How Silicon Valley CFOs keep pace: quick-change artists.
His Own Niche
Gourmet coffee. Bagels for the taking. Unlimited soft drinks. Casual dress. Ultra-flexible work schedules. Occasional onsite massages. Personal web sites to talk about family, pets, sports. Yes, all the perks you've stereotyped in a California company - well, they're for real.
"We like to have fun," says PeopleSoft's CFO, Ron Codd, matter of factly. "It's one of our core values." And at PeopleSoft it's in writing.
With an undergraduate accounting degree from the University of California at Berkeley and a master's from Northwestern, Codd jumped from Tandem Computers to Wyse Technologies to MIPS Computer Systems and then, in 1991, landed at PeopleSoft. When he walked into the enterprise-software developer, it was a $15-million, 75-employee, four-year-old venture. Now he oversees the $1-billion, 5,000-employee giant.
Codd's career with all high-tech, high-growth firms is typical of the resume. of any Silicon Valley CFO. Priority juggling, experience mongering and the speed of change intoxicate those who succeed in this exclusive arena.
"In a high-growth company that's characterized by only one constant - change - you always have to be revisiting what you're doing," says Codd. "You have to have your ear to the ground, always getting lots of feedback from everybody you can, internally and externally, because what worked yesterday, when you were one size, often breaks when you get bigger."
For instance, PeopleSoft was a single profit center when he joined. In 1997, Codd helped reorganize for a second time, into nine industry business units in North America and four international geographic organizations, reslicing the P&L and re-adopting goals and measurements.
With such growth, everything becomes a major project. The company just completed a 380,000-square-foot office site in the San Francisco Bay area, only to realize that, by early 1999, they'll outgrow the new campus.
But many of the day-to-day headaches soon will be one man removed from Codd. The CFO is in the process of shifting many of his administrative chores to a newly created post Codd calls the "internal CFO."
"I consider myself more a PT boat commander than a fleet commander," he explains. "I like the technical side of things, the business-to-business relationships, the negotiating, dealing with the Street. I'm not really fond of managing a large organization of people. I like the idea of having somebody who enjoys managing people do that. I'd rather be working in corporate development, in mergers and acquisitions."
In a growing, stretching company, Codd has the luxury of carving out that niche for himself. In M&A, for instance, he enthusiastically talks about the company's five acquisitions to date, the largest a $225-million merger with Red Pepper Software in 1996, and cautiously says PeopleSoft will be accelerating the acquisition pace - a good bet, given that Codd is taking the reins.
In the meantime, he's leaving to his "successor" a long list of innovations in the finance department. For example, Codd initiated a steadfast policy against earnings conference calls, standard practice in the industry. "It's not a good two-way communications vehicle," he says. "You've got a lot of different people on the phone with different agendas, some positive and some of them not so positive. If somebody picks up on a negative thread in a line of questioning, whether it's there or not, they can send the stock down a good measure." Instead, Codd organizes more-personal, one-on-one calls with several analysts and investors who are interested in PeopleSoft.
Along the same lines, Codd also began posting to PeopleSoft's web site a five-page "operations analysis" and a "business outlook" section within the firm's online earnings release. In the name of full and fair disclosure, Codd says, "My favorite line is 'Your grandmother in Oklahoma has as much information about how we're going to do as a sophisticated investor in Manhattan that belongs to a large institution. That's what this whole capitalist market is about, theoretically at least."
Like other Silicon Valley CFOs, Codd aggressively adopted PeopleSoft's own enterprise application software internally, not only to help manage the blossoming firm's growth, but because he wanted to turn the finance department into a "glasshouse demo" for visiting customers. His strong technical background (he actually helped build several of the systems the company used internally several years ago) and natural presentation skills make him a particularly useful salesman, since PeopleSoft's customers are typically CFOs.
Codd also helped develop an innovative company-wide bonus plan that combines features of bonus plans and profit-sharing plans. Using a waterfall approach, the company establishes a bonus pool based on the firm's profitability, then divvies up the money among the senior vice presidents, who in turn allocate chunks to each organization under their control, based on performance. The managers of those groups hand out the dollars to their subgroups as they see fit - with no rules on how they should disburse the rewards, says Codd.
In finance, for instance, flexibility and high energy earn a lot of points, but solid technical skills are the most important. "If I'm looking for a controller," Codd explains, "I want someone with real knowledge of accounting rules, especially in the complex areas of accounting, like revenue recognition. I'm not looking for someone who can just manage people and projects. That doesn't make it in this company. You have to be willing to make decisions on less than totally perfect information. In a high-growth industry, you have to make a fair amount of 'gut' calls."
But Codd balances the need for quick decision-making with his own brand of conservative financial management. "I've got all the people here bought into that philosophy, so I operate with a significant cushion all the way around. At the end of last quarter, we had $420 million in cash and no debt. That's the kind of conservatism that lets me sleep at night."
With those numbers, Codd admits he doesn't formally measure PeopleSoft's cost of finance. But he estimates that the entire administrative function costs "about 5 percent of revenue" and includes about 300 people.
At 42, with a wife, a seven-year-old son and 18-month-old daughter, Codd does have very concrete ideas about where he'll be in five years. He's tom between becoming a professional corporate director (he already sits on three boards), teaching, writing a book on high-tech financial management ("mostly nonfiction," he says, only half joking), consulting or taking a COO or CEO position. "I have a lot of realistic options," he says. "But, you know, it's doubtful I would do the CFO thing again."
An Eight-Part Strategy
After 19 years in financial positions at Motorola, Larry Carter realized he wasn't going to make it to CFO. So he jumped ship and moved through several high-tech companies as CFO before ending up, in 1995, as the top finance person at Cisco Systems, a leader in networking for the Internet.
Since then, he's led a finance department whose total cost is "a tad over 1 percent" of revenue, and he's watched Cisco's productivity skyrocket to an almost unheard of $700,000 of revenue per person per year.
From most vantage points, what Carter has brought to Cisco's finance department goes beyond the standard innovations. Besides the drive to go paperless for everything from travel arrangements to stock option exercises to merit increases, the company has pioneered the use of synthetic leases, a business that's now worth nearly $1 billion. The department has managed a three-day closing, unusual for an $8-billion firm, typically reporting earnings to Wall Street on the seventh work day, even at year end. And Carter has supported the drive to receive more than 40 percent of Cisco's customer orders over the Internet - an equivalent of $3.5 billion in purchases, making Cisco the world's largest user of electronic commerce, according to the CFO.
But Carter is a self-professed "low-key kind of person," so it takes some coercing to get him to talk about his eight-point formula for the finance department. Here's a glimpse into his method.
First, he blends managing the industry's natural fast growth (Cisco's five-year compound growth rate is at 65 percent from 1993 to 1998) with maintaining financial control. He knows the company needs to stay entrepreneurial, "but at the same time, you need certain controls to prevent you from going into a tailspin or get you in trouble with the SEC."
So Carter implements transparent controls, like pre-approved travel that goes through a series of automated checks for policy compliance that are essentially invisible to the business traveler. "Most companies spend an enormous amount of time and effort to prevent 2 percent of the employee population from doing something they don't want them to do," he reasons, "but in the process they slow down the other 98 percent."
With some 40 sell-side analysts and in excess of 500,000 investors following Cisco, Carter also believes in managing Wall Street's expectations. "Companies that hype their stock or don't manage expectations get into tremendous trouble," says Carter, who estimates he spends between 10 and 20 percent of his time with shareholders and analysts. "We don't want any surprises. We want our stock to trade on results, not expectations. That's very important given the volatility of our industry." So part of his investor-relations time goes to hosting analyst and shareholder visits to the San Jose corporate headquarters, introducing them to Cisco's products and explaining the firm's business strategy.
Another important part of Carter's philosophy is to stay externally focused. He's adamant about always keeping the customer in mind. Cisco goes so far as to plug a customer satisfaction factor, measured by a third party, into the bonus formula for its managers. Carter's own direct interaction with his outside customers resulted in Cisco Capital Corp., a captive lease company he set up when he kept hearing customers ask for help in financing orders that sometimes grew into the millions of dollars.
Being a good business partner, especially with the CEO in a fast-changing industry, is another key component of his finance strategy. Carter communicates with his boss daily, usually by voice mail since both travel extensively. His other key roles, as he sees them, include building a strong team that can scale dramatically with the company's growth, taking the initiative to understand the company's changing technology, staying close to the competition - whether they're traditional competitors, emerging ones or established companies trying to break into the data networking business - and, the CFO's standard chore, advocating frugality.
To complement Carter's eight-point approach, Cisco's hiring strategy is to pick only the top 10 percent of the crop, no matter what the discipline. In finance, with 400 people worldwide, Carter regularly goes through a ranking exercise with his top managers that keeps him informed of the top 10 percent of performers (as well as the bottom 5 percent) and also high-potential employees. For Carter, that top percentile means workers who are smart, innovative, high energy, team-oriented and able to get the job done: "You have to get results. You can do everything else - you can be smart and work your tail off - but if you don't get the job done, there's no room here."
To teach them some of the latter skills, Carter has been pushing for a 40-hour annual training requirement per person in finance, but he admits it's tough to make it mandatory - "like pulling teeth" - and one of the few areas he considers weak in Cisco's development program.
Listed as one of Fortune's top 100 companies to work for, Cisco offers the standard benefits fare for employees, at least standard for Silicon Valley: free soft drinks, popcorn, an onsite workout center, casual dress, laundry service pickup and delivery. And the firm likes a level playing field, says Carter, so there's no special treatment for executives. Carter flies coach with everyone else, drives his own car the 45 minutes to and from the office and works out of a 12-by-12 office just like his neighbor. That attitude helps keep the annualized turnover at 6 to 8 percent, which is good for the Valley, he says.
It also leads to one of Carter's toughest challenges. "In an organization like this, with so many bright people, where there are always more ideas than there are resources, I have to get behind the projects I think will leverage the company the best," he explains. Carter recalls, when he interviewed with one of Cisco's board members before he landed the CFO job, he asked if his lack of networking experience was a concern: "The board member said, 'Actually, no, because financial executives in the semiconductor industry are known for being very cost-conscious. They know how to say no.' I thought about that, and then I said, 'You know, after 30 years as a controller, I've found it's easy to say no. What's difficult is figuring out what to support, when to say yes.'"
When the News Isn't Good
Sometimes the high-technology business seems to conspire against you. In February of this year, Lam Research, a wafer fabrication equipment supplier to the semiconductor industry, was forced to restructure and reduce its workforce by 14 percent, or about 700 employees, worldwide.
The Asian financial crisis is the culprit, according to the company, leading some of Lam's customers to postpone their expansion plans - and thus their orders from Lam. With a solid one-third of its customer base in Asia, the company is now rethinking its manufacturing strategy and finding ways to continue to fund its critical R&D programs, the lifeblood of all Silicon Valley firms.
But quick-change artists adapt. Lam's CFO, Mercedes Johnson, smoothly prepared investors for the news and initiated plans to take a pre-tax restructuring charge to earnings of between $80 million and $85 million in the company's fiscal 1998 third quarter.
"One of the most difficult parts of our message to investors is explaining the volatility of the industry," says Johnson. "Investors need to know what really drives the consumption of semiconductors, which drives the need for our semiconductor equipment. So we try to be very proactive in communicating the benefits and the pitfalls of this industry and to target specific communication to those kinds of investors who have a long-term investment view." Right now, since Asia is a concern for Lam's investors, Johnson has been discussing it in her presentations during the last four months, all the time emphasizing that the firm is in an industry with enormous growth potential, but warning, "In the short term, there will be peaks and valleys." Maneuvering through those valleys is what proves a CFO's mettle.
An Argentinian by birth, Johnson holds a master's in accounting and a CPA degree, both from the University of Buenos Aires. She joined Lam Research as a vice president in April of 1997 and was bumped up to CFO the very next month. Before that, she spent 10 years in senior management at Applied Materials and also moved through financial positions at Nanometrics, NCR Corp. and Hewlett Packard.
The latest employee thinning left Johnson with fewer heads in her department, now totaling about 200 worldwide - not too different from the rest of the industry, she says, but certainly leaner than, say, a typical manufacturing firm of the same size. But she's used to working under that kind of pressure: "In a business that shrinks and expands as quickly as ours does," she reasons, "you just cannot afford to keep a large infrastructure in place, because you don't know when the next downturn will come or how severe it will be. So we tend to run the business with a smaller staff than most organizations. Therefore, we have to have an enormous drive for productivity improvement, so we can do more with less."
One way Johnson keeps people from migrating out of Lam's finance department on their own is to establish an open professional-development program that makes 100 percent of Lam's senior management available to employees at specific times for informal mentoring, "because I think highly motivated, self-starting people not only perform best but tend to be more loyal to their employer when they see a path for their personal professional growth," she explains. So every employee has a development plan that's revisited regularly.
Along with helping to implement the PD program, Johnson has reinvented Lam's annual planning process, adding a semi-annual budgeting activity that allows for mid-year course adjustments and a rolling, 12-month forecast process that the finance organization drives. Most unique though is her monthly financial review process, when she brings together corporate management and the leaders of each of a dozen business units. These high-level financial reviews take about two days of Johnson's time each month, but it's worth it, she says: "It's a process that helps us identify where we are and what we need to do as a business. We include scenario planning and a lot of what-if exercises from the financial group."
She's also proud of Lam's top-notch tax-planning activity - one she credits her predecessor finance leaders with developing - for minimizing the firm's global tax burden. And, in the wake of the Asian turmoil, her finance organization is gearing up to help its Asian customers find financing, the key to getting Lam's numbers up again.
While Johnson chooses not to disclose the company's cost of finance, she does say the latest trends in measuring performance don't all fit at Lam. The idea of calculating economic value added measures, for instance, is intriguing to her but on hold for now. On the other hand, she has just adopted activity-based management and reports it's a hit among her internal clients. Thanks to Johnson and her department, "it helps everyone better understand what drives their costs, and I'm sure it will have a long-term positive effect on improving our profitability. After all, that's our job - to react very quickly, support changes in the business environment and work with management to do what needs to be done based on what we, the finance organization, see in the marketplace."
RELATED ARTICLE: Big Valley
"Well, Silicon Valley is 45 miles south of San Francisco, but it extends from south San Francisco down the peninsula to San Jose and back up to Berkeley on the East Bay. I think you meant northern California," one Silicon Valley CFO's email quickly corrects this Easterner's flawed geography. "Southern California finance is very different."
Indeed. The CFOs in the Silicon Valley area are a different bred, by most accounts. They tend to know each other, since most practice the same unique brand of financial management of their fast-growing, high-tech firms. They speak the same language. And some move from company to company, looking for their next new experience.
One meting place for these top finance people is through Financial Executives Institute's Santa Clara Valley Chapter, which draws most of its members from the Silicon Valley. Spun off from FEI's San Francisco Chapter in 1976, the Santa Clara Valley group has grown from 66 members to about 450. It meets monthly at the University Club in Palo Alto, on the edge of the Standard University campus.
For more information about this group of finance innovators, contact Richard L. Giorgetti, senior vice president of Management Solutions and chairman of the chapter at (408) 292-6600 or firstname.lastname@example.org.
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|Date:||Mar 1, 1998|
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