Can You Hear Me?

How to work better with headquarters.
Don DurfeeJuly 3, 2008

The shining glass building that houses the offices
of ICI India is an unusual sight. The structure itself
is ordinary — it would blend in perfectly in a suburban
London office park. But this isn’t England. It’s Gurgaon,
India, the chaotic and dusty special economic zone more than
an hour’s drive from Delhi. On the sidewalks, vendors carry
on a lively trade in the mid-day heat (over 40 degrees Celsius
on a recent afternoon). A cow grazes in an empty plot across
the street.

Inside the air-conditioned office, Sandeep Batra is explaining
the peculiarities of the Indian paint business. “We don’t sell
our paints through big retailers as you would in Europe or the
U.S.,” says Batra, the urbane CFO of Imperial Chemical Industries’
Indian operations (ICI is now owned by Dutch chemical
company Akzo Nobel). “We sell through mom and pop shops
in the markets.”

Convincing the store owners to carry ICI’s products requires
a costly but essential investment: tinting machines that allow the
store to mix the full range of ICI’s paint colors. And because the
company sells through hundreds of tiny shops instead of big home
improvement centers, its distribution model is necessarily different.
Instead of the one or two warehouses that ICI has in most countries,
there are 60 in India. The number of sales staff is also many
times bigger.

4 Powerful Communication Strategies for Your Next Board Meeting

4 Powerful Communication Strategies for Your Next Board Meeting

This whitepaper outlines four powerful strategies to amplify board meeting conversations during a time of economic volatility. 

Such deviations from ICI’s usual way of doing things cost
money, of course, and expensive exceptions don’t generally
win the goodwill of corporate managers. But Batra and his colleagues
in Gurgaon have learned how to overcome objections.
“Our business situation is impossible to explain to someone
who has never visited India,” he says. “So when the CEO or any
other senior visitors come, the first thing we do is take them to the
market. We take them to the shops and to the warehouses where
we sell materials — that’s a very different India from what you
see in this office. Once we do that, we never have any difficulty
explaining about the need to put these tinting machines in, or the
need to have feet on the ground, or whatever else is required to
chase the opportunities we have here.”

It’s always been helpful for a regional CFO to build this kind
of understanding with headquarters. But having informed advocates
in the head office is about to become absolutely essential.
The reason: as growth grinds to a halt in the United States and
slows in other developed markets, CEOs are demanding that
Asian operations grow faster to help make up for shortfalls in
global earnings. CFOs find themselves squeezed between growing
pressure from headquarters and the constraints of doing
business in local markets. If those applying the pressure don’t
understand the limitations, they may well impose strategies
that don’t suit conditions on the ground and push for results
that are out of reach for local operations.

There’s another problem. The business world’s attention
is shifting to Asia at a difficult time for those operating in the
region. The region’s economies are still growing, but many
businesses here are already seeing demand slow. Inflation is
rising, currencies are volatile, and sky-high rates of employee
turnover are undermining growth plans. Add to this Asia’s new
supply chain woes: natural disasters that have disrupted trade
just as manufacturing costs in China begin a steep climb.

Many finance executives report that the challenges are
starting to weigh on them. The China CFO of one American
industrial company reports that because of poor business conditions
in the United States, managers there are asking him
to raise his forecast by 10 percentage points. But his division
is already growing at a 30 percent annual pace, and he has
difficulty getting his superiors to understand why even faster
growth is difficult, if not impossible: high employee turnover, a
product lineup that doesn’t match local needs, and prices well
above those of Chinese competitors.

“I’ve worked in the U.S. office,” says the CFO. “When it
comes to China, they have no comparisons and no good analysis.
They have too many countries to take care of. All they can
do is give you targets and track your performance.”

Rebecca Norton, VP of finance, Asia Pacific, for software
maker Business Objects (a unit of Germany’s SAP), also feels
the push for even higher results. “I get a little nervous that the
pressure and expectations [from the home office] are not necessarily
in line with actual market conditions out here.”

The View from There

In part, misunderstandings can be traced back to corporate
structure. During the 1980s and 90s, the balance in multinational companies tilted toward greater global integration, with
an eye toward seizing opportunities across business lines and
saving money by doing things in a common way everywhere.
One manifestation of this was the global business unit, an
arrangement that in many companies has replaced countrylevel
units. But this structure has often led companies to unintentionally
shortchange their emerging markets operations,says David Michael, managing director of the Boston Consulting Group’s greater China practice.

“It gives you a global view on one hand, but when incentives
aren’t right the high-growth markets fall off the radar screen,” he
says. The reason is that the business units’ heads may be focusing
on short-term global performance indicators, and trying to hit
their quarterly, one-year, or two-year targets. If most of the profit
is coming from developed markets, it’s tempting to allocate scarce
resources to those operations first and neglect emerging markets
that boast more potential than actual profit.

Exacerbating this head office bias is the common practice of
putting expats in charge of local operations and then shifting
them out after just a few years. While there are good reasons
for relying on expat managers, the arrangement can encourage
short-term thinking. “We have a lot of expats come to China,
and since their service period is just three years they just want
to make sure they do a good job for those three years, and then
return to receive a promotion in the U.S.,” complains the local
China CFO. “But I want sustainable
growth here, and that
means a longer-term focus on
people and investment.”

Satish Shankar, a partner
with Bain in Singapore,
argues that if multinationals
are to earn significant profits
from their emerging markets
operations, they must move
away from a model that relegates
emerging markets to
second-tier status. “Most
MNCs operating in Asia have
built decent positions, but
don’t have the same market
visibility and sustainability as
they have in their home markets,”
he says.

Some big companies are
indeed making such an effort,
pushing responsibility back
out to the country operations
and building a full set
of business functions. One
is GE. According to Murali
Narayanan, Singapore-based
regional finance manager for
GE Energy’s repair business,
the company is making the
Asia-Pacific operations more self-sufficient. To that end, GE is
expanding and deepening functions like manufacturing, supply
chain and risk management, and talent development. Also, more
commercial decisions are being made in Singapore rather than
headquarters. “This enables us to respond to customers and conclude
deals faster in the region,” says Narayanan.

Such examples are still comparatively few, though. There is
still often a gap between what headquarters knows and what it
thinks it knows.

Exorcisms and Bank Drafts

In the late 1970s, Brian Kenny was visiting Jakarta, handling U.S.
financial reporting for the Indonesian unit of chemical company
W.R. Grace. The company was preparing to start a new plant,
but the facility failed to start up on schedule. This created a variance in the monthly financials that Kenny had to explain back to his superiors in the United States.

The cause of the delay? An exorcism. Employees believed
that malevolent spirits had taken up residence in the facility,
and refused to pass through the gate until religious authorities
declared the area safe. Kenny’s explanation met with disbelief
at the home office. “They said, ‘That’s a lot of baloney — you
had start-up problems, didn’t you?’ I said, ‘Well, yes, we had a
start-up problem. The problem was evil spirits.’”

These days, Kenny is Grace’s Shanghai-based CFO for Asia
Pacific, a position he took up after a series of finance jobs at
headquarters, including international CFO. Grace is one of
those companies starting to see the need for a closer focus on
Asia, and China in particular — the company’s new corporate
CFO was formerly the China CFO for Dell Computer.

Still, in a sign of how difficult it is for even a well-traveled corporate executive to grasp conditions on the ground, Kenny has
discovered a range of issues he wasn’t aware of before joining the
Asian operation. “I’m no longer the guy who flies in on Monday
and out on Friday,” he says. “There is a lot that people have to do
here — particularly in finance — that headquarters just doesn’t see.”

Credit terms are one example. “[When you work in the
home office] you always hear the usual stuff about how we
can’t sell to customers on the usual 30 day terms in this or that
market,” he says. “Sometimes that’s real and sometimes it’s
just salesmen not wanting to be tough with customers.” Now
he’s finding that many of the company’s customers in Asia do
indeed consider a line of credit as a zero-interest loan. “They’ll
borrow against it and then say let’s talk about what we’re going
to do over and above that.”

There are treasury issues, too. Customers often pay Grace
via bank draft — a common method in Asia, but almost unheard
of in the United States. Depending on the country, bank drafts
can be safer, since the draft carries the bank’s credit rating
rather than the customer’s. But this payment typically means
that a company gets its cash slowly, creating potential working
capital problems. “If you sell to a customer on 30-day terms and
on day 29 they give you a bank draft, that’s three months more
you’ll have to wait,” says Kenny.

Small matters, perhaps, but when companies rely on misconceptions
to make big decisions, they can cause expensive
disasters. One notable example was Ford Motor’s decision in
the late 1990s to combine its North American and European
operations. The hope was to achieve cost savings by doing
things in a common way across the regions. But as Harvard
Business School professor Pankaj Ghemawat describes in
a 1995 Harvard Business Review article, managers failed to
appreciate the significance of a few key differences. One was
the wide gap between the cost of gasoline in the United States
and in Europe, which implied a difference in the kinds of cars
consumers in each market wanted (i.e., big SUVs in the United
States and more fuel-efficient cars in Europe). The merger hobbled
the company’s regional product development capabilities
and led Ford to build cars that few Europeans wanted to buy.
The car maker endured US$3 billion in losses in Europe and
saw its regional market share shrink from 12 to 9 percent.

Invisible Barriers

Similarly momentous decisions are being made in Asia today,
and as companies ramp up for faster growth in the region,
planners will have to address some challenges that are often
hard to see from headquarters. Consider just a few: forecasting
difficulty, human capital troubles, and the rising demand for
localized products.

Predicting financial results is never easy in high-growth
markets, since volatility is often a companion to growth. But
the environment has become even more vexing for forecasters,
who confront rising inflation, unstable exchange rates, and
a host of political issues (such as China’s upcoming Olympic
Games) that can disrupt supply chains.

B. Suryanarayanan, CFO of Mindtrac, a Singapore-based
supplier of commercial tires, says that he is not attempting anything
beyond a three-month rolling forecast, and even that is
unreliable. The recent depreciation of local Asian currencies
against the U.S. dollar (a reversal of the prevailing trend over
the past year) has made Mindtrac’s imports more expensive.
The rising cost of oil has increased the cost of tires and the fees
for transporting them. Beijing’s Olympics preparations have
also complicated matters. Because the Chinese government
has shut down a wide swath of factories around the capital —
and required others to operate no more than four days per
week — the company can’t procure enough tires from its suppliers.
That forces it to buy tires on the spot market, which — by
definition — takes away predictability. Count on consistently
high growth from Asia, and you could be disappointed.

Then there is human capital.
The region’s exceedingly tight talent
market is leading to fast-rising
pay levels and rapid staff turnover.
Such employee churn can make it
hard to achieve aggressive growth
targets. Even if corporate managers acknowledge this, they
may misattribute the cause.

“[At headquarters] they think that the turnover is happening
because there’s something wrong with our company or our
culture,” says Kenny. “Are we asking too much of them? Too
little? Is there not enough training?” Those are good questions,
of course. But during his time in China, Kenny has come to
understand that the turnover is largely out of his control. In
China, many employees are products of China’s one-child policy
who feel pressure not only to keep up with their peers, but
also to earn money to support their parents during retirement.
“In a sense, if the market is offering 25-30 percent pay increases,
you aren’t doing your family justice if you don’t go for the
money. This is something I’ve had to instruct the Americans
about,” Kenny says.

Companies seeking to expand in Asia also confront the rising
desire of consumers — both retail and business — for products
tailored to their needs. Bain’s Shankar points out that
for consumer products companies, for example, significantly
higher growth means reaching a mass market that’s increasingly well-served by nimble local competitors, who can often
produce more cheaply than MNCs.

But developing localized products cheaply is no simple
task: it requires a time-consuming overhaul of a company’s
value chain. Shankar provides the example of a Western food
company in China that was having trouble selling its flour. The
flour was high quality but expensive, and so reached only a tiny
segment of the population. Reaching the mass market meant
lowering the price significantly. When the company compared
its business with those of its competitors, it found many differences:
its packaging enabled products to stay fresh on the shelf
for 12 months, but competitors used cheaper packaging that
ensured freshness for just three months; the MNC used higher
quality flour; and it sold its product in heavier portions.

Furthermore, Chinese food companies were using machinery that
cost half of what the MNC was using but delivered between 70
and 80 percent of the quality. By adjusting its process and product,
the company was able to expand its market share.

“There is a one- or two-year transition period to get to
where you are profitable,” says Shankar. “And that’s a challenging
period for local managers.”

Managed Expectations

Helping steer the company through such a transition is an obvious
job for the Asia-based CFO. Doing so obviously requires
regular, clear communications with headquarters (See “Getting
Heard” at the end of this article). Kevin Zhou, retail CFO for
Luxottica, a US$6 billion Italian eyeglasses company, advocates complete transparency.
“You have to always tell them the truth about what’s
happening in China, and keep updating them,” he says. “Keep
explaining, and before long people in headquarters will really
understand what’s going on in this market.”

Luxottica, which owns brands such as Ray Ban and LensCrafters, is aggressively expanding in China. For the past ten
years, the company has been
manufacturing for export,
but determined to make
money in China itself, Luxottica
has turned its attention
to retail. To date, the
strategy has been to launch
its own stores and to buy
up local chains and rebrand
them. The company has 300
stores in China, a number it
has said will increase to 1,000
in five years.

Managers in Italy recognize
that getting to that position
will require more than
long-distance management of
the business by non-Chinese
executives. Retail, after all,
demands an intimate understanding
of local market conditions, operating constraints, and
consumer preferences. The hiring of Zhou earlier this year was
a step in this direction. Previously China CFO for the Direct
Group of German publisher Bertelsmann, Zhou is taking the
lead in helping Luxottica understand the financial and regulatory
implications of the company’s growing China business.
These include treasury issues, such as how to manage cash
flow in a country with tight currency controls, and updates on
China’s quickly evolving regulatory environment.

Zhou is also imparting operational lessons he’s learned.
One of these: avoid outsourcing local backoffice operations in
China. Zhou believes that outsourcing — and centralization of
finance efforts in general — is ill-suited to China-based operations.
First, there’s a lack of qualified service providers in the
country. The savings aren’t significant, since China is already
low cost. And, significantly, a growing business needs close
support from finance above all.

While at Bertelsmann, Zhou decided to counter the company’s
usual practice of consolidating finance along functional
lines. “When I got there, I said, ‘We need to decentralize.’”
The company had four distinct business lines in China,
and it was impossible for the central accounting manager,
for example, to support all four, since each confronted very
different challenges.

Such advice from those on the ground can be highly valuable.
But only if those in charge are prepared to listen. The good
news is that as the business world’s attention shifts to Asia,
some CFOs report having a more receptive audience. “Three or
four years ago, it was hard to get senior management to come
to India,” says ICI’s Batra. “But now, when India comes up in
a board meeting or a management committee meeting, people
will look foolish if they don’t have a first hand perspective on
the country. That makes them want to come here.”

Don Durfee is managing editor for CFO Asia.

Getting Heard

At a time when demands on Asian operations are escalating, it’s time
for local CFOs to brush up on an old skill: expectation management.
David Hui, senior client partner with talent management firm Korn Ferry, says that the ability to be persuasive when speaking with superiors at the home office is one of the defining features of a successful local CFO. “When you are in headquarters you tell people they have to do things the way you do,” he says. “But [when working
in a local operation] you might have to say, ‘I understand the global perspective, but from a local perspective, this is what’s more important.’ You have to be able to argue your case.”

That requires regular communication. Most of the CFOs interviewed for this story speak with their boss at headquarters at least once a week. Rebecca Norton, VP of finance, Asia Pacific for Business Objects, makes it a point to participate in global conference calls as often as possible, in order to “wave the Asia-Pacific flag.” That’s necessary to ensure that overseas colleagues understand the conditions under which the business operates locally. In Asia, that includes great diversity of cultures and languages, and great distances between markets.

Be careful, however, of appearing to make excuses. “A possible downfall is that you can start saying that Asia’s different,” says Norton. “And the more you say it, the less people appreciate it.” One solution is to encourage frequent visits from headquarters. “I’m a passionate advocate of making sure that the head office people are given every opportunity to be exposed to the issues we face in our market,” says Simon J. MacKinnon, president, greater China, for Corning, a U.S.-based
producer of fiber optics, pollution control devices, glass for LCD panels, and specialty materials. “You have to get them out of the five-star hotels and into the plants and out in front of customers. You have to help them really understand the issues.”

To encourage more visits, MacKinnon suggests reviewing the company’s travel expenses to determine whether most of the travel is done by Asian managers traveling to headquarters, or home-office staff coming to Asia. “It’s a crude metric, but you provoke thought just by asking the question,” he says. — D.D.