A CFO’s Strategy: Verticals Within Verticals

Lawson Software's Rob Schriesheim keeps the focus on six customer markets, allocating capital where growth prospects are strongest, and slashing co...
David McCannNovember 12, 2009

If not a match made in heaven, Lawson Software and its CFO, Rob Schriesheim, are at least a solid fit. To keep its footing in a market dominated by two much larger competitors, the company must have a very strategic orientation. And the finance chief, far from an accounting geek, has spent most of his career at the high end of the strategy spectrum, embroiled in complex restructurings and the analysis of capital-allocation options.

That harmony notwithstanding, taking the CFO chair was not part of the plan when Schriesheim joined the company’s board in 2006. Lawson — the third-largest publicly traded vendor of enterprise resource planning systems behind Oracle and SAP, according to Schriesheim — had recently merged with Intentia, a Swedish ERP supplier. The company’s board and CEO decided that the newly constituted company needed a different type of CFO than the incumbent, and Schriesheim was charged with finding the replacement.

Before long, though, several board members urged him to take the role himself. They were motivated by observing the strong relationship Schriesheim had quickly developed with the CEO and the two executives’ complementary skills. “It wasn’t in my business plan at the time, but I did think it was an exciting situation,” Schriesheim said during an interview with CFO editors in New York City on November 5. “It was a chance to fundamentally transform the company and a substantial intellectual challenge. There were a lot of strategic and operational issues where I felt I could add value.”

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Not the least of the challenges was helping to engineer a shift in the Lawson culture to heighten the focus on profit growth. That involved seismic cost-cutting and, on the product side, paying more attention to evolving customer needs rather than “falling in love with” the company’s existing technology.

An edited version of the interview follows.

So what’s it like competing with Oracle and SAP?

Everyone asks that! They’re formidable competitors. We tend to be very selective in the verticals in which we compete. Most software companies go to market in a vertical way, so it’s not like that is unique. But we have become very disciplined about how we allocate our financial and human capital among our six key areas. We try to compete on our ground — in verticals in which we have leading positions.

We’re the third-largest publicly traded ERP company in the world, but on the other hand we’re not that big. We’re $760 million in revenue, 4,500 customers, and 3,500 employees. So we have to be very judicious about how we invest, and that’s been the whole theme behind how we’ve transformed the company over the past three years. We’ve gone from a 3% operating margin to 15%, and from a nickel in earnings per share to 35 cents in EPS. We’ve actually grown on a constant currency basis in a recessionary environment by being very focused.

schriesheim2“When I look at businesses, I like to develop an analytical framework that allows me to understand how we should optimally allocate capital.”
— Robert Schriesheim, Lawson Software

By “focused,” you mean focused on your specific niches?
I wouldn’t call them niches, but yes. Here’s the interesting thing: two years ago, we derived about 35%–40% of our revenues from five vertical markets — health care, public sector, fashion, food and beverage, and equipment-service management and rental — and one horizontal market, strategic human-capital management. Now it’s 65% from those areas. That’s important, because the way we’ve allocated our capital is in markets where we know we can win.

And we’ve gotten very vertical within those verticals. It’s very different selling an ERP system to a hospital than to a fashion manufacturer, but it’s also different selling to a jeans manufacturer rather than a sports-footwear manufacturer. An ERP application is a relatively large, complex sale, and you have a lot more credibility if you really understand the issues the customer deals with. We’ve developed a great deal of intellectual capital in those particular verticals.

How did you arrive at them?
The merger with Intentia created a company of global scale and critical mass. But we found that we were spread too thin. We didn’t have a sufficient focus in a targeted number of verticals. So we made an assessment of which verticals we were the strongest in and which had the highest growth prospects over the next three to five years.

One of the areas, equipment-service management and rental, was completely new for us. The customers are large distributors of heavy equipment, like Caterpillar dealerships. Now we have 8 of the 10 largest Caterpillar dealerships in the world as customers. It then becomes much easier to sell to other Caterpillar dealers, as well as Komatsu dealers.

Each one of these environments does business a little bit differently, and that dictates a certain degree of customization in the application. I’m not saying that Oracle and SAP don’t do that. Where Lawson does well in competing against them is with companies between $250 million and $3 billion in revenue. About 75% of our customers are in that range, and our software tends to be architected in a fashion that’s more suitable for that size customer because it requires less in the way of internal resources to do the implementation.

You also have a consulting business, but it has been significantly downsized. Why?
We made a strategic decision to move more of the services business to our third-party partners, like IBM and Deloitte. Expanding the third-party network allows us to supplement resources and meet customer demands. In our revenue mix, over the past three years our maintenance revenue has gone from 39% to 46%, and our services revenue has done exactly the opposite, from 46% to 39%. And in the same time period, our gross margin has gone from 51% to 59%, and our operating margin from 3% to 15%.

Historically we differentiated ourselves by doing the great majority of our own implementations. You maintain quality control better that way and it’s a closer relationship with the customer. But we also wanted to push more of our consulting work to third-party providers. We’ll continue to do most of the implementations ourselves, but there’s other ad hoc consulting-services work that we want our third-party network to provide.

Your costs have been falling sharply for quite a while. The downsizing of the services business is part of that?
Yes. Over the past three years, we’ve taken about $100 million of cost out of the business. We standardized a lot of processes and took a lot of complexity out, particularly in Europe. We introduced shared-services centers. We moved about 25% of our worldwide workforce offshore to Manila. We viewed that more as a strategic source of capacity than a cost-cutting tool, but it has that impact because a person in Manila is about one-fifth the cost of a person in Europe or the U.S.

What do you mean by “a strategic source of capacity”?
We spend about $80 million a year on research and development. While we’ve taken out the $100 million in costs, we have not diminished the spend committed to R&D. It has held roughly constant, between $82 million and $85 million a year. It still represents about 11% of our revenues, yet head count has grown by one-and-a-half times since 2007 and is now 20% of our worldwide head count. The reason is because half of that head count is Manila. So we’ve been able to increase our capacity and as a result roll out new products and service offerings, but at lower cost.

How did the economic downturn affect you?
We used to have about half of our business outside of the United States. Now it’s about 40%, because Europe has been hit very hard by the recession and is lagging the United States in recovery. We had a $96 million revenue decline in fiscal 2009, and $94 million of it was outside the United States. Of that $94 million, $45 million was due to foreign-currency exchange rates. Of the remainder, about $50 million, the great majority was due to the purposeful resizing of the services business.

But we’re actually generating the highest operating margins in the history of the company. In fiscal year 2007, we did $760 million in revenue and $56 million in operating profit. In 2008 our revenue was $854 million, but in 2009 it was back down to $760 million — and yet operating profit was $91 million. [Lawson’s fiscal year ends May 31.]

Where do you see sustainable revenue growth occurring?
We see sustainable levels of growth in health care, where we’ve got 60% market share in the United States. A lot of the debate in health care is focused on making it more affordable. The reason large health-care organizations buy ERP systems is to take costs out of the supply chains.

There are also significant growth opportunities in the relatively new vertical that I described, equipment-service management and rental. The public sector has continued to grow this past year, and I’m not sure why. The other area that we view as having [the potential for] higher-than-average growth is human-capital management, where we’ve got customers like Wal-Mart and McDonald’s.

As an employer, how do you see the health-care debate looking from a cost perspective?
Our health-care costs represent about 8% of our total employee costs. Like any other employer, we’re concerned about the continuing escalation of the costs. And you wonder, although it’s nowhere near this point yet, whether if we don’t do something about changing the health-care system it could crowd out investment in other areas.

How does the market you’re in, the ERP software market, shape what you do as a CFO every day?
As in any technology business, you are constantly focused on how changing technology alters the way people use your products and thus the way you need to allocate your capital. Because the pace of change is so rapid, you have to be very careful about continuing to appropriately invest and reinvest in your product.

Can you give an example of a capital allocation change that you made in response to changing customer behavior?
People don’t fall in love with technology for the sake of technology anymore. They want technology that is easy to implement and use. Now, to say that any ERP system is easy is an oversimplification, but we have invested heavily in making our technology architecture flexible. For example, we rolled a new product called QuickStep that shortens the implementation time. That required investment in people and programming.

How has your career background shaped your views of the CFO’s role?
I spent 20 years in technology, mostly in software, telecommunications, and semiconductors. I spent a lot of my career working with large institutional investors at private-equity firms in highly stressed environments where we took companies through [prepackaged bankruptcies] and restructured their balance sheets. There were complicated Rubik’s Cube–type restructurings that involved a lot of constituencies.

I also have sat on a fair number of publicly traded technology boards. One of them, Dobson Communications, we sold to AT&T for $5 billion. It was a 19-to-1 return on equity.

So as I moved to a prior CFO role in a billion-dollar publicly traded company that went through a complex restructuring, GlobalTel Systems, I brought the lens of an investor and a director as much as that of an operator. When I look at businesses, I like to develop an analytical framework that allows me to understand how we should optimally allocate capital. You have to be able to understand the business strategically to understand where you’re going to generate the highest investment returns.

I’ll also tell you that Intentia was a really distressed business. It was a highly decentralized operation that had grown by acquisition. When they put the two companies together and I walked in the door as CFO, I found out we had a material weakness. We had to spend two years remediating that. That included cash management, offshoring, shared-services centers, and a more efficient tax structure, as well as taking a much more strategic approach to the business.

How did it come about that you took the job?
The merger agreement stipulated a reconstituted board that included two independent directors who didn’t have any prior affiliation with either Intentia or Lawson. I was Lawson’s pick. Harry Debes, who had been brought in as CEO concurrently with the announcement of the merger, decided with the board that we needed to bring in a different type of CFO. I was asked to lead the search committee.

At the time, I was sitting on three public boards and was a partner at a venture firm. Several board members called me up and asked if I would consider being the CFO, because I had developed a very good relationship with Harry. We worked together very well, and we had complementary skill sets. His background is in sales and marketing, rising up in the ERP industry itself. My background is in strategy, deal making, capital markets, and public enterprises.

So now you’re the CFO of a company that’s selling products to chief information officers, but also CFOs. Do the product-development people run things by you?
Not usually, no. They’ve been at the business a long time. We’ve got user groups. But we tend to use an expression, “we eat our own dog food.” One of the issues we had after the merger, which is not uncommon, is that we didn’t have a common financial system throughout the company. That’s one of the reasons we had an inherent weakness that we had to remediate. So over the past year and a half we implemented the latest version of Lawson’s ERP products companywide — the HR system as well as the financial system.

So you’re a living test.
Yes. Believe me, we gave them a lot of feedback when we were going through the implementation because we were living through what our customers live through. ERP implementations are not a panacea. You don’t implement it and voilà, you can just press a button to get more timely and more accurate access to insightful information. It often requires organizations to change their behavior in addition to implementing new software. And we had to do a lot of that internally at Lawson.

How so?
The biggest challenge we faced was to continue the company on the path we had chosen. Three-and-a-half years ago, Lawson had 3% operating margins and hadn’t introduced a new product in a few years. There was a holistic set of issues that had to be addressed — strategic, product, cost structure, culture. It’s always the most difficult thing for a CFO, or a CEO or division head, to get the entire organization on the same page and aligned towards the same goal. Sometimes you have really good people who for whatever reason don’t buy in, and you have to part ways with them.

Cultural change is hard. We had to get the organization to buy into the notion that we are a customer-centric company that can make money. That it is possible to be customer-centric but still have a good economic profile. And that’s the way we ought to run.

So before that the customers led the company around by the nose?
I wouldn’t say that. I think a lot of technology companies fall in love with their products and don’t pay enough attention to what the customers are saying they want and need. I think that we are now much more focused on that. It’s the first thing we do. And then we think about how we are going to provide that in a way that is profitable. At the end of the day, we’re very focused on profitable growth. Those are the two most important words we live by now. The only way we can do that is by focusing on the needs of our customers.

What would be your biggest nightmare as CFO?
Well, I’ve been through liquidity crises and taken companies through bankruptcy — I did that for a living. But the biggest nightmare for me would be a fraud issue. Anything can be remediated, and I’m someone who welcomes any surprise. Tell me everything that’s wrong. I just want to know about it. The sooner I know about it the sooner we can figure out how to fix it. But for someone to come and tell me that we’ve got a fraud issue, that would be the thing I would dread the most.

Why, exactly?
Because a fraud issue indicates something is wrong with the institution itself. Integrity in the CFO position, and the CFO organization, is extremely important. Investors have to feel that you’ve got a lot of credibility. It’s nice if you’re really smart and hard working, but integrity is the most critical attribute.

You know, you’re in business to manage challenges. There’s always going to be situations where you’ve misjudged, you’ve made mistakes, you’ve got to downsize. I certainly don’t look forward to having another credit crisis or liquidity crisis. But you can manage your way through that, so it’s not the thing I dread the most.