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From the conference scene
~ Pergamon
EuropeanManagementJournalVol. I5, No. 4, pp. 470-471, 1997 Publishedby ElsevierScienceLtd.Printedin GreatBritain 0263-2373/97$17.00+ 0.00
From the Conference Scene Reinventing the Finance Function, ICM (International Communications for Management), 3-4 February 1997, Mayfair Conference Centre, London The full title of this conference was 'Reinventing the Finance Function: To Drive Value Creation and Competitive Advantage', and was introduced on 3 February by the Chairman, Alan Buckle, of KPMG Financial Management Consulting. Alan emphasised the 'value creation' part of the conference title and said that, in the past, adding value in corporate finance seemed to have become synonymous with reducing costs. Not so nowadays, and it was certainly not the focus of this conference. The intention here was to integrate the finance function into corporate strategy and add value. Previously, there existed a distinction between the accountant and the entrepreneur. This was now less marked. Although there was still a clear need for a strong financial discipline, no-one was sure what the role of finance was any more. Alan's view was that finance should build a bridge between shareholders and the operations people. Operations are fine, but they need good information and value creation as well as good financial results. His vision of the future was different to that of the past. Then, finance was a kind of business process reengineering, still valuable but essentially focused on cost-saving. Finance should not stop there. Now, companies have started to transform the finance function - to improve the present and create the future. Some current financial strategies 4 70
were activity-based costing/activitybased management, benchmarking, the balanced scorecard (what drives the business?), outsourcing and economic value added/shareholder value analysis. In his keynote address, Andrew Le Poidevin, Group Finance Director at Queens Moat Houses plc, used his company as a case study of how a crisis was the genesis of a highly effective finance function. Queens Moat Houses had experienced relentless expansion. By 1993 it had 190 hotels with debts of 2£1,265 million. But, there was only minimal infrastructure: there was no regular cash-flow forecasting, minimal central treasury function, incomplete centralised information and virtually no PCs. There were three phases of regeneration of the finance function: 1993/4 - crisis management, 1995/6 - stability, and 1997/8 - controlled growth. By 1997, Queens Moat had restructured most of its business and finance functions, the latter including new controls over key decisions such as payments, capital expenditure and contracts, and cash accumulation by squeezing every last penny out of the system. Currently, the finance function was in transition to a growth role; this meant aiming at consistent growth in the cashgenerative capacity of hotel assets by maximising cash available for capital expenditure, minimising working capital, minimising the 'cash comfort zone' and directing capital expenditure to the highest returns. The route 'profit ~ cash ~ capex profit' was the opportunity for a value added function.
Reg Hinkley, Deputy Group Treasurer of BP International, tiffed his presentation 'Re-engineering the Finance Function at BP', and referred straightaway to four 'key change
drivers': business rationalisation in the developed world, handling growth in the developing world, developments in financial markets and Monetary Union in Europe. There were challenges in all of these four fields; for instance, in the developed world there was the challenge of limited growth prospects because of consolidation and downsizing. Growth potential was best outside OECD such as Latin America and South-East Asia but the role for BP finance in these regions could be too risky. Some countries had weak legal frameworks and no real international credit ratings. Reg felt that developments in financial markets were interesting, particularly new forms of securitisation like floating a bond on the back of a project, or shipping finance. Similarly, the scale of change inherent in Monetary Union in Europe was potentially dramatic and likely to dominate the agendas of many European companies, with significant up-front costs. Monetary Union would influence pricing, cash management, risk management, financial contracts, accounting and systems. The risks and rewards now were linked with outsourcing non-core activities to others better placed to manage them, using financial markets as new sources of finance and means of separating or repackaging risk, and with the need for companies to understand their core capabilities and hence retained risks, and price those risks they wanted to transfer. The finance function necessarily played a key role in all this. In BP International, the Finance Function now had three major roles: financial steward, strategic facilitator and profit creator. The first was necessary, but not altogether
European ManagementJournal Vol 15 No 4 Aug ust 1997
FROM THE CONFERENCE SCENE
sufficient. The second role saw a new ethos - finance as a key player in business, emphasising corporate restructuring (including tax), project financing and risk management, and mergers, acquisitions and disposals. The third role was vital - finance as a stand-alone profit creator, e.g. retail financing and asset finance. This involved clear separation from traditional financial activity to ensure an adequate risk/reward profile. Essential new areas to work on to increase the role of the new finance function were new relations between the Board of Directors and the senior finance team, better interface between finance teams and managers of business units, and managing the firm's profile in financial markets.
Keith Longh, General Manager, Finance, of Lasmo plc, spoke of the experiences of an oil and gas exploration company one-tenth the size of BP. Nonetheless, it is a FTSE100 company, listed in London, New York and Montreal, with a market capitalisation of £2.2 billion and an annual investment of £300 million, mainly in the UK, Indonesia and North Africa. The essence of Keith's talk was the alignment of the finance function with the business process and goals of the organisation. All of Lasmo's objectives focus on shareholder value. The whole organisation is referenced to value-based corporate objectives.
Although in 1996 oil and gas was the best performing UK stock market sector, there has been historic underperformance caused by investment in volume growth rather than value growth. Strategies in the industry were pointing the wrong way. In 1995/6, Lasmo introduced a change process aimed at improving efficiency and cost-effectiveness. Organisational changes included new separation of responsibilities, a hierarchy of performance contracts and new service level agreements. There was also a finance change process - from a function to a service team. Finance was given a role in setting strategy by identifying the sources of net present value, in periodically assessing value added, improving internal financial control, and in public reporting and investor relations. In summary, Lasmo is now referenced to value-based corporate objectives, manages its resources with reference to those objectives, ensures that finance participates throughout the investment cycle, and encourages dialogue within the business and within the service team. Among several other interesting contributions at the conference, that by Robert Tomkinson, Group Finance Director at Electrocomponents plc, stood out. Robert explained how the finance function had developed at Electrocomponents. Consistency had been a key feature
of the company's development. It was now a leading high service distributor of electronic, electrical and industrial suppliers with services worldwide. It had grown organically, not by acquisitions, and had never had rights issues. Its market offerings were consistent between 1937 and 1997, e.g. business-to-business only, unconditional guarantees, no discounts and 24-hour service. The role of finance in this framework was that of a partner in the business with responsibility for measuring the performance of the business. Its vision had changed: from scorekeeper to business partner, in process, technology, organisation and reporting. The new emphasis was on value recognition, meaning that business units and business processes within the company should be seen to be financially accountable, i.e. working towards a financial result which they own. For a long time, Electrocomponents had concentrated on its core business and currently made a substantial profit, making it a best performer on the London stock market, and earning a 45 per cent premium to the market. Robert's presentation earned a lot of interest in a company which had shown clear corporative objectives and in which the vision of finance was obviously compatible.
Paul Stonham
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~i~i~i~i~!i~~!~i~i~i
471
EuropeanManagementJournalVol. I5, No. 4, pp. 470-471, 1997 Publishedby ElsevierScienceLtd.Printedin GreatBritain 0263-2373/97$17.00+ 0.00
From the Conference Scene Reinventing the Finance Function, ICM (International Communications for Management), 3-4 February 1997, Mayfair Conference Centre, London The full title of this conference was 'Reinventing the Finance Function: To Drive Value Creation and Competitive Advantage', and was introduced on 3 February by the Chairman, Alan Buckle, of KPMG Financial Management Consulting. Alan emphasised the 'value creation' part of the conference title and said that, in the past, adding value in corporate finance seemed to have become synonymous with reducing costs. Not so nowadays, and it was certainly not the focus of this conference. The intention here was to integrate the finance function into corporate strategy and add value. Previously, there existed a distinction between the accountant and the entrepreneur. This was now less marked. Although there was still a clear need for a strong financial discipline, no-one was sure what the role of finance was any more. Alan's view was that finance should build a bridge between shareholders and the operations people. Operations are fine, but they need good information and value creation as well as good financial results. His vision of the future was different to that of the past. Then, finance was a kind of business process reengineering, still valuable but essentially focused on cost-saving. Finance should not stop there. Now, companies have started to transform the finance function - to improve the present and create the future. Some current financial strategies 4 70
were activity-based costing/activitybased management, benchmarking, the balanced scorecard (what drives the business?), outsourcing and economic value added/shareholder value analysis. In his keynote address, Andrew Le Poidevin, Group Finance Director at Queens Moat Houses plc, used his company as a case study of how a crisis was the genesis of a highly effective finance function. Queens Moat Houses had experienced relentless expansion. By 1993 it had 190 hotels with debts of 2£1,265 million. But, there was only minimal infrastructure: there was no regular cash-flow forecasting, minimal central treasury function, incomplete centralised information and virtually no PCs. There were three phases of regeneration of the finance function: 1993/4 - crisis management, 1995/6 - stability, and 1997/8 - controlled growth. By 1997, Queens Moat had restructured most of its business and finance functions, the latter including new controls over key decisions such as payments, capital expenditure and contracts, and cash accumulation by squeezing every last penny out of the system. Currently, the finance function was in transition to a growth role; this meant aiming at consistent growth in the cashgenerative capacity of hotel assets by maximising cash available for capital expenditure, minimising working capital, minimising the 'cash comfort zone' and directing capital expenditure to the highest returns. The route 'profit ~ cash ~ capex profit' was the opportunity for a value added function.
Reg Hinkley, Deputy Group Treasurer of BP International, tiffed his presentation 'Re-engineering the Finance Function at BP', and referred straightaway to four 'key change
drivers': business rationalisation in the developed world, handling growth in the developing world, developments in financial markets and Monetary Union in Europe. There were challenges in all of these four fields; for instance, in the developed world there was the challenge of limited growth prospects because of consolidation and downsizing. Growth potential was best outside OECD such as Latin America and South-East Asia but the role for BP finance in these regions could be too risky. Some countries had weak legal frameworks and no real international credit ratings. Reg felt that developments in financial markets were interesting, particularly new forms of securitisation like floating a bond on the back of a project, or shipping finance. Similarly, the scale of change inherent in Monetary Union in Europe was potentially dramatic and likely to dominate the agendas of many European companies, with significant up-front costs. Monetary Union would influence pricing, cash management, risk management, financial contracts, accounting and systems. The risks and rewards now were linked with outsourcing non-core activities to others better placed to manage them, using financial markets as new sources of finance and means of separating or repackaging risk, and with the need for companies to understand their core capabilities and hence retained risks, and price those risks they wanted to transfer. The finance function necessarily played a key role in all this. In BP International, the Finance Function now had three major roles: financial steward, strategic facilitator and profit creator. The first was necessary, but not altogether
European ManagementJournal Vol 15 No 4 Aug ust 1997
FROM THE CONFERENCE SCENE
sufficient. The second role saw a new ethos - finance as a key player in business, emphasising corporate restructuring (including tax), project financing and risk management, and mergers, acquisitions and disposals. The third role was vital - finance as a stand-alone profit creator, e.g. retail financing and asset finance. This involved clear separation from traditional financial activity to ensure an adequate risk/reward profile. Essential new areas to work on to increase the role of the new finance function were new relations between the Board of Directors and the senior finance team, better interface between finance teams and managers of business units, and managing the firm's profile in financial markets.
Keith Longh, General Manager, Finance, of Lasmo plc, spoke of the experiences of an oil and gas exploration company one-tenth the size of BP. Nonetheless, it is a FTSE100 company, listed in London, New York and Montreal, with a market capitalisation of £2.2 billion and an annual investment of £300 million, mainly in the UK, Indonesia and North Africa. The essence of Keith's talk was the alignment of the finance function with the business process and goals of the organisation. All of Lasmo's objectives focus on shareholder value. The whole organisation is referenced to value-based corporate objectives.
Although in 1996 oil and gas was the best performing UK stock market sector, there has been historic underperformance caused by investment in volume growth rather than value growth. Strategies in the industry were pointing the wrong way. In 1995/6, Lasmo introduced a change process aimed at improving efficiency and cost-effectiveness. Organisational changes included new separation of responsibilities, a hierarchy of performance contracts and new service level agreements. There was also a finance change process - from a function to a service team. Finance was given a role in setting strategy by identifying the sources of net present value, in periodically assessing value added, improving internal financial control, and in public reporting and investor relations. In summary, Lasmo is now referenced to value-based corporate objectives, manages its resources with reference to those objectives, ensures that finance participates throughout the investment cycle, and encourages dialogue within the business and within the service team. Among several other interesting contributions at the conference, that by Robert Tomkinson, Group Finance Director at Electrocomponents plc, stood out. Robert explained how the finance function had developed at Electrocomponents. Consistency had been a key feature
of the company's development. It was now a leading high service distributor of electronic, electrical and industrial suppliers with services worldwide. It had grown organically, not by acquisitions, and had never had rights issues. Its market offerings were consistent between 1937 and 1997, e.g. business-to-business only, unconditional guarantees, no discounts and 24-hour service. The role of finance in this framework was that of a partner in the business with responsibility for measuring the performance of the business. Its vision had changed: from scorekeeper to business partner, in process, technology, organisation and reporting. The new emphasis was on value recognition, meaning that business units and business processes within the company should be seen to be financially accountable, i.e. working towards a financial result which they own. For a long time, Electrocomponents had concentrated on its core business and currently made a substantial profit, making it a best performer on the London stock market, and earning a 45 per cent premium to the market. Robert's presentation earned a lot of interest in a company which had shown clear corporative objectives and in which the vision of finance was obviously compatible.
Paul Stonham
<:iii,
":il
~i~i~i~i~!i~~!~i~i~i
471