With the economic slide, some companies are going to find themselves on the edge of survival. But those near the brink can take heart. Some do survive - and get the chance to tell their tales of near-death experience. Hansen Technologies is an information system and billing software company, and one of those gravely wounded following the tech wreck when its major client, WorldCom, filed for Chapter 11 bankruptcy. WorldCom was one of only three big clients for Hansen's support services, and represented about 40 per cent of its revenue.
This disappeared almost overnight and another 10 per cent vanished as the knock-on effect bit into the telecom sector as a whole, including another of its major customers, Telstra.
In 2000, Hansen's stock had listed at $1 a share and quickly climbed to more than $2. But two years after WorldCom's collapse in July 2002, Hansen had lost two-thirds of its revenue and its share price had slid to just 13¢.
Chief financial officer Grant Lister, who joined Hansen in late 2002, says, "We were struggling. Our share price was struggling. We had liquidity issues and we weren't in good shape."
National coach line Greyhound Australia tells a similar tale. When company secretary Rick Romanin joined in January 2007, the organisation had been shrinking for several years as cut-price airlines slashed into its core business of long-distance passenger transport. It was in danger of becoming irrelevant in its central market as competitors drew customers away in droves. Although the story was not so dramatic, if Greyhound was to survive it had to find new customers.
So, what do finance chiefs do best when things look slow for their companies?
First, they clean up reporting processes to ensure their managements have access to better data for decision-making.
As they had to win new contracts, the first target for Lister and Hansen was how they collected data to inform any new bid. "We didn't have a particularly good bid process," Lister says. "We didn't have an upfront calculation of what would be our likely outcomes [from a bid]. We reinvented the bid process [and] came up with a new bid document."
The financial reporting system wasn't capturing costs well across the board. For instance, it wasn't allocating labour costs directly to revenue from the products Hansen produced. "We weren't able to figure out where we were making money versus where we were losing it," Lister says. "We weren't able to measure the return on that item."
Without being able to accurately measure return on investment (ROI), the software company was unable to determine accurate margins, or whether a product had succeeded or failed. "All we knew [was] that we'd delivered it," he says.
New and better options
The second thing CFOs can do is identify new options. Hansen already had a new market in its sights: the deregulating energy sector. It would need new billing systems to support fresh metering technology. But before the company could win customers, it had to take a scythe to costs. This included the most difficult part: cutting jobs, or about 30 per cent of its workforce. "That was painful," Lister recalls. "There were many people with terrific skills."
At Greyhound, the options for new markets weren't so clear. With about 1100 destinations serviced nationally, Romanin could see that part of the problem was a lack of detailed financial information, which would mean being able to determine how well each route was performing and altering policies accordingly. The CFO immediately began introducing better reporting systems, ensuring Greyhound had information based on routes, customers and products as opposed to the "bucket" accounting system which gave profit and loss per route at the end of the year. "We started to plan at a much lower level and look at everything in more detail; how many passengers and how far they travelled, for instance," Romanin says.
Romanin was convinced that market loss wasn't just down to cut-price airfares, but was also about not providing services in the right places. "It may have been poor connections, or we hadn't engaged with the local community," he says. Like Hansen, having firm data supported intuition on Greyhound's strengths and weaknesses, better informing its decisions on how to respond to the demands of regional markets and manage long-distance routes more efficiently.
To reverse the company's decline, Greyhound had to diversify. Romanin says the company realised mining contracts should be the target as they matched their strengths better than most coach operators. Mining sites are scattered all over Australia, and Greyhound is the only national network, long-haul coach company with strong occupational health and safety credentials operating regularly in remote areas. But contracts are difficult to shift from incumbents and they usually only change hands via acquisition. Being a safe revenue stream, these contracts are also expensive to obtain.
After many months of tough negotiations, Greyhound had a breakthrough when it won the tender to transport BHP Billiton's employees to and around the Olympic Dam mine site in South Australia. It involved prising the big miner away from an existing provider, and Romanin counts Greyhound's understanding of BHP's risk environment as a deciding factor.
"BHP Billiton wanted its customer to know at any moment of the day what the risks were and what we would do to resolve them," he says.
As well as improved reporting, Romanin introduced better ways for Greyhound to measure performance, including marginal ROI per asset - which gives a better idea of a service's profitability - as well as exception reporting. This changed the focus from the average return to returns from the top- and bottom-performing services.
"Don't manage the average, manage the exception," Romanin says. "I'd rather hear about what the top 10 and bottom 10 are doing, and focus the energy on those. The average will look after itself."
Romanin moved accounting from Toowoomba to Greyhound Australia's headquarters at Eagle Farm, in Brisbane.
At Hansen, Lister's problem was too much irrelevant detail. He slashed the number of reports by about 60 per cent, ensuring senior and divisional managers only received relevant financial data. "We produced the output that had meaning to the organisation and resisted producing outputs we didn't really need," Lister says. "We just don't want the noise."
Respond to change
Turnaround successes often require an ability to respond quickly to a changing market. For Greyhound, radical change came in the form of Tiger Airways when it arrived in Australia in November 2007. "That was really a surprise to us," Romanin says. "The big difference [compared with] Virgin and Jetstar is that [Tiger] really is low cost. The simple question was: why would you take a 12-hour bus ride from Melbourne to Adelaide for $120 when you could fly there in less than an hour for $60?"
Almost overnight Greyhound became a company that could only survive by focusing on shorter distance, regional routes. "Over the past four years, the most obvious key performance indicator is that our average passenger distance for a commute has dropped from 800 kilometres to 400 kilometres," Romanin says. "That's a huge change, and what it says is that we no longer really do long distance, point to point. By and large [our service] is rural and regional."
Services were cut on some routes, and diverted to more profitable ones where Greyhound could compete in regional areas, but they also introduced strategies familiar to airlines, such as code-share agreements with other operators.
In some areas the company reduced the number of coaches on a route, but formed alliances with local coach services to take their passengers, or used their networks to transport passengers closer to their destination. Greyhound has also made some strategic acquisitions to further embed itself into the mining industry.
The first was a service in Mount Isa, contracted by local mine owner, Xstrata.
After recording compound contraction in revenue of about 5 per cent a year for the past five years, Romanin says in the first quarter of 2008 revenue was up 10 per cent.
Negotiating a turnaround
- The uncertainty of the prevailing market conditions has left many struggling to change their strategy fast enough, but there are certain things CFOs must immediately pay attention to. The most important relationship for any company to maintain is with their bank, and that's the case even more so in this downturn, PricewaterhouseCoopers partner Phil Carter says. "A year ago if you went to your banker seeking funding, I suspect in a lot of cases the banks would have pressed the cheque into your hands before you had ended the sentence," he says. "Now the banks will ask a lot more questions before they do."
- Carter says many companies he is dealing with would have been in trouble without the financial crisis, and if they haven't already, they must look closely now at how the economic downturn will expose hidden vulnerabilities. Many businesses will need to cut staff and restructure their operations. However, it is not unusual to see companies which would love to do this but leave it until they can no longer afford it. "They might decide that they would like to close a division, or downsize - that might improve your profitability, but you need liquidity to be able to do that," he says.
- Many companies are now also taking a good look at the efficiency of their business, especially barriers to cash flow. For instance, easy funding sources mean many are "in effect funding customer supply contracts", Keiran Hutchison, a partner at Ernst & Young, says. All companies now should be taking a close look at their payment terms and insisting on shorter times. In addition, as much as possible, Hutchison says there needs to be "cost agility" - for instance, ask "how can you make sure as many costs as possible are variable rather than fixed".
CFO, Fairfax Business Media
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