So You Think You Need An FD
SO YOU THINK YOU NEED AN FD
By Janet Kersnar, Management Today
Hiring a finance director is a rite of passage to commercial maturity for a small company. But when is the time right to do it? Janet Kersnar finds out...
Every now and then, executive headhunter Steve Carter gets a call from a firm that wants to hire its first-ever financial director. The company is often a small business, perhaps set up in the chief executive’s garage and now on a growth curve that will soon transform it beyond recognition. Carter, who oversees the UK finance and accounting recruitment at Robert Half International, has seen it all before. ‘Hiring and FD for the first time is an aspirations issue,’ he says. ‘But just because everyone else has one isn’t a good enough reason to want one.’
After the initial pleasantries on the phone, Carter likes to cut to the quick and so brings up one of the touchiest subjects in the search for an FD – the pay package. ‘It’s an easy test,’ he says. ‘If they ask me how much a finance director is going to cost and there’s a gulp on the other end of the line when I tell them, I know that they’re not serious.’
Many companies are serious. Though Enron and the like have put finance chiefs in the limelight for all the wrong reasons, one look at the work of CFOs at UK blue-chip companies – such as Jon Symonds of AstraZeneca, Philip Hampton of Lloyds TSB and Judy Boynton of Royal Dutch/Shell – and it’s easy to see why they are in demand. With increasing frequency, these finance executives are hailed by the investor community for the discipline, transparency and rigour that they bring to their companies. From their financial vantage point, they’ve become pivotal in shaping and articulating corporate strategies, while going beyond their basic accounting and control duties to gain a deeper understanding of what their businesses do and why. Perhaps more importantly, they’re the right hand of their bosses sitting down the hall in the chief executive’s office.
Any entrepreneurial exec running a small or mid-sized company that doesn’t have an FD could be forgiven for swooning at the prospect of having one – even if that means stumping up a base salary that can be anywhere between 10% and 20% higher than their controllers are paid.
Therein lies the rub. ‘Everyone thinks they want an FD,’ observes Richard Dowd of Dowd Associates Executive Search in White Plains, New York. Yet echoing the views of other financial-recruiting experts on both sides of the Atlantic, he says it’s one thing for a company to want an FD, but it’s another to be ready for one. As he puts it: ‘It’s like saying: “Sure, I want to be a star athlete.” But do I want to go to the gym every day at six in the morning and stop eating pizza? No.’
So how do companies know when they’re ready for and FD? Often there is a specific trigger event. From 1998 to 2000, this trigger might well have been an IPO, and – as their financial advisers pointed out to them – firms preparing for a stock market launch needed someone who understood the regulatory and reporting environment and how to deal with analysts.
Though IPOs might be few and far between these days, there are still plenty of companies with expansionary plans. These plans often involve a radical restructuring that will require expertise beyond what their current senior accountants or controllers can provide. Plans for cross-border mergers, acquisitions or joint ventures often encourage companies to look for an FD who is adept at dealmaking or capital-raising and knows a lot about setting up sophisticated treasury and risk management structures.
Sometimes, however, the trigger is subtler. Consider a startup company that has matured to the point where its founders are faced with vastly different demands on their time than when they had, say, a dozen staff. They begin to realize that having a strategic partner to help them run the business would allow them to continue being the ‘chief enterprising officer’ and avoid getting bogged down in the nitty-gritty of running the day-to-day- business.
That’s essentially what happened at Tertio Holding. Set up in London in 1989 by two entrepreneurs, Martin Hopkins and James Home, it grew quickly as a software and services company for telecoms, finance and other service sectors. By the late 1990s, Tertio was doing well with more than 100 employees, the company was growing year on year at a fast clip and by 1998 annual revenue totaled £12 million the year before.
But Hopkins and Home pushed for more growth. The trouble was, however, that as they drew up global expansion plans, the demands of running the business were leaving them with less and less time for the things that they like to do most – be entrepreneurs.
At that point they – along with their financial advisers – decided they needed an FD. And fortunately for executives in their position, there is no shortage of candidates. Recruiters say there are legions of finance executives at major plcs who would relish the challenge of joining a small company where they can make a big impact. ‘Of course, going from GE to Bob’s Bakery isn’t for everyone,’ concedes Dowd of Dowd Associates. Typically, the ideal FD will be a qualified accountant and will have worked at a big company, in a regional FD or other senior role.
In late summer 1998, David Gibbon, then 38, had just settled into a promotion from FD to managing director of SIMS Graseby, a plc specializing in high-tech medical devices, when a recruitment consultant began bending his ear about a new FD post at Tertio Holdings. Quick due diligence, including meetings with the chief executive and the chairman, gave Gibbon enough information to know that it was job he couldn’t refuse.
‘The whole recruiting process took two weeks – we met, we liked each other and the decision was made,’ recalls Gibbon. ‘That was the clincher for me. I was used to working in a plc, where people want to make quick decisions but have to go through layers and layers of other departments and it drove home to me how differently things can be done.’
Five years later, Gibbon hasn’t had a moment of respite. A year or so after his arrival, the two founders decided to leave the company and Gibbon was soon overseeing the financial and legal work that led to a management buyout, which brought venture capitalists Advent International and Apax Partners in as shareholders. A demerger followed in May 2002, splitting the company in two - Tertio Service Management Solutions and Tertio Telecoms.
As finance director of the telecoms software concern that now does business in 16 countries, Gibbon isn’t just responsible for finance. Like the finance chiefs of other smaller companies, he also oversees a host of other areas such as the HR, IT and legal departments.
Crucially for the company, however, he’s worked closely with CEO Mike Watson to bring the company into the black after heavy losses in 2001, having also negotiated £2 million bank funding and a venture capital top-up. Revenue in 2002 was £11.5 million, and margins on the services it provides also improved to the tune of £1.6 million.
‘Not many of our competitors can say that,’ boasts Gibbon. A lot of that was from a cost-cutting programme that slashed the workforce. But Gibbon also gives credit to what he calls management systems that he introduced shortly after his arrival, which have increased accountability and visibility.
He also overhauled the company’s profitability analysis. ‘When you have outside shareholders, all this is important. They need absolute trust in the integrity of the numbers,’ explains Gibbon.
What he and other FDs who are in the same boat as him demonstrate is an acute awareness of their mission. ‘Companies get what they ask for,’ says Carter of Robert Half. ‘If they are very clear that they want and FD whose aspirations are aligned with the vision of the board, that’s what they’ll get.’
There are no worries on that front at Symbian Limited. ‘My goal is to commercialise the R&D that Symbian does,’ says Thomas Chambers, a former accountant and investment baker who joined the private software company, with a revenue of £47 million, as its first CFO in 2000.
Launched five years ago by a consortium of big mobile-phone makers, including Ericsson, Motorola and Nokia, to provide operating software for phones, Symbian’s business was built around its R&D unit. ‘Don’t get me wrong. There wasn’t anything wrong with Symbian before I joined,’ says Chambers. ‘It’s just that as an R&D company run by engineers, there were more than enough people around worrying about building the best operating software but no-one around to think about things like delivery times and cost savings.’
For the company to be ready for its next stage of development – which is expected to include an IPO when market conditions improve – Chambers says Symbian’s board wanted to find someone who could bring the discipline that’s required of a public company. In other words, they wanted someone with an ability to report at certain times and in certain formats, to set expectations that the company can either meet or exceed, and to set up a business model so that its performance can be measured.
Chambers, 42, has done that and more. A key part of his work initially was to create a simple, flexible business model – ‘that’s not just for finance but also for sales, which evolves as we evolve’.
Part of the business model entails outsourcing some of the technology development. Another part set a pricing policy – starting last year, Symbian charges $5 for each phone that uses software. ‘There’s no volume pricing going on here,’ he says. That has given Chambers a clear view of his overheads and helped boost the bottom line.
On the back of that, he also developed what he calls ‘The Symbian Story” - essentially a set of 40 PowerPoint slides explaining what the company does. This is something that’s useful for senior management to have on hand when they want to get key stakeholders like staff, customers and the consortium partners up to speed on the company.
So has Chambers lived up to the board’s expectations? So far, yes, Chambers reckons. “I’m really proud of what the whole team – it’s not just me – has been able to achieve.’ But the big test will come in the year ahead. ‘We currently have 20 phones under development,’ says Chambers. “once those come to market, life will be very different for us.’ Without a doubt, hiring a CFO/FD was a smart call.