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 an 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 (see table).
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 an 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 realise 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 totalled pounds 16 million, up from pounds 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 com- pany, 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 specialising 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 a 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 pounds 2 million bank funding and a venture capital top-up. Revenue in 2002 was pounds 11.5 million, and margins on the services it provides also improved to the tune of pounds 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 plc-standard forecasting, reporting and project-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 an 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 banker who joined the private software company, with a revenue of pounds 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 dollars 5 for each phone that uses its 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. mt
When Jamal Hirani and Jonathan Marks set up tiffinbites in January 2003, they planned to roll out the Indian fast-food chain across the UK.
It was soon doing far better than predicted, and Hirani took the unusual step of hiring a finance director just seven months into the company's existence. Not many firms would do that before they'd even published their maiden accounts, but Hirani had several reasons.
He and Marks had originally raised pounds 500,000 in private investment as start-up capital, and Hirani was spending much of his time liaising with investors and keeping them up to date with company developments. He needed someone to do that for him, so he could concentrate on expansion. Hirani also wanted an FD who would manage relationships with banks and venture capitalists. And as tiffinbites was growing so quickly, it needed someone to inject discipline into the accounts. Finally, it was hoped that an FD would introduce cost savings by challenging management on efficiencies and by negotiating better deals with suppliers.
Hirani interviewed 30 candidates. 'I was offering them probably half the salary they were on, but there was the carrot of working with a growing business and having some of the equity in it.' He and his team chose Akbal Johar, a chartered accountant who was working as a financial controller in a larger firm. 'When I saw the concept and the attention to detail,' says Johar, 'I wanted to be part of it.'
He has increased bottom-line margins by 2% through the suggestions and changes he's made. These included renegotiating deals with suppliers and cutting costs by rethinking some of the firm's habits. 'My previous company was a mature business that was relatively static. This is exciting, it's different. It's hard work and the buck stops with me.' So far, Hirani has had no regrets about recruiting an FD when he did. 'When you grow, you need to bring in a specialist who can be there full-time.'
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CHOOSING YOUR FINANCE DIRECTOR
Is your company ready? A good FD will introduce changes into how you operate. If you can't accept this, there's no point bringing one on board.
Know your own needs. Do you want an FD who can prepare your company for an IPO, or one who will put order into your accounts? Don't forget your long-term aims.
Do you have the skills necessary to select a good FD? If you're not an expert in finance, find colleagues, friends or non-exec directors who can help do the choosing.
Chemistry is as important as competence. Your FD must be someone whom you can trust, who understands the business' philosophy and aims, and who you can get on with.
Make sure the FD wants the job for the right reasons. Avoid anyone searching for an easy pre-retirement position with some nice share options thrown in.
If you're not sure what to pay, ask around and read job ads to work out the going rates. If you can't afford a big salary, think what you can offer in terms of an equity share.
A good FD won't just guard the accounts - that's for plain bookkeepers.
Seek out someone who'll help in other areas - from schmoozing investors to contributing ideas for your strategy.