

One thing is clear: no CFO is likely to forget the hard lessons he or she has learned in areas like cash management, forecasting, risk, and human capital. "Those who lived through the Depression were forever more frugal, and I think you'll see something similar this time" in the business world, says Dombrowik. He for one is planning to retain as much of Red Lion's recent cost-cutting as possible when demand picks up again (although the soaps will likely be upgraded).

Other finance chiefs offer similar perspectives on how they are changing with the times, and which of those changes they expect to stick. On the following pages we present the key lessons they have learned.

Think Differently about Cash and Credit
If the past year has taught CFOs anything, it is to be more skeptical of banks. "Prior to this I never would have envisioned having to worry about the financial strength of my bank group," says Mark Shamber, CFO of United Natural Foods Inc., a $3.5 billion distributor of natural foods to supermarkets including Whole Foods. Now, Shamber carefully tracks the financial reports of the publicly traded members of his bank group, looking particularly for write-offs and to what extent the banks are using funds from the Troubled Asset Relief Program. United Natural's five-year, $400 million asset-backed credit facility is still safe, but Shamber knows he will have to work hard to secure comparable funding before the facility expires in 2012. (Many other companies will be in the same boat, having obtained five-year facilities in 2007, when cheap credit was still available.)

Ronald Mambu, CFO of JBT Corp., a $1 billion maker of food-processing machines and airport-services technology, was concerned enough about his banks to temporarily stop the normal practice of paying down its credit line by sweeping cash from operations. The company maintained that approach through March. "We didn't want to be caught short if a bank said it couldn't honor its credit line," he explains. Where to keep cash has become a matter of concern, too, given the growing number of bank failures (69 in 2009 at recent count, compared with 26 for all of 2008). Safe places for Marvell Technology's $1.1 billion in cash "are still emerging," says Clyde Hosein, CFO of the $3 billion semiconductor maker, "and I still ask the question, Should I put it in a big mattress somewhere?"


Others say they are keeping a closer watch on cash inflows and outflows. Johnson Controls, for one, has begun "really focusing on when receipts and disbursements are coming and going" within a given month, says CFO Bruce McDonald, whereas in the past, such attention to detail wasn't a priority. A silver lining: the $38 billion conglomerate specializing in automotive interiors and building services and products was able to make a 50% reduction in its monthly cash needs.

Overall, the newfound skepticism toward banks is likely to result in lower levels of corporate debt and higher levels of corporate cash. Take Extra Space Storage, a publicly traded real estate investment trust specializing in self-storage properties. Since last fall, CFO Kent Christensen and his recently expanded treasury team have been scrambling to build relationships with nearly 50 banks, in part to cover the $100 million of CMBS loans that came due over the past year and in part to give themselves a better cushion for the $1 billion or so coming due in the future. To conserve cash, the company also cut its dividend and is creating a joint venture in which it will swap partial ownership of some of its properties for $62 million in cash, among other tactics.

As a result, Extra Space Storage is now "in a pretty good situation," with enough cash to cover all loans coming due until 2011, says Christensen. He hopes he won't have to hoard the cash for that long. Nevertheless, he is planning to take the company's debt level as a percentage of market cap down from a maximum of 60% to 45% or 50% over the next five years. "I can tell you it will be many years before you see CFOs go out to get the level of debt you saw in past years," he says.

Questions about how, when, and if to obtain outside funding are affecting operational decisions as well. In June, Extra Space shut down its development group, which worked on new properties, and abandoned any hope of organic growth for the next six years after calling more than 100 banks for construction loans and getting only one yes. Spencer Rascoff, CFO at venture-backed Zillow.com, says the real estate–focused Website cut its staff by 27% last fall in an accelerated move to get to the break-even point and "remove any capital-market risk. We might not have focused so intently on that if credit conditions had been different," he says.

Forget about Long-Term Forecasts
This turbulent period has upped the frequency of forecasts to the point that they should probably be called "now-casts." Actuant, a $1.6 billion diversified industrial company that supplies the automotive, electrical, and energy markets, is now updating its forecasts quarterly, and the monthly operations reviews have gone from "'It looks like they're on track' to almost reforecasting, the rate of change is so fast," says CFO Andrew Lampereur. Looking ahead, to the extent that it's done, is limited.

Similarly, at Charles River Laboratories, a provider of outsourced research services, the forecasting horizon is short. CFO Thomas Ackerman says the company is forgoing the five-year plan and is looking only at 2010, "given the lack of visibility" into the future.

Above all, CFOs have become more willing to say that they have no idea what will happen. "We're entering a period like the 1970s, where there's a lot of uncertainty, so you don't try to predict the future as much as you look at a range of possible outcomes and say, 'What do I put in place now so that I have a lever to pull if the worst-case scenario happens?'" says Starwood's Prabhu.

Not all of these trends are likely to persist indefinitely. Lampereur, for one, says he expects less-frequent forecast revisions once the pace of change slows down, and Ackerman plans to go back to his five-year financial plan once client demand becomes more stable. One lesson, though, that has been indelibly stamped on the minds of today's CFOs is that "things can get a lot worse than what we've forecast in the past," says Lampereur. He notes that while previous "downside" scenarios that Actuant management presented to the board capped sales drops at 5% to 7%, sales in the past quarter dropped 35%.

A more sober vision of the future leads to a different type of risk management, too. CFOs say they're doing far more "what-if" analyses, with a range of contingency plans ready to go. "We've done a lot to increase liquidity and decrease leverage, but there are many more [actions] we've teed up, including asset sales and receivables securitization, depending on what happens," says Prabhu. "It doesn't mean we'll do all or any; what we want is optionality."

Keep a Closer Eye on Customers
keeping an eye on customer credit is standard practice during any downturn, but this time it may be here to stay. Corning, for one, has begun requiring customers — many of whom are bigger than the $6 billion maker of glass-related electronics components — to disclose their inventories and other financial information. Corning then models their financials, with a view toward answering the question, "Will they have enough money to pay us?" says CFO James Flaws. With 70% of Corning's customers located outside the United States, some of which are "living on low margins and big debt," Flaws says his team "works very hard to keep our customers in business" and may even extend terms if necessary.


Many CFOs responding to the survey say credit and collections has become a top-of-mind issue as well. Some 40% plan to monitor customer credit more closely even after an economic recovery. "We've become much more conservative in providing credit to our customer base, even to the point of losing sales because of our recently restricted credit-policy adjustments," says one respondent.

CFOs have also become more skeptical of client demand in forecasting. In August 2008, semiconductor maker Marvell Technology faced analyst scorn when CFO Hosein revised guidance downward despite reporting a better-than-expected fiscal second quarter, citing concerns about the economy and end-user demand for consumer electronics that its chips help power. Analysts pointed to the sales increases that Marvell's customers were forecasting and speculated that the issues were company-specific and not related to the economy. As it turned out, demand for Marvell and the industry dropped even more sharply than Marvell had forecast, making Hosein look good in retrospect. "Most people just look at customer orders," says Hosein, "but if that's all you do it's problematic, because you're trusting that clients know their demand."

Reengineer the Workforce
More than half of survey respondents say they expect to approach their staffing needs differently in the future. While that means a bit more outsourcing at some companies, or moving to a shared-services model at others, there are few wholesale shifts to report. Instead, what may persist is the relatively new notion of hiring people for a shorter workweek and less pay. Other CFOs say it's a prime time to reevaluate how many people they really need in a given function and how they might reshuffle assignments.

"I'm really looking at resource allocation in a way I hadn't been before," says Patricia Morris, CFO of SourceForge, owner of several technology media Websites. "It's a good time to ask, Do we have the right people in the right places? And do we move people around to get the benefit of their experience in other areas?"

Another way of lowering labor costs coming out of this recession is to shift operations permanently to lower-cost countries. After facing big severance expenses to cut staff in Europe this year, for example, Actuant is now looking to hire more assembly workers in countries with less-generous labor laws when volume comes back. "What we don't want to do is replace [the European] jobs in the exact same places when we see a rebound," says Lampereur. Instead, the company is looking to hire in lower-cost countries, "places where you can get out with 60-to-90 days' severance."

Ironically, the finance department is one of the few areas of the company that may not change much, with only 12% of respondents seeing big shifts ahead. Many do say their departments are being pulled in new directions. Finance staffers at satellite-network provider Hughes Communications, for instance, are now being asked to help think through sales strategies and customer-financing options, and even make presentations on sales calls, says CFO Grant Barber.

In fact, retaining talent may only have gotten harder. "As we meet the current economic challenges, the workforce of the organization, including the finance team, is being stretched greatly," says one survey respondent. "The biggest concern is retaining the best of the team as the economy recovers, as there is not much that can be done in the short term to reward these employees." Several CFOs who have made hires during this time find the job market for finance and accounting talent as competitive as ever. Ajilon reports that demand remains almost unchanged, as accounting jobs were cut only 2% between June 2008 and June 2009.

At Hughes Communications, Barber has even instituted a new rotational program, moving three key people around to different business units, in part to try to retain them. "I have been fortunate I haven't lost any of my direct reports for a year, but I know they are being recruited," he says. "I wanted to increase their knowledge and growth and development," in hopes that they will see a better career path at Hughes than elsewhere.

Finally, Don't Be Too Cautious
One lesson CFOs should be learning from this recession is how to survive a short-term plunge in demand while laying the groundwork to grab future market share. At Johnson Controls, Bruce McDonald currently faces a 40% reduction in demand for the company's automotive-interiors division, but believes that great opportunities lay ahead, as some major competitors have declared bankruptcy and others teeter. "The market is going to recover, but we don't know when," he says.

In the meantime, Johnson Controls leadership has tasked business-unit leaders with getting to a point where the company is not losing money on the division — but without "over-restructur[ing] so that when the market comes back we have to build new plants," says McDonald. Getting to breakeven allows him "to be patient with that business" as he awaits the chance to grab market share. The same holds true in the company's North American residential-air-conditioning business, which has been severely impacted by an 80% drop in home starts. "We continue to invest in the next generation of more-efficient products," says McDonald, noting that the unit is expected to be profitable this quarter.


For many companies, this is a time to pounce on acquisitions and grab market share, provided they have sufficient cash. Although sagging advertising revenues widened SourceForge's year-over-year net loss in the first quarter, CFO Morris says she is nevertheless on the hunt for acquisitions, even those that are not necessarily accretive to earnings. "One of our key strategies is to invest in our sites," she says. "If there were some talent available through an acquisition," the company "would certainly consider it," she says, given the $47.1 million of cash sitting on its balance sheet. SourceForge has already made one such acquisition, in June. The company "has been very clear with the Street" about its intentions, says Morris.

No one knows when the downturn will end, or how strong the recovery will be. But if CFOs come out of the experience a little more cautious and frugal, they will also be far more battle-tested and capable. "You're dealing with a variety of situations that may not have existed before. And you're dealing with things that a CFO is supposed to deal with, like capital structure and capital allocation," says Prabhu. "If you like being a CFO, this is a good time to be one."

Alix Stuart is a senior writer at CFO. Additional reporting was provided by Josh Hyatt and Kate O'Sullivan.


Finance Confronts the New Normal

What will the postrecession business world look like? We surveyed more than 400 finance executives about what they're doing to prepare for the future — and how different they think that future will be. The topic elicited a wide range of responses, with executives disagreeing on the impact the recession has made on the CFO post, but nearly unanimous on the question of its legacy. The upshot: few expect a return to the prerecession status quo, but most hope the lessons they've learned will serve them well when the economy rebounds.

CFO New Normal Survey, 2009


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