David Axson
The interesting thing to me was I actually think CFOs have coped really well with the environment in which they're now operating. And I think a lot of that came from lessons learned during the financial crisis of 2007/2008. CFOs have become much more externally focused and aware of the impact in the marketplace, both on their supply chain and on their customer base. And therefore they've been in a situation where they've been looking to create much more financial flexibility. And the ultimate irony for me was in the first few months of the pandemic, we actually saw cash balances increasing on many balance sheets of companies. CFOs were very quick to reduce dividend payout and share buybacks as a mechanism for conserving cash.
They've also been very effective at reducing operating expenses. You know, some companies that you would have expected to be decimated by the pandemic have actually weathered it reasonably well, to the extent that a company like Airbnb that you thought may fail in this environment actually reported a profit earlier this week, which I think shows that CFOs have become much more aware of the importance of cost and cash flexibility within their business. Obviously, the availability of data and technology is driving that information availability. The good thing about a crisis is the CFO suddenly becomes really important in the business. You know, when businesses are growing and making boatloads of money, the sales and marketing guys and girls always get their fair share of attention. But as soon as we see volatility and uncertainty, the CEO looks to the CFO, and cash and capital conservation become prevalent.
Emma Pownall
And how do you think this has been different to the experience of 2008 and 2009 in terms of that CFO experience?
David Axson
I think the speed of global impact, it was more of a rolling crisis in 2007/2008. It started off with some housing market challenges in the United States. But that really rippled across the world over about a nine to twelve-month period. And many different markets were impacted in different ways. The thing about COVID is the speed within the space of six weeks, it went from new news item to global pandemic. And, you know, we literally saw businesses suffering 50% declines in revenue, the retail sector being decimated with sharp closures, you know within the space of days and weeks. So I think the speed is somewhat unprecedented. And you can't even relate it to anything in history because the degree of global connectivity that exists today and the dependence upon globalised supply chains is at an all-time high. So I think the impact was magnified by that.
Emma Pownall
Yeah, I totally agree. I think we've seen that with our customers, the incredible pace of it. And I think the difference being that everyone was experiencing it at the exact same time as well has really changed how businesses have had to deal with this situation hasn't it.
David Axson
Yes and the other thing I think's really interesting; the impact has not been even. Some sectors have obviously felt much more significant repercussions, travel and retail probably being the two most obvious, whereas some other sectors have actually benefited from the downturn. A lot of technology providers that have been enabling this work from home that we've all been engaged in for the last nine or ten months have actually seen positive upticks in their business. A number of sectors have benefited, you know, in the United States where I'm living at the moment, you know, the construction industry has been booming. People are modifying their homes and building extensions or moving from smaller houses to bigger houses, you know, as they begin to outfit their home offices.
Because travel has been decimated so much, people have actually been saving money, as long as they still had a job and are still being getting paid, their expenses have gone down. Now there's another segment of the economy that's obviously been very severely impacted. And unfortunately, it tends to be people in lower-wage positions who've been impacted in the hospitality and retail sectors in particular. So it's been a very bifurcated impact. And that's a little different than the global financial crisis, which is more broad-based in terms of it's impacting all economic sectors and all industry sectors.
Emma Pownall
And so what do you think we're seeing now, sort of eight/nine months into this experience for businesses?
David Axson
Well, I think the key thing that companies are looking for is some degree of predictability about whatever the new normal is going to be when that situation manifests itself. You know, obviously, news about vaccines in the last few weeks is triggering market expectation that we may see some degree of normalcy, whatever that may mean, you know, in the first/second quarter of 2021. So I think a lot of companies are working out what does that mean? You know, how many workers are they going to bring back to the office? What is the long term viability of home working? But also, a lot of companies are beginning to look at potential growth investments, whether that's acquisition opportunities, we've seen a significant uptick in M&A activity over the last three or four months, I think that will continue. Because of the global low-interest-rate environment, I think companies will also be looking at creating credit capacity that can support growth in the future and take advantage.
What a very interesting situation at the moment is, you know, we haven't had inflation for 10/15/20 years in any meaningful way. And most company's cost of capital, certainly on the debt side of the equation has come down dramatically. And that again has given CFOs increased flexibility. And we haven't really seen significant constraints on the availability of credit during the current crisis driven by massive amounts of government stimulus around the world. But that's created a very interesting situation where I think organisations are actually looking positively to the future in terms of what investments they can make. But I think the biggest question at the moment now is timing.
Emma Pownall
You mentioned predictability which is something CFOs obviously like to have and not got a lot of at the minute. What do you think the role of the CFO will look like going forward from here?
David Axson
Yeah, I think that's a great question. And what we've actually seen this year has simply accelerated the change that's been ongoing for quite a long time now. The number one job of a CFO is to ensure the integrity of the financial statements. And, you know, if they don't do that, they end up in jail. So you know, it's fairly important they get that bit right. But that is a backward-looking activity. You're making sure the numbers add up, that everything has been accounted for correctly, and that you're representing the financial performance of the corporation or the organisation in accordance with accounting standards. But that's taking up an increasingly small part of a CFOs time.
The process of automation over the last 15 or 20 years has allowed the accounting close process and a lot of the transaction processing to be highly automated. And that's only increasing as the advent of things like robotic process automation and machine learning, and artificial intelligence are applied to those core accounting activities. So we've seen a progressive change in a CFO's focus from backward-looking to forward-looking over the last 10 or 15 years. And that's only been accelerated over the last, you know, 10 months or so as we've been dealing with the pandemic. And the point about pivoting to look to the future is it is by definition uncertain, that crystal ball simply isn't good enough to predict the future with certainty, even in more stable times. And I'm not sure what stable times means because even if we go back prior to the pandemic, you know, all the way back to sort of the dot-com crisis and then 9/11 and then we had European debt crises, and we had the Asian tsunami and there's sort of been an event every year.
Now, obviously, the financial crisis and COVID are much more systemic and global in nature. But they're all part of a trend where the only certainty is uncertainty. So I think CFOs are becoming more comfortable with ambiguity. They're beginning to understand that you can't create a single point estimate of the future, you know, a very detailed budget that is just a single view of how much we're going to spend and how much we're going to make next year. So embracing tools like scenario planning and sensitivity analysis, and Monte Carlo simulate anything that begins to address risk, uncertainty and variability is now very much from the center to the CFO. Investors are asking for their view of the future, and what the probability is of different outcomes. Boards of directors are, and even regulators pay great attention to an organization's view of its likely future performance.
So what we've seen over the last 9 or 10 months is simply an acceleration of that trend. We're always going to be in a world of uncertainty and volatility, I believe, because of the degree of global connectivity, we do have small events in one part of the world rippling through and becoming major events elsewhere. And so if you're a CFO that's not comfortable with ambiguity, I don't think you're going to be very successful. And we've seen increasing numbers of CFOs, who may not necessarily come from an accounting background. And that's a trend that I only see increasing, as you begin to look at people that are more comfortable being the strategic business partner to the CEO. And how do we create the financial capacity to support our strategy to invest in growth, whatever it may be.
Emma Pownall
So if the role of the CFO is gonna change, they do have one thing up their sleeve, which is data. There's a lot more of it and a lot more visibility, how important do you think analytics are to a modern CFO?
David Axson
It is incredibly important. But I think we should also be cautious. You know, it seems today that no matter what the question, the answer is analytics, I think we have to step back a little bit and think about data, and how data supports analytics, because the quality of the analysis is only as good as the data that's fed into the analysis as we all know. Now one of the things that I think is creating new resources for CFOs is the increasing availability of data. You know, when I first started in finance in the 1980s, the only data we had was financial data that resided in the general ledger. Over the last 30 years, we've seen a progressive expansion in the availability of data, not just increased financial data with increased granularity, history, variability built into it.
But we also now have significant amounts of operational data and market and customer data. And the good news about that expanded data set is things that happen in the market or with the customer, tend to come before changes in operations. And changes in operations tend to proceed changes in finances, you know, the financial result of any business event is the last thing that happens, by the time it hits the P&L account or the balance sheet, it's largely too late to change it. So what CFOs are dealing with is a much more expanded data set. And that's sort of the good news. There used to be an old adage: You can't manage what you can't measure. The challenge today is we can't manage what we can measure because there's so much data available. But one of the key tasks CFOs have today when they're thinking about the power of that data and the analytics that they can bring to bear on it is to really understand what data is relevant and filter out the noise.
So CFOs are spending a lot of time thinking about what data is relevant versus what data is just noise, and then working out how we can feed that data into appropriate analytic tools. And the good news is, I think we're beginning to move away from the spreadsheet world where it didn't matter what analysis we were going to do, a finance person would create a spreadsheet to manage it. You know, I've been using a phrase for quite some time: We need to liberate the finance professional from the tyranny of the spreadsheet. Spreadsheets are a wonderful personal productivity tool, but they're not an enterprise-wide analytics platform. They're not an enterprise-wide reporting platform. And they're not an enterprise-wide planning, budgeting and forecasting system. But finance people have made them do all those things. And there's a significant amount of risk associated with that. But also a tremendous amount of manual care and feeding that's required to keep that mass of spreadsheets connected, linked, and have a degree of integrity that we can rely upon for decision making.
The advances we're seeing from technology today, not just in terms of the very important but often undervalued data management tools and capabilities, is then to build the analytic capabilities that sit on top of that. So the finance professionals are focused more on how do we use the data, rather than how do we get the data, clean the data, organise the data, and structure the data, so we can then do something with it. And that's going to be a tremendous advantage moving forward. And again, you know, the impact of the last few months has really seen an acceleration in that trend. I think the biggest challenge we face at the moment for many companies is in dealing with now a distributed workforce. It's put a lot of pressure on the IT organisation in terms of ensuring cybersecurity and data integrity when people are not in the office, and they're not inside the firewall, and they're not using the corporate network. So I think we've seen a significant pivot to think about how do we ensure the integrity of analytics and data in a distributed operating environment.
Emma Pownall
Let's jump back to that idea of cash resilience. It feels like it's more than just how much money is in the bank and that CFOs do have some options today. What does cash resilience actually look like?
David Axson
It's changing. In the old days, we had fairly rigorous and inflexible rules about how we manage cash within an organisation; we want so many days of cash on hand, we set terms for customers to pay, we set terms for how quickly we pay our vendors. And they tend to be somewhat arbitrary and standard across all situations. So all customers have to pay within 30 days, and we pay all vendors in 60 days. What are the advantages of more frequent and more granular data and better analytic tool sets is we can be much more scientific about how we manage those cash flows. So if we think about cash and the components of working capital, being payables, receivables, and inventory, we're really looking across all three of those, not just one in isolation. So you may actually be able to flex payment terms, and balance that with how quickly you pay your suppliers and you're really looking at optimization across that. You may also choose to have different payment terms with different customers and different suppliers based upon the materiality and the credit risk associated with those companies.
So I was doing a project with a large UK based pharmaceutical company last year actually. And one of the things that we were looking at is, they had somewhat standardised stock levels for their products across the world. But it didn't really reflect how quickly they got paid, what demand volatility looked like in different markets. So by building a series of analytic tools, and this was underpinned by data science and machine learning, we were able to set very specific inventory levels, safety stock levels for different products in different markets. And the result of that was over half a billion pounds worth of cash actually being freed up in their cash cycle, as a result of optimising the level of inventory across the world. Now, what we didn't anticipate - and one of the unexpected benefits was - when COVID hit global supply chains were decimated. So we were actually very quickly able to tune those models to look at the impact on our ability to move product around the world.
So I think the key message about cash resilience is to take a much more holistic view, but also a much more analytic view. And instead of coming up with arbitrary blanket policies that you apply across the board, you can actually create much more flexibility in the way you optimise cash throughout your business. Now you can't do that by only looking at your bank statement once a month, and by reconciling cash using an Excel spreadsheet. You really need to take advantage of the expanded data set and the tools and technology that we were talking about a few minutes ago. So I think it's a really interesting time. And those organisations that are well-positioned to understand cash flows in their business, not just on a daily basis but in some cases on an intraday business, can actually unlock a lot of cash, which creates a lot of flexibility going forward. And the other thing that I'm beginning to see is, you know, there are basically three things we can do with cash; we can invest it in the business, we can return it to shareholders, or we can pay down debt. And again, what we're seeing is CFOs, beginning to look at what is the right balance between those three things. We saw a significant turn at the beginning of the year with companies did not really pay down debt because interest rates are really low, but they did reduce the amount of cash they were going to return to shareholders so that they could create some cushion and some flexibility in their business to mitigate against the impact of the COVID virus.
Emma Pownall
Yes, so it's not all bad news. Some businesses are in a position to invest, and even those that aren't they will be looking to grow potentially. How do you see it playing out in 2021?
David Axson
If I knew the answer to that question, I would probably be making a fortune on the stock market. Yeah, there are certain things I think we're going to see. I think we will see an uptick in selective M&A. I think you will see stronger players in market segments buy up weaker players and seek to take advantage of maybe some diminished asset values so that there's some good value out there. I think we will see companies begin to think about where are the opportunities for us as a business as a consequence of some of the long-term behavioral changes that may result from the environment we've been in this year. So for example, you know we are going to see work from home flexibility increase. People may go back into the office, but it may not be five days a week. So think of the implications for that on something like you know, London Underground, the transport system. Maybe instead of selling monthly travel cards, they sell a card that gives you a certain number of journeys. So 75 journeys worth, like we used to buy phone cards for a certain number of minutes. You know, that may be an environment that they have to think about creatively in terms of putting that positioning in place, because people may only go into the office two or three days a week. So why buy a monthly card it's not economic to them. So maybe it's a pay per use rather than a pay per time period. Those are some of the types of dynamics I see companies thinking about.
One of my previous clients is Procter and Gamble, and they make a lot of household cleaning products and their business has really boomed. And I think we are going to see a systemic change in attitude to cleanliness. And that's going to result in a step function change in consumption of various products - maybe not at the elevated level we've seen over the last six to nine months, but people are going to pay attention to how clean the table is in the restaurant when they go out to eat for example, something that we probably didn't really think about quite so consciously, we are going to see people washing their hands more often in the future. So thinking about how those changes in behaviour create opportunities. You know, we've seen it with home delivery, whether it's home delivery of groceries, or restaurant meals, or whatever. I've seen a lot of innovation and creativity from companies already as they try and adapt to the environment we're operating in today. And I think some of those learnings will be sustained into the future. And CFOs will be looking at, you know, what investments that we had planned no longer make sense? And what new investments that the new normal is bringing to bear actually makes sense for us to pivot our investment into? So I actually think being a finance person is the coolest job in the world when you have this type of volatility and uncertainty, you know, we could really have a positive impact on the organisation. And we can actually get our ideas in front of senior leadership and actioned.
Emma Pownall
And you work really closely with CFOs in lots of different businesses. What are you seeing they're really excited about at the minute?
David Axson
I think everyone's excited about some degree of normalcy returning. But I think what CFOs are really seeing is their best talent has emerged on the surface. The creativity of their teams has really helped. And for many organisations, I was speaking with a CFO last week of a very, very large global company and he said "My team has outperformed my expectations. I didn't really realise how good they were until they were put in this situation of still trying to close the books when there's no one in the office. How do we do that? Well, our closed-cycle times haven't changed. You know, I thought it would take longer. But you know, I've got my accounting team spread across 45 different locations, and they're still able to function. That's something I would never have anticipated previously". So I think it's been liberating from that standpoint. And I do think CFOs are looking at the opportunity. CFOs by definition are designed to be pessimistic, you know, we've got to expect the worst and hope for the best that's sort of in our DNA. But we've been through the worst, you know, so it's all upside from here on, at least I hope that is the case. And therefore that allows a CFO to sit down with the leadership team of an organisation and start thinking positively about the future - particularly those companies that have weathered the storm. Now, don't get me wrong, there's been a lot of negative impact on many organisations and many employees. But even in some of those companies I'm beginning to see, you know, workers are being hired back, furloughs are being reduced. And hopefully, we'll see that accelerate significantly when there's a degree of confidence about the efficacy and availability of vaccines that will allow us to execute with more confidence.
Emma Pownall
And if you were going to give CFOs one piece of advice, what would it be? How do they change today's upheaval into tomorrow's profitability?
David Axson
I think the most important thing is to not forget the lessons we've learned over the last nine to ten months. It's amazing how quickly we forget the past. And we sometimes create our own optimism our own rose-tinted view of the future. And I think one of the CFOs best jobs and vital roles is to keep people grounded. And that's not being a naysayer, it's because they have visibility to cash and cash availability. CFOs are really creating the fuel for growth. Cash and capital are what allow organisations to grow it's what allows organisations to hire more people, to pay bigger salaries, to pay bigger bonuses. And all the upside is a function or ability to translate our actions into financial outcomes that are positive. And for a CFO, one of their key roles is to keep people rooted in the fact that we are doing this to create the capacity to make people's lives better. And the means to do that, at the moment in our own economic model is to create cash and capital growth, that allows us to hire more people and pay better people and create more exciting jobs for the Future. And by connecting what the money allows us to do, the money in of itself is not the endpoint. It's what it enables us to do that's important. And I was speaking with a CFO the other week, they're a health care company, I said, "what's your job?" He said very simply, "It's to make people's lives better and keep them alive longer. It's not to deliver a return to shareholders". He said, "I have to deliver a return to shareholders, but I only do that if the products that our company is making, you know, make people better and keep them alive longer". So we've got to stay focused on what that financial capacity allows us to do. And that to me makes it very exciting.
I was doing a project with Federal Express about 20 years ago, and I was walking through the finance department. And I asked someone in the accounts payable department what their job was, and she turned to me and said, "Deliver packages on time". She didn't say pay bills or pay suppliers. I said, "Well, how does what you do help FedEx deliver packages on time?" Without any hesitation, she said, "Well, if I don't pay our suppliers in a timely fashion, according to the contract, are they going to come out when one of our package sorting lines breaks down at 3am in the morning and help us get that back up so we can continue to deliver packages on time? No." What that company had done had create a culture where everyone could connect their role to what the company was trying to accomplish. And I think CFOs have a key role in doing that because sometimes we get lost in the P&L account, the share price and the balance sheet. But it's what those things enable us to do that actually create value in the world. And that's why we work for a living, I think. So I would always encourage the CFO to think about the outcome that they're trying to positively influence.
My guest was David Axson, ex-head of Accenture CFO Strategies, and advisor to global CFOs with some positive thinking on the emerging role of the CFO, and ways they can help their companies prosper as we emerge from COVID.
In our next episode, another very different tool for improving business outcomes. We'll be looking at purpose: not just what your business does, but what it stands for with your customers and employees. Companies with purpose are dramatically improving their chances of surviving, and even thriving. Until then, thanks for listening to Datel's Business Futures podcast.
This podcast was produced by ModComms, a full-service marketing agency offering innovative approaches to client challenges. www.modcommslimited.com