Good News, Bad News

Selling a new growth strategy is never easy, especially if it first calls for more pain. Just ask Reuters CFO David Grigson.
Janet KersnarOctober 6, 2005

First came the good news. At the July 26 interim results presentation at his company’s swanky new headquarters in London’s Canary Wharf, David Grigson, CFO of Reuters, Europe’s largest financial news and data company, told shareholders that he would be returning £1 billion ($1.8 billion) following the sale of its electronic brokerage unit Instinet. Meanwhile, his charts and graphs showed positive net sales for every month in the first half of 2005. What’s more, underlying recurring revenue — its most closely watched metric — was up 0.4 percent, the first time since 2001 that it hadn’t declined. Grigson also highlighted group sales for the six months to June 30, which beat analysts’ expectations despite falling from £1.17 billion to £1.14 billion.

Then Grigson and CEO Tom Glocer hit investors with the details of the long-awaited growth strategy, dubbed “Core Plus.” Reuters, they said, will have to make hefty investments to try to improve the way business lines are run, to help migrate products and services to internet-based technologies, and to build up businesses in places like China and India. The aim is to turn the steep revenue decline of the past five years into growth rates of between 5 percent and 7 percent by 2008. But Reuters’s bottom line will have to take a big hit from another £170 million of restructuring costs, starting in 2006. Profitability will have to wait. Shareholders weren’t impressed. “How many times has Reuters promised growth was around the corner?” one investor grumbled to the Financial Times. “Every time, they seem to have some sort of restructuring cost or reorganization cost to fall back on.”

Or, as Johnathan Barrett, an analyst at London-based brokerage house Williams de Broë, puts it: “For a business that was just getting back to flat revenue growth, they were asking us to believe that they can get to 5 percent to 7 percent revenue for the long term. That’s a big ask.”

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Reuters’s share price tumbled more than 7 percent after the presentation, the biggest decline among FTSE 100 companies that day. Grigson’s take? “I wasn’t surprised. We all understand how markets react,” he says. As the Reuters CFO sees it, the share price decline and the initial negative reactions reflect the market tendency towards “short-termism” that so many CFOs have to contend with. (See “Tell It Like It Is,” at the end of this article.)

However, when a company finds itself in Reuters’s predicament, the key is how well the executive management communicates its plan for recovery. It’s a situation all too familiar to other companies. According to Christopher McKenna, a lecturer in management studies at Oxford University’s Said Business School, “Companies that have a long-term strategic problem often need to change their message over the short term. But when that message changes too often, people start to lose patience, and start to lose the original logic of the strategy.” And if investors begin to lose the logic, it’s likely that CEOs and their management teams have too. Think Carly Fiorina of Hewlett-Packard, or Jürgen Schrempp of DaimlerChrysler — two ex-CEOs whose reputations were sullied by questionable growth strategies.

Same Old Story

As for Reuters, it’s a story of a fast-growing star turned to rapidly shrinking burn-out. The company virtually invented the modern foreign exchange market in the 1970s and rode its huge growth through to a public flotation in the early 1980s. Talk then, under CEO Glen Renfrew, was of building a global supermarket for financial institutions, and the company grew further and expanded into other markets through the 1990s under CEO Peter Job. It acquired Instinet, which provided much of its growth in the early part of that decade as share trading in the U.S. boomed. It moved into the Internet through a venture capital arm and by wholesaling news to Websites.

By the summer of 2000, however, the Reuters that Grigson joined was already on its way to becoming a very different company, paying the price for missing the boat in at least two key parts of its business.

The most important was in its core financial data market, which accounts for more than 90 percent of the company’s revenue. Having become the dominant player, Reuters had grown fat and complacent, and was seen by many of its customers as arrogant. Bloomberg, started in 1981 by former Salomon Brothers bond trader Michael Bloomberg, was thus able to capture a huge share of the market in little over a decade with a product tailored to sophisticated traders and investors.

Reuters was painfully slow to react and was overtaken by its rival. According to IMD Reference, which tracks the financial market data industry, Reuters’s share of overall revenues derived from terminals continued on a downward spiral, slipping from 42 percent in 2001 to 39 percent in 2003, while Bloomberg’s increased from 34 percent to 42 percent. Competition also intensified at the low end of the market, notably from Thomson Financial, a division of Thomson, which has captured about 6 percent of the market.

The situation at Reuters went from bad to worse by the time Glocer, a 44-year-old corporate lawyer who rose rapidly through the company’s American division, stepped in as CEO in the summer of 2001. “We were a weak company going into a deep recession, and that’s a pretty awful place to be,” recalls 51-year-old Grigson, who was finance director of U.K. media group Emap before joining Reuters.

After a year at the helm, Glocer saw Reuters’s stock hit a nine-year low. By the following summer, the company’s market capitalization had fallen to £1.4 billion from a high of £23 billion in the spring of 2000. The shares were trading at less than 10 percent of their peak.

Glocer and Grigson “not only had to fix the company,” says Giasone Salati, an analyst at CSFB in London. “They had to fight against a storm in the markets in which they were operating — it was the toughest market financial institutions had seen for a few decades.” Reuters’s main customers — hundreds of thousands of bankers around the world — were losing their jobs in droves, and it is not yet clear whether it has been a particularly deep downturn for financial services or a more permanent consolidation. Either way, it underlined the need for the company to find new markets.

Mixed Messages

Reuters’s other missed boat has been its media division, and confusion about the company’s growth plans on this front may help explain investors’ apparent lack of faith in the overall strategy.

The media division is a relatively small part of the group in terms of revenue but it’s what most people define as Reuters’s brand. And as Grigson says, “At Reuters, the brand is everything…and it absolutely needs to dictate to us where we go and what we do.”

Glocer had raised expectations that the summer unveiling of the growth strategy would include bold plans to finally capitalize on Reuters’s vast and costly news-gathering operation with products aimed at the general consumer. In an interview in February’s issue of Business 2.0 magazine, Glocer talked about missed opportunities when CNN built its billion-dollar network by using mostly Reuters’s wholesale television footage. Similarly, Yahoo (in which Reuters’s venture capital fund was an early investor) used Reuters news to help build its huge audience. This was “Tom’s ‘woulda coulda shoulda’ speech,” as Chris Ahearn, president of Reuters Media, has described it.

Glocer’s vision, according to the interview, was to tap into new Internet-based technology to build an online broadcast network, and to begin controlling the distribution channels of the raw text, video, and pictures that other news organizations have been helping themselves to for years. Earlier this year, Reuters hired heavyweights from MSNBC and AOL amid plans to begin building an online presence through, mobile phones, and interactive TV.

When it came to the growth strategy in July, however, there was little said about the big consumer media push. Grigson’s message was subdued at best, as he stated: “We are not seeking a mass consumer audience here. Rather, the audience that we seek to aggregate are the ‘influentials’ around the world for whom we already have brand recognition that we will build on and who will have money to spend.” That sounded like some kind of personal finance product and fell flat. In any case, Reuters had done little with Citywire, a retail investor website in the U.K. which it had bought into in 2001.

A closer look at the media division, which now reports as a distinct unit, underlines the confusing message that Reuters investors receive. For example, media in 2004 reported an enviable gross operating profit of £127 million on revenue of £144 million — but that’s because Reuters booked operating costs of only £17 million to the unit, or a tiny fraction of the costs of news gathering. The bulk of media’s revenue comes from about 300 contracts with television stations, such as the one with CNN that Glocer complained about. The rest largely comes from the Internet, where Reuters’s revenue fell in 2004 as it switched off wholesale customers, such as Yahoo, and tried to build up ad revenue generated from its own Websites.

The television business is event-driven, and therefore notoriously expensive to run and unpredictable. Reuters has struggled to squeeze it into its core mission and closed down Reuters Financial Television in 2001 after a costly experiment. Also, in print, much of Reuters’s effort via its 2,300 journalists in dozens of bureaus around the world is driven by general news, while competitors like Bloomberg remain sharply focused on business and finance. But, as Ahearn said in a presentation to analysts in early summer, “General news is generally a commodity … and difficult to monetize.”

That seems to be the heart of Reuters’s communication problem. For though Grigson and Glocer have made Reuters a slimmer, more focused company, they have struggled to articulate how Reuters will make money out of what it is best known for.

Cutting the Fat

Where Grigson has had great success is in cutting costs elsewhere. Between 2000 and 2006, more than £1 billion of costs will have been taken out of the company — £440 million the result of Grigson’s three-year “Fast Forward” program that began in 2003.

Much of the saving has come through job cuts — 3,000 have been, or will soon be, axed, leaving Reuters with a total of around 13,000 staff worldwide. Product lines are also being reduced from 1,500 to 50, while data centers are being either shut down or streamlined to bring the total number from 250 to 160 now, and to just ten by 2010.

Grigson explains, “Reuters had allowed itself to get too fragmented and part of the challenge over the last few years was how to bring it back together again.” This was particularly apparent in finance. “In my neck of the woods, we had 60 accounting centers, all of which, in effect, had their own chart of accounts,” Grigson says. “It was the ultimate form of fragmentation, in which everybody ran their own little business that included not only their own data centers and development groups, but also accounting, HR and so on.” This year, Reuters opened its first shared service center, in Bangalore. “From 60, we now have one,” he says.

One explanation Grigson offers for the lack of direction in the past is that Reuters’s strategists have been without management tools to help identify where the best opportunities lie. “When I joined five years ago, we had no [management information system] at all,” he says. “As long as everybody in their own little pocket around the company had sufficient information to know what they were doing, it didn’t matter that there was no gathering together of that content to inform the center what was going on.”

He’s now putting in Profitability Insight (PI), a software program, to help focus strategy. Still under development by Reuters’s IT department, PI aims to use traditional activity-based costing methods to link costs to specific functions — hardly revolutionary, but something Grigson says was next to impossible to execute in the old, more complex Reuters organization.

Once the pilot stage is complete, PI will be able to help the company allocate resources more efficiently, monitor investment plans against targets and generally improve the quality of discussions taking place in management offices. Meanwhile, a new bonus structure for top managers is currently being considered that will take into account PI metrics and profit objectives. PI already made it possible for Grigson to publish full divisional P&Ls for the first time at the July meeting.

However, if skillfully managing decline and putting in command and control tools were essential in the past few years, investors are now clamoring for a convincing growth story. “Fast Forward was a lot simpler. It was all about cost reduction,” as Barrett of Williams de Broë says. “This time there is some more cost reduction, but the emphasis is clearly on organic revenue growth. And the organic growth assumption is arguably more important for the long-term valuation.”

As if voicing investors’ concerns, Niall FitzGerald, Reuters’s new chairman, said in the company’s latest annual report that he’d be asking his management team: “How do we grow the company?” It’s not yet clear when his team will have the answer.

Tell It Like It Is

“It worries me when companies don’t behave according to what is ultimately best for their shareholders rather than just what the markets will be doing for their shareholders next week,” says David Grigson, CFO of Reuters, the U.K. company whose share price took a 7.4 percent hit in July after announcing that a new long-term strategy will negatively affect short-term financials.

Do other CFOs feel the same? According to academics John Graham and Campbell Harvey, both of Duke University in Durham, North Carolina, and Shiva Rajgopal of the University of Washington, Seattle, Grigson is in a minority.

In a recent survey of 401 finance executives, the academics discovered the lengths that CFOs are willing to go in order to manage reported earnings, even if it means sacrificing economic value. For example, over half of the respondents said that they wouldn’t take on a profitable project if it hit earnings. (See chart below.) What’s more, 18 of the 20 CFOs interviewed one-on-one by the academics acknowledge that they face a trade-off between delivering short-run earnings and making long-run optimal decisions.