Yahoo Europe’s Emmanuel Frantz

The internet service provider's European CFO discusses budgeting in the downturn.
Janet KersnarApril 2, 2009

As Yahoo says hello to its new CEO Carol Bartz, former chief executive of software house Autodesk, and goodbye to Blake Jorgensen, group CFO since 2007, the finance team at the $7.2 billion (€5.3 billion) US internet service company must not miss a beat. Amid those internal changes, the economic downturn, stiff competition and an on-again-off-again takeover bid from Microsoft have made Emmanuel Frantz’s first year as CFO of Yahoo Europe eventful to say the least. The big concern is that, as in the last downturn, the portion of corporate marketing budgets going towards online advertising spending could shrink dramatically. So what is Yahoo’s plan of action? From his base in Switzerland, Frantz discusses not only how the Silicon Valley company intends to continue growing market share among advertisers and consumers alike on this side of the Atlantic, but also how Yahoo’s finance team is using an old planning tool to help the company reach new heights.

Yahoo’s new CEO talked about “re-energising” its European business at a recent conference. What does that mean? Despite good fundamentals, there are some concerns. Overall as a group, our share of audience time is shrinking. So far the new social networks have not succeeded in monetising their network as well as we do, but nevertheless they are competing for users’ attention. We are working to turn this around. If our audience time continues to fall, we won’t be able to optimise our monetisation, which means we will lose margin and this triggers a downward spiral.

But bear in mind that more than 550m people globally use Yahoo every month-that’s half of the total worldwide. As for Europe, more than 70m users are connecting to Yahoo daily, including more than 10m people visiting our news site, making us tied with the BBC as the number one online source for news.

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One of the areas that Europe’s leadership team is focusing on involves advertisers. We’re working on new features that extend their control over where and when an ad is shown, including what time of day and what day of the week campaigns run, and what age and gender they would like to reach. We’re also promoting an “open” strategy-that is, the ability for consumers to add social functionalities on our home page to integrate content and services from third-party developers and publishers. Finally, there’s the mobile internet. Even in these tough times, companies still want to experiment on mobile technology. At the moment, Yahoo reaches 850m wireless subscribers through partnerships with 70 operators and equipment manufacturers worldwide. Those components are all part of a clear strategy of growing market share. Now we need to execute it.

But what an environment in which to be doing all that. How is Yahoo coping with the downturn? If you look at our annual results, you’ll see that revenue growth has slowed to 6%, while our operating cash flow margin has been eroding, and has been flat for the past three years. But typically of a very entrepreneurial internet startup, the costs have not slowed accordingly. Since the company began 14 years ago, it was always assumed that everyone just needed to come up with ways of spending money, because our revenue growth could afford that. That needs to change. Over the past few months, the company has had to take a deep breath and look at where and how we’re spending money.

How is finance helping to make this change? Finance at Yahoo sees this as an opportunity. Because of the current economic conditions and our recent performance, we’re actually able to make the case for change.

That’s why we were able to use the budgeting season last autumn to begin looking at our cost structure differently, to help everyone formulate investment cases and product portfolio re-prioritisation for 2009 and beyond. At the end of the day, everything is up for grabs in this downturn and you have to justify every level of spending.

This is where zero-based budgeting comes in. It doesn’t mean zero growth; it means systematically enabling the entire company to prioritise spending rather than just approving budgets that are simply an increase from one year to the next. It’s a good way of focusing the minds of budget owners, which is obviously important when those resources are quite scarce. Cutting budgets without consciously deciding what not to do causes things to fail randomly throughout the enterprise.

It is not surprising that the old, purely incremental approach to budgeting was one of the main reasons why operating costs have been outpacing revenue growth and resource allocation hasn’t been aligned with changing circumstances. And I’ve also seen how budget pressures can make organisations less, not more, productive. When departments struggle to meet unrealistic expectations, they rob Peter to pay Paul and become unreliable. They may cut back on training, key projects and innovation-and the so-called “discretionary” expenditures are the first to be sacrificed. In doing so, their productivity, responsiveness, quality and reliability suffer. The zero-based budgeting exercise has helped us avoid that.

What are some of the lessons that you learned from rolling out this new process? What we knew early on was that applying zero-based budgeting in every part of the company would have been time consuming. To speed up the process, we mapped out our geographical and products P&Ls to understand where we’re winning and where we’re losing. We did not spend any time identifying the causes, but rather deciding which geographies or products we had to exit or invest in. We also looked at external benchmarks, particularly when it came to support functions. One important outcome was that it enabled us to restructure globally, while achieving run rate cost savings of approximately $400m in the right places.

We will be doing more iterations during rolling quarterly forecasts, and looking at new areas such as data centres, which is a big spend area for us. What’s clear is that we have to be better next year in terms of making trade-off decisions that free up resources for revenue generating opportunities.

What part of Yahoo do you use the most? As an avid photographer, I regularly visit the Flickr Collection, which we run as in partnership with the photo agency, Getty Images. You don’t have to be a professional photographer to have your photos selected for the collection by Getty judges so I may yet get lucky.

Janet Kersnar is Editor-in-Chief of CFO Europe