Circuit Riders.

In the new e-conomy, CFOs rattle tradition and roll with will have to shake things up, the purches.

Hear the one about the shopkeeper who loses a dime on every sale but plans to make it up on volume? It's no joke any more. The stock market's endorsement of the dot-corn boom has consistently transcended extravagance and contradicted common sense. Who even remembers the names of the erstwhile Wall Street stars who got their clients out of tech stocks -- in 1996 -- convinced that Internet mania had gone too far and that the sector was about to crash? Infallible hind-sight shows the Nasdaq was still blowin' and goin' several thousand points later -- and so, of course, was the Dow, old stocks benefiting (pundits said) from the efficiencies wrought by the new technologies.

But the problem with common sense is that it is, after all, common. Tried and true no longer counts because the old world has been blown to bits -- as the title of one of the hottest new business books proclaims (see page 16). But what does the e-revolution mean to CFOs?

Unlocking Profits

David Bovet, a vice president with Mercer Management Consulting, says online commerce can make all the difference in the world to the financial performance of even the most pedestrian, old-economy companies. And you can hardly get farther from Silicon Valley than the Weyerhaeuser door plant in Marshfield, Wisc., that Bovet discusses in his new book, Value Nets: Breaking the Supply Chain to Unlock Hidden Profits. The plant had been losing money for years; a strong union kept labor costs high; and a commodity product meant margins and pricing flexibility were low. But in 1995, instead of closing the plant, Weyerhaeuser introduced a new, high-tech, e-commerce program called DoorBuilder.

Previously, ordering doors had been a cumbersome, paper-clogged, labor-intensive chore. Doors have to meet building codes that differ from city to city; it could take weeks of phone calls and faxes between plant and customer to make sure an order would be kosher with regulators. Once the details were hashed out, they were written on sheets of paper and stapled to the doors as they moved through the line. Often these sheets came loose; instructions weren't followed; costly waste and rework resulted.

DoorBuilder replaced the paper with a web-based ordering system that lets customers sit at their desks and choose what they want from 2 million possible configurations. The computer system checks for conflicts with codes and flashes a warning if it finds any, so problems can be resolved immediately. Digital ordering eliminates the notes stapled to doors, reducing waste and inefficiency.

But that's just about doing old things better. E-commerce also lets Weyerhaeuser do new, never-before-thought-of things that add tremendous value to the Marshfield operation. DoorBuilder calculates, in real time, the value of each customer and every order. Weyerhaeuser can turn away unprofitable orders before they even enter the system. But because the system can track a customer's order, profitability and credit record, Weyerhaeuser can identify its best customers and offer them accommodations it might not extend to less lucrative accounts.

Because DoorBuilder has reduced lead times and eliminated waste, it's all but assured that orders will be shipped and received on time. Before DoorBuilder, on-time shipments ranged from 60 percent to 70 percent. They're now in the 97-percent range. Time is money and Weyerhaeuser's superiority in this respect means it no longer sells a commodity; it sells a premium-priced service. Thus, margins have improved, return on assets has gone from negative to over 25 percent and revenues are growing at 10 percent to 15 percent per year.

Bovet says the Weyerhaeuser example shows why CFOs need an attitude adjustment. "A narrow-minded focus on driving down individual elements of cost won't get you where you want to go. A lot of times, we're asked as consultants to look at logistics or procurement, and shave 5 percent off the cost. But the power of technology lies in developing a new solution that can drive top-line revenues while it cuts costs," he notes.

What does it take to harness that power? Jordan Graham, managing director for securities, insurance, banking and managed care industries at Cisco Systems' Internet business solutions group, stresses the importance of focusing on the customer. "The traditional role of the CFO is the bad guy in the company," he says, "the person chartered with all financial reporting, keeping a lid on costs, making sure the company achieves its revenue targets. But the CFO has an opportunity to facilitate thinking about e-commerce and engage other parts of the organization in rethinking a lot of things they do."

For example, to ensure that its own online business initiatives are grounded in the real world of customers and business, Cisco uses what it calls a "client funding model" to guide investment in information technology. This model distinguishes between common infrastructure and line-of-business technologies. The corporate SG&A account covers networks and applications that tie the corporation together, but business units are themselves responsible for investments they think will improve their own businesses.

"Each one of our business units is measured based on three things: top-line revenue, gross margin and customer satisfaction," Graham says. "So when executives running a business unit think about an IT initiative, they have to balance it against other ways they might spend the money, i.e., hire more sales people, invest more in R&D, refurnish offices, do a marketing campaign -- they have to make business tradeoffs. This forces them to define up front the business impact of an Internet initiative. It's one thing to say, 'We'll do this IT initiative'; it's another to say, 'We'll build a business case around it."' Graham adds that overall spending at Cisco is growing at about 40 percent, but IT spending is growing at a compound rate of 75 percent, with over half funded from the business units themselves. "They're investing because they've seen the impact on their returns," he concludes. "On an IT budget of $325 million, we saved over $825 million last year." (That is, expenditures of $325 million for IT saved th e company $825 million by increasing efficiencies.)

But in what, exactly, is Cisco investing? Or AOL, when it sent disks to almost every man, woman and child in the United States -- and booked the expenditures as a capital item rather than an expense? What's the stock market investing in when it sends valuations of money-losing Internet startups to maniacal heights?

Generally Accepted Accounting Principles won't tell you. And because GAAP doesn't have the answers, some suggest CFOs need a new set of measurement tools to understand what e-commerce is doing to their world.

Dye the Bottom Line Black

Economist Paul Romer, arguably the new economy's most important theorist, tells a story about a stamping line in a gear factory. A directive came down to reduce waste in raw materials. When they were trying to figure out ways to do that, the workers noticed that the dyes on one stamping press seemed to last considerably longer than the dyes on the rest of the presses. The only other difference they could find between this press and the others was that when the operator came in, he turned on the press and let it warm up while he got his materials ready. The other workers all came in, got their materials ready, then turned on their presses and began to stamp. This discovery had great value. By capturing one worker's insight and training, the company extended the life of its dyes by 20 percent.

A significant bottom-line impact, but one wholly ignored by conventional accounting standards. And one that goes to the heart of how e-businesses define themselves. In the old economy, businesses created value (mostly) by moving things. In the new economy, businesses create value by moving information. "Many companies think they're in the hardware business, but in truth, they're actually in the software business. Whether or not they recognize that fact and exploit it will be critical to their success," Romer says.

The theory that the business of bits has superseded the business of atoms has its detractors, but even those who don't fully buy the notion that the new economy changes everything in business nonetheless admit IT must change how organizations work. Oracle CFO Jeff Henley (see page 14) demonstrates a refreshing agnosticism about the degree to which technology has changed the CFO's role. But he also says, "CFOs need to be really knowledgeable about what the transition to e-business means because it affects the entire company."

Yes, e-business is different. But how and why seem debatable. None of the CFOs with whom Financial Executive spoke (in an admittedly limited and unscientific sample) shares the conviction of authors Philip Evans and Thomas Wurster that a massive new skill set will be indispensable in the blown-to-bits world of e-commerce. All of which gives one welcome hope that eventually, Internet technology will be commonplace and the blue-sky valuations of dot-coins will have sorted themselves out.

Gregory J. Millman is a frequent contributor to Financial Executive.

The CFO as Change-Driver

Jeff Henley

"The CFO needs to be a principal driver of change," says Oracle's Jeff Henley. "Many companies don't have a full vision or full commitment to e-business, so they run the risk of losing their market position and being overtaken or put into jeopardy by nimbler competitors."

You'd expect the CFO of a new economy bellwether firm to be an e-business booster, of course, but Henley's diverse career has given him considerably more breadth than your typical Silicon squire. A southern California baby-boomer, Henley took his MBA from UCLA in the 1960s before going to work for Hughes Aircraft. A few years later, he detoured into the chemicals industry in 1972, he struck out for Silicon Valley, and joined Memorex. A few years later he changed course again and got into the food service business with a company named Saga. That was followed by a few years with a private company in Los Angeles. He returned to Silicon Valley in 1991 when he joined Oracle.

Some people speak about the technology of the Internet with quasi-religious fervor. Henley isn't one. Perhaps he's too close to the center of technological creativity to romanticize it into a consummate, world-altering force. For him, technology is a tool, fancier than a hammer, but just as unlikely to change everything "I led a primitive life for a long time," he laughs easily. "I started out adding up spreadsheets with a rotary calculator in business school. It's laughable to see presentations that say the role of the finance person is different. The role is no different than it was 15 years ago, but the technology is so awesome that you can spend less time on transactions and be more productive as a business partner."

Henley has used technology to take a lot of the donkey-work out of Oracle's finance function. For example, expense reports go through the corporate intranet instead of coming into the financial unit on paper that has to be handled, shuffled, copied from and filed. "Reducing the number of people handling data creates speed and efficiency -- and that's a big part of the e-business revolution," Henley says: He's used enterprise software to consolidate back-office functions for Oracle's worldwide business into three regional service centers that handle accounting, billing, collections purchasing and similar routine matters. Henley enumerates the advantages: "My organization has gotten leaner and more nimble. Economies of scale mean we can do those things much more cheaply now and the centralization of data also makes access simpler and easier. But the real value added is that I can spend more time being a business partner."

This means tackling knotty issues of tax or treasury management, and educating the non-financial people in the corporation about financial principles so they can be better managers. "As finance people, the value we add is the information we provide," Henley believes. "I take great pride in making my group more efficient. Every year we provide faster, better, richer information. Better and more accessible -- those have been my goals."

The CFO as E-business Strategic Partner

David Young, Datum, Inc.

"My role as CFO may be different from some," says David Young of Datum. "One of the things I enjoy being involved in is setting the vision of the company. That's how I got involved two years ago in helping drive us into the e-business market."

A native Hoosier, Young graduated from Indiana University and joined Container Corporation of America, which transferred him to California in 1974. His introduction to the world of high-tech came a year later when he joined MSI Data, the company that invented the now-ubiquitous bar code, "I've been in the electronics business in one form or another ever since," Young says. He joined Datum in 1994, when revenues were about $30 million. Thanks in part to acquisitions he's steered, Datum's current revenues top $100 million.

When Young came aboard, Datum was heavily dependent on the telecommunications industry. Its main product was atomic clocks. It makes cesium clocks so accurate, they won't gain or lose a second in 100,000 years. These are the clocks that authorities in Greenwich and Boulder use to set time standards for the whole planet - and beyond, since global positioning satellites operate according to the same standards. Cesium clocks are Datum's top-of-the-line product. The low end is rubidium clocks, roughly 100 times less accurate, but good enough to synchronize telecommunications so drivers talking on cell phones don't lose the signals as they move from one relay to another.

"The telecommunications market for synchronization is tremendous," Young says. "But I had long been saying we'd need to expand our marketplace to grow beyond the 10 percent to 15 percent telecommunications industry growth rate." His colleagues agreed, and in 1999 Datum acquired a software group in Lexington, Mass., that produces Confidential Courier, a hacker-proof means of transmitting sensitive information over the Internet. Although Confidential Courier is interesting in its own right, Young found it more interesting as a vehicle for Datum's new e-business venture, Trusted Time.

Trusted Time will address a gap in Internet communications reliability most e-mail users overlook. "If you send an e-mail, the time that appears is the time on your machine," Young explains. "If you drive to the post office at the last minute to file your income tax return, for example, someone stamps the envelope to prove it got there by midnight. But when you file electronically, there's no way to be sure you tiled in time." If you haven't finished filling out your income tax return by midnight April 15, you can simply reset your computer's clock and send the return electronically on April 16. The IRS has no way to tell when you actually sent the return -- the only indication of time is the one your computer puts on the e-mail. And you can set and reset your own computer's clock as often as you like.

Trusted Time will eliminate that opportunity to cheat -- and make it possible to send via Internet other materials that now have to be handled manually because they need to be time-stamped (court filings, for example).

Datum's role in the e-business boom is similar to that of Levi Strauss in the California Gold Rush -- to sell a product prospectors need. Young's role in developing Datum's e-business plan illustrates the theme of CFO-as-full-business-partner. "In the electronics world, marketing or engineering may seem to be the driving force," he concludes. "But the CFO often has a big voice in what goes on."

Seismic Activity

FOR BETTER OR WORSE, Philip Evans and Thomas S. Wurster have set the terms of the debate on the impact of the Internet on business.

Their book, Blown to Bits: How the New Economics of Information Transforms Strategy, offers the provocative thesis that the Internet has completely changed business -- that rules by which business must be managed and the benchmarks by which success may be measured must be made anew. The authors talked with Financial Executive about how online business affects the CFO.

FE: Why does e-business seem to break all the rules of valuation?

Evans: The fundamental model that pervades most managerial thinking says the key asset defining the organization is physical capital, and traditional metrics are predicated on the idea that the key question is return on capital. We know how to measure capital: classic shareholder value analysis. The assumptions are standard, simple, you can plug them together to get an answer to such questions as is this a good business, is it being managed well, should I put more resources in, etc. But in a pureplay e-business, all that gets thrown out the window. No calculus on that basis would give any of them a positive valuation.

Wurster: CFOs of large companies trying to reposition in e-business need the right kind of metrics to deal with new businesses that typically have different cash flow, EBITDA and market capitalization characteristics than old businesses.

FE: What does this mean for corporate financial strategy?

Evans: There's a shift toward a world where human capital and management of people is more central than management of physical capital. It isn't that capital hires labor, but that labor hires capital, people get together with an idea and raise money from venture capitalists. So business is shifting from being a capital center to being a labor center.

Wurster: CFOs in most businesses are used to stable, well-understood linkages. We suggest a lot of this will be blown to bits.

FE: How?

Wurster: The new business models are changing the relationship between cash and shareholder-value creation. The first challenge for the CFO is that the old ways of thinking about market value are under attack. New insurgents are undermining values in the core business. Look at E-Toys vs. Toys R Us. The metrics to measure success are different. In the new business models of the Internet, revenue multiples are more relevant than EBITDA and cash flow. This is a very different shareholder value metric than CFOs are used to. It's highly unstable and not well understood. Here's the logic behind the move from EBITDA to revenue metrics: People are valuing the land grab, the move to occupy new space quickly. But this too is unstable. Look at the retail plays in Internet space. A year ago people were talking about these companies being valued at 20 times to 40 times revenues, but then revenue multiples collapsed as people thought through what would be the long-term source of competitive advantage. So the change in the metrics in the new model and the instability of linkages create problems for the CFO.

FE: How does this affect the CFO's role in the corporation?

Evans: Thinking about business as an option becomes important in a world where the level of uncertainty is high. It's not irrational, it doesn't imply that crap-shoots replace rational analysis. For example, think about business investments not so much for the value they create but for the subsequent investments they will permit. When Microsoft bought Web TV, everyone criticized it. Microsoft knew the business itself was unlikely to be the next generation of Internet access, but it also knew if it owned Web TV, it would have a platform to launch other initiatives -- unknown and unspecified at the time of acquisition. So you buy the right to play in the next round by making an investment in this round. The key challenge the CFO faces is that rather than worry about accountability, which is what the CFO worried about in the past, there now has to be a focus on how to allocate risk.

Wurster: The people doing this well take a venture-capital approach. The first thing good venture capitalists bring to a business is a short-time-frame perspective. They say, I can get from A to B in six months and then what will it be worth and who will I partner with, and so forth, They look at a series of cascading options.

FE: Any parting advice?

Wurster: Financial reports are a lagging indicator. CFOs are comfortable looking at financials, but in most businesses, the strategic position deteriorates before anything shows up in the financials. We're now in the middle of a disruptive technology shift in global business, and CFOs can't wait for problems to show up in the financials.

Evans: Nobody can know the future. But there are people who are able to think about a range of futures, who have skills related to identification of scenarios and skills involving the structuring and allocation of risk. For the traditional CFO, the only real risk-bearer was the shareholder. Now employees, investors in different tranches, customers and suppliers need to be brought into the enterprise to bear some risk.

Both Sides Now

Andy Bryant, Intel

ONE WOULD EXPECT INTEL, one of the most prominent companies in the high-tech industry, to know better than most how to make e-business work. So whence the company's recent, decidedly counterintuitive, decision to put worldwide human resources, information technology and e-business development in the hands of its CFO, Andy Bryant?

Shortly after Intel announced his enhanced responsibilities in December, Bryant admitted that as recently as two years ago, he thought e-business would be a passing fad. After watching the Internet develop, he changed his mind. "I turned from skeptic to zealot," he says. But he admits to a somewhat "schizophrenic" feeling about his new role: "The role of financial officer is to be the chief advocate for the shareholder, drive returns, make sensible investments, etc. When it comes to big computer projects, we're more skeptical than positive."

Still, he has no doubt that e-business (which he defines as any business process or application that uses the Internet) will change nearly everything about business. "Business-to-consumer e-commerce is interesting, but even more interesting is using the Internet to run big businesses more efficiently and more effectively," he says.

For example, when market conditions change quickly, e-business lets companies adapt quickly. When business is conducted on Internet time, everything is sped up," he explains. Right now, demand exceeds supply in Intel's business, but it takes us 30 days from the point where we realize we're constrained to the point where we can re-set manufacturing schedules. By the end of the year, we want it down to three days." And being able to adjust 10 times as fast to changing market conditions will have ripple effects Intel will be able to have product when demand rises, but won't be locked into production schedules when demand falls. It also means people who shuffle paper back and forth for 30 days will be redeployed more productively elsewhere in the company -- a real competitive advantage in a tight labor market.

Similar initiatives are underway in human resources All of Intel's 70,000 employees have stock options, but exercising them has been time--consuming and paperwork-intensive. By year-end, Bryant hopes to enable employees to exercise their options online.

And electronic communication with customers and suppliers lets Intel coordinate its plans with theirs. "When you know what your suppliers have on hand and their ability to respond you can buy less inventory you don't need and buy the stuff you need on time, so it reduces the cost of doing business," he says.

Self-described zealot though he is, even Bryant was surprised at the extent of his new responsibilities. When he sat down with Intel's technical people to prioritize e-business projects Bryant discovered all the applications development work in the company now involves system-to-system communication via the Internet or intranet. Thus, within a few years all of Intel's business will be e-business.

Obviously, as the company shifts more business to the Internet, it will become more Internet-dependent. This implies a certain level of risk. "A year or so ago, e-mail was down in many Intel sites for a day or two; it was extremely disruptive because we've become so dependent," he says. "Today, nearly all of our orders come in via the world wide web. If somebody shut down the web, we could still function with faxes. But as you become more comfortable with the systems, you eliminate the manual back-up." Bryant says Intel recognizes the risk and must cope with it by engineering stability, security and redundancy into the systems to ensure that they stay up.

Meanwhile, Bryant faces other risks as he tries to ride two horses simultaneously -- the CFO horse and thee e-business zealot horse. When Intel Chairman Andy Grove said in a meeting that one of Bryant's favorite projects wasn't as important to the company as it was to him, "My first reaction was, you can't do this to me!" Bryant recalls "Then I stepped back and thought that from the shareholder's perspective, I'd have to say, 'Good call, Grove' I told him what had gone through my mind. He said, 'That's why you're in the job -- you can do both, sides."

The CFO as Matchmaker 

Bryant Bynum,

Keystone Automotive Operations

Keystone, the nation's largest distributor of specialty is a large company whose suppliers and customers are small. So Keystone thinks it's the small jobber community compete with large automotive chains. That's why, CFO Bryant Bynum says, Keystone decided to bring the supplier and the customers together.

"Keystone over the years had developed a sophisticated AS400-based cataloging system for its telemarketing sales force," Bynum explains. "It didn't just have the ability to look up parts; it also had technical information and good pictures. The first approach was to make this catalog available online so our customers could get access to this information. But we determined there was even more information we could provide, including our own inventories and available-to-ship information.

"We were trying to accomplish three things. Number one was to be able to drive efficiencies in our own operation. Keystone had a telemarketing center but was experiencing large, double-digit growth on a year-over-year basis, and that's expected to continue. In Exeter, Pa., it's hard to scale up a call center that quickly, and we wanted to make our systems scalable. And we wanted to make it easy for our customers to buy from us, so they could transact business more efficiently but, more important, to tie them in as tightly as possible so Keystone is their first choice of vendor. Finally we wanted to help our customers be successful by enhancing their sales. So we took our catalog information, technical notes, inventory information and pictures of the products and put them online, on the counters of our jobbers' stores. Their customers can tap into our systems and information, look up a part, see it, order it and know it's going to be in the store the next day for installation."

The company did a formal rollout on Jan. 1, 2000. "A thousand customers make up the bulk of our sales," Bynum notes. "As of mid-February, we had 580 customers online bringing on 50 to 75 a week. We had a run rate of 5 percent of our sales through that business-to-business web site Considering we had an unsophisticated user community, I'm pleased with the results."

And where does Bynum see himself in this process? "A CFO can play a control-type role or take a broader business role. I attempt to take on a broader, business-driven role. Therefore, besides leveraging the Internet and e- commerce to reduce transaction costs and create efficiencies, I think it's important for the CFO to help define the strategy technology is going to take within an organization, and help marry sales; marketing, operations and technology."