Credit & Capital

Capital Allocation Principles Stand the Test of Time

Intuit CFO Neil Williams dissects the three broad components of capital allocation strategy.
Neil WilliamsDecember 10, 2015

Even a great company can’t thrive long-term if it’s growing expenses faster than revenue.

At Intuit, that means we focus intensely on how we allocate capital. It’s one of four fundamental financial principles, which include:

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Drive Business Strategy and Growth

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  1. Grow revenue organically at double digits
  2. Grow revenue faster than expenses
  3. When allocating capital, spend it on the highest-return opportunities
  4. Always have a conservative balance sheet
Neil Williams

Neil Williams, CFO, Intuit Neil Williams, Millennials, Finance

We’ve adhered to these principles for more than 15 years. We’ve challenged them regularly to reconsider whether they are still right for us — right for the time, right for our business. So far they have stood the test of time even as we shift to more cloud-based services.

Having a disciplined approach to capital allocation is a core pillar. It breaks down into three broad categories: First, how do you manage spending internally? Second, how do you invest money in inorganic growth? And third, how do you manage returning value to shareholders?

R&D: Investing in Your Products and Business

As a rule of thumb, we target investing between 15% and 17% of our total revenue in R&D, which at Intuit is primarily software development. It is a basic metric, and one you can benchmark against other companies. But it’s not about who is investing more or less than your company. What’s important is that the investment level is right for your organization.

For us, it’s about a strong partnership with our technology leaders. I work very closely with our chief technology officer to determine the right level of investment for Intuit. We have found that’s a good way to stay in balance — making sure we’re investing in the business at the same time we’re focused on profits and shareholder return.

To make sure we’re reinvesting properly, we look closely at what type of return we can expect with the dollars we invest in a particular area or project over a five-year period; for internal investment we’re typically looking for customer and revenue growth.

Acquisitions: Fuel for Topline Growth

Investing in acquisitions is a good way to supplement organic growth. At Intuit we look for companies that are doing things very closely connected to our core software categories. Examples include companies like Good April, for TurboTax capabilities and Lettuce, acquired for its inventory management capabilities that are now integrated into QuickBooks Online.

They’re typical of the strategic companies we seek out, because they were doing things that we thought would accelerate our own product roadmap. We do a build-or-buy analysis any time we’re seeking a new capability or feature to determine how long it would take us to build something out. We’ll put the dollars toward M&A when it makes more sense to acquire the technology in order to get to market faster and more efficiently.

On the flip side, divestitures fit into both our R&D strategy and our acquisition strategy. It’s part of the process of trying to decide where the highest and best returns will be for the capital we have available to invest.

For instance, we want to invest in QuickBooks Online is because we think it has big potential, with a large, untapped addressable market. At the other end of the spectrum is a product like Quicken, desktop software that is not an area of focus for us going forward. After careful consideration, we decided to find a new home for the product. We’re proud of the Quicken legacy. Therefore, we are seeking a buyer who shares our mutual dedication to and love of the product and who will commit the resources to make it even better.

Shareholder Return, and Getting Good Advice

The third category in a capital allocation strategy involves returning capital to shareholders.

We target holding, on average, $750 million in available cash. Anything exceeding that we consider available for reinvestment or for return to shareholders, either through share repurchase or dividends.

We typically have a very active share repurchase program. And in 2012, we initiated a cash dividend.

During meetings with key investors several years ago we asked for their perspective on how we could improve performance and how we could more effectively communicate about these strategies. They asked that we be much more transparent about our capital allocation goals and processes.

That was very good advice.

For several years now, on every investor call, we discuss our capital allocation strategy. We talk about our benchmark of a 15% rate of return over a five-year period — whether that’s investing internally, acquisitions, or share repurchase.

As a result of taking direction from those investors, we have become very clear in stating our priorities and executing against them. And we get great feedback from shareholders across the board for this approach.

If you’re examining your own capital allocation strategy, here are four tips to consider:

  • Align. Your capital allocation strategy should be in support of your company’s strategy and strategic priorities. The two should be tightly linked.
  • Identify. Be clear about what your principles are. Regardless of whether you land on guidelines similar to those I have laid out, it’s very important to know what your own principles are and have them clearly stated within the company.
  • Articulate. In any category, whether it’s internal investment, M&A, or return to shareholders, articulate your expectations for return on investment. At Intuit, we have a hurdle rate of 15% for a five-year period.
  • Execute. Finally, admit mistakes and cut your losses in any area that is not meeting your stated investment objectives.

Perhaps most importantly, don’t consider any of these things to be evergreen. Revisit them periodically and be open and willing to challenge them.

Neil Williams became Intuit’s senior vice president and chief financial officer in January 2008. He is responsible for all financial aspects of the company, including corporate strategy and business development, investor relations, financial operations, and real estate. Before joining Intuit, Williams CFO of Visa U.S.A. Williams is also a member of the board of directors of RingCentral, a provider of cloud business communications solutions, and Amyris, an integrated renewable products company.