CFO Mag Jan-Feb 2012

CFO
J ANUAR Y / F E B R UAR Y 2 0 1 2
www. cfo. com
Whos Out There?
SCOTT TRAVASOS, CFO OF BLUE SHIELD
OF CALIFORNIA FOUNDATION
CFOs CANT
IGNORE
SOCIAL MEDIA.
BUT WHATS
THE ROI?
CFO/360
REPORT
RISKS TO AVOID
WHEN EXPANDING
OVERSEAS
M&A
WHY IT PAYS TO
IMAGINE THE WORST
OUTLOOK
SURVEY
CFO OPTIMISM
TICKS UP
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1 C F O | j a n u a r y / f e b r u a r y 2 0 1 2 c f o . c o m
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44
50
Features
Whos oUt there?
CFOs shouldnt fear social media, and cant ignore it.
But what about the ROI?
by david rosenbaum
cfo/360 report:
Global PositioninG
Expanding abroad has lots of potential, and plenty of
risks. Here are some quick tips to help you avoid
problems with staffing, regulatory requirements, joint
ventures, and more.
by michelle celarier
52 human capital: The help
54 growth companies: howdy, parTner
55 technology: learning To Share
j anuar y/ f e b r uar y 2 0 1 2
Vol . 2 8 , no. 1
37 business
outlook survey
prOCeeding
with CautiOn
While the global outlook
is mixed, U.S. CFOs are
somewhat more optimistic.
by kaTe oSullivan
CFO, Vol. 28, No. 1 (ISSN 8756-7113), is published 10 times a year, with combined January/February and July/August issues, and distributed to qualified chief financial officers by CFO Publishing LLC, 51 Sleeper St., Boston, MA 02210
(executive and editorial offices). Copyright 2012, CFO Publishing LLC. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior permission of CFO Publishing LLC. Requests for reprints and permissions should be directed to FosteReprints, (866) 879-9144; E-mail: jkaletha@fostereprints.com; Website:
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up front
4 from the editor
6 letters
10 topline
A new CFO steps into the batters box at Hillerich & Bradsby; how
CFOs can help drive innovation; after a tumultuous stretch, HP
CFO Cathie Lesjak assesses the companys ups and downs; and more.
17
capital markets

Making M&a saFer
Four ways companies can mitigate some of the most common pitfalls
when acquiring another business. By Vincent Ryan
21 risk management
dOnt trust, veriFy
With antibribery actions on the rise, companies should monitor their
business partners more closely than ever. By Sarah Johnson
23 accounting
the COst OF COnFidenCe
Two proposals aim to increase auditor independence, but may cause
problems for CFOs. By David M. Katz
25
strategy
in the FaMily way
CFOs who work for family-owned companies can be invaluable
advisers, but often remain on the outside looking in. By Alix Stuart
27
human capital
the new talent Mix
Finance chiefs are bolstering their strategic roles by hiring more
FP&A help. By David McCann
31
growth companies
where the MOney is, and the seCurity isnt
Cyber thieves are increasingly targeting small and midsize
businesses, and why not? Most SMBs do little to protect themselves.
By Russ Banham
33
technology
dashbOards Can nOw gauge MOre data
CFOs are expanding their use of dashboards to capture a wider
range of metrics. By Marielle Segarra
56
the quiz
40
On The RecORd
charles horn, CFO,
Alliance Data Systems
INTERVIEW By kATE OSULLIVAN
Have $1 Billion,
Will Spend
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JANUARy/FEBRUARy 2012
VOL. 28, NO. 1
31
23
25
GR WTH
Its what CGMA stands for.
Officially, its Chartered Global Management Accountant. Established
by AICPA and CIMA, two of the worlds most prestigious accounting
bodies, CGMA is a new designation representing accomplished
professionals that drive and deliver business success, worldwide.
Find out more at cgma.org
J
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from the editor
scott lei Bs, edi tor- i n- chi ef

social studies
you may not realize it, but theres a good chance that as of this
moment youre acting out a scene from the movie The Social Network.
late in the film, the companys first CFo, eduardo Saverin, is being
deposed in a civil suit:
Attorney: After expressing misgivings about Mr. Zuckerberg taking
the company and moving it to California for the summer, why did you
put $18,000 into an account for his use?
Saverin: I figured we were partners and I wanted to be a team
player. I figured Mark, Dustin, and the interns could work on the site
while I generated advertiser interest in New York. But what I mostly
figured [was] how much could go wrong in three months?
to invest or not to invest? to regard three months as a period
in which not much can happen, or as one in which everything might
change? to appreciate just how big the next Big thing can be, or fail
to? those are just some of the questions and challenges regarding social
media that all CFos must confront, even if they arent quite ready to
click the like button. if you think that social media is nothing more
than a time killer for your kids and perhaps a hipster or two in the
marketing department, think again. Senior editor David rosenbaum
explains how social media can help you understand Whos out there?
(page 44), and how to redefine your relationship with them. (For a re-
lated take, see Deal with it, page 56.)
elsewhere in this issue we take a look at different kinds of rela-
tionships, specifically, those youll need to develop overseas if you hope
to expand your global operations. in our inaugural CFo/360 Special
report, we take a look at some of the challenges confronting companies
that want to staff up foreign operations or develop joint ventures as a
way to tap into emerging markets. See Global Positioning, page 50.
and speaking of global, our latest Duke university/CFO magazine
Global Business outlook Survey finds that CFo optimism is up, at least
a little. the same holds true for hiring and spending plans. See Pro-
ceeding with Caution, page 37. CFO
SuBSCriBer ServiCeS:
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CFO
4 C F O | J a n u a r y / f e B r u a r y 2 0 1 2 c f o . c o m
Julia Homer
executive vice President & Chief Content officer
Senior vice President & Director of research Sam Knox
editor-in-Chief, CFO magazine SCott leiBS
(scottleibs@cfo.com)
CFo maGazine/CFo.Com
Deputy editors marie leone (marieleone@cfo.com),
Kate oSullivan (kateosullivan@cfo.com)
articles editor eDWarD teaCH (edteach@cfo.com)
managing editor SuSan Kron (susankron@cfo.com)
Senior editors:
Accounting & Tax/New York Bureau Chief
DaviD m. Katz (davidkatz@cfo.com)
Banking & Capital markets vinCent ryan
(vincentryan@cfo.com)
Human Capital & Careers DaviD mcCann
(davidmccann@cfo.com)
risk & Compliance SaraH JoHnSon
(sarahjohnson@cfo.com)
* Growth Companies alix Stuart
(alixstuart@cfo.com)
technology DaviD roSenBaum
(davidrosenbaum@cfo.com)
Staff Writer marielle SeGarra
(mariellesegarra@cfo.com)
Copy editor Deana ColuCCi
Contributing editors ruSS BanHam, ranDy myerS
Design/art Director roBert l. leSSer
CFo reSearCH
editorial Director, research Celina roGerS
research Director DaviD oWenS
associate research Directors
mary BetH FinDlay, JoSH Hyatt
research editor matt SurKa
manager of research operations linDa KloCKner
Contributing research editors elizaBetH Fry,
eriC laurSen, CHriStoPHer WattS
CFo ConFerenCeS
Director of Program Development
maureen CamPBell
eDitorial aDviSory BoarD
David W. Devonshire, evPevP/CFo retired,
CFo, motorola inc.
Bruce edwards, Chairman emeritus,
Powerwave technologies inc.
David e. Farber, the rvH Group, merrill lynch
Frank r. Gatti, CFo & SvP, etS
James C. Johnston, President, Johnston Co.
Stephen Payne, americas Working Capital leader,
ernst & young llP
albert a. Pimentel, CFo & Coo, mcafee inc.
ellen B. richstone, Former CFo, rohr inc., Sonus
networks, and luminus Devices inc.
Kenneth J. Sanginario, Principal, northStar
management Partners
Debra Smithart-oglesby, Former CFo,
First america automotive
eDitorial oFFiCeS
focus on business, not IT
I think David Rosenbaum covers the sub-
ject of the CFO-CIO relationship quite well
in CFOs and CIOs: Can We Talk? (Decem-
ber 2011). History shows the IT function to be
far too technology-centric and not business-
centric enough. The career path for people in IT
is within IT, across enterprises, independent of
a career within an employer. IT has also dem-
onstrated that it is technology fadoriented,
rather than being focused on, or even aware of,
the strategy or requirements of the business of
ones current employer. The surveys referred to in your article show that the
majority (67%) of CIOs do not see themselves as a trusted partner or business
peer and even more (69%) do not see themselves viewed as a valued service
providerfor good reason.
A CIOs financial literacy is important, but even more important is lit-
eracy in the strategy and requirements of the business. The tyranny of the
technician is well known and widely experienced in business today. Cloud
computing is nothing more than another technology fad, and a retreaded one
at that. It is not a business strategy, but rather a wasteful opportunity to con-
sume resources converting to another technology platform instead of defining
and understanding the business processes supposedly being supported by IT.
Safety-Kleen CIO Mark Stone has it right: . . . if youre a CFO and your
CIO is not on the same wavelength, find a new CIO.
Don SherwooD
boulder, colorado
Your article CFOs and CIOs: Can We Talk? raises some interesting chal-
lenges and paradoxes:
CIOs who report to CFOsa frequent occurrence but logically a disconnect
Businesses struggling to get strategic decision support information out of
business systems but chasing buzz technologies like cloud computing before
addressing critical issues like precision configuration
Cost-centric IT management instead of business value management (be-
cause most people do not know how to do it) drives business systems further
away from where the real value lies.
jameS roberTSon
james a. robertson and associates
Via e-mail
letters
CFO
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letters
Send to: The editor, CFO, 51 Sleeper St., boston,
ma 02210, or e-mail us at: letters@cfo.com
Please include your full name, title, company
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CFO
CHAIRMAn & CeO Alan Glass
EVP & PuBlIshEr Rob Stuart
AdVErTIsIng sAlEs/PrOduCT dEVElOPmEnT
sEnIOr VP, ChIEF sAlEs OFFICEr lissa short
SenIOR Vp, e-MeDIA, MARKeTInG, &
AudIEnCE dEVElOPmEnT John e. pal
sEnIOr VP, PrOduCT dEVElOPmEnT Rich Rivera
Vp, MARKeTInG Phillip loFaso
OnlInE OPErATIOns mAnAgEr Jerry Xenos
dIrECTOr, sEArCh & AnAlyTICs Jeff goldstein
OnlInE OPErATIOns COOrdInATOr
David Gannalo
SenIOR MARKeTInG MAnAGeR Tiffany Coe
sEnIOr wEBCAsT PrOduCEr Joe Fleischer
wEBCAsT PrOduCEr Phil lavanco
nATIOnAl AdVErTIsIng OFFICE
New York Metro/New England/Ohio/Pennsylvania
Dulce A. Chicn, (212) 488-4718; fax: (212) 459-3007
New York/Southeast linda hooper, (212) 488-4722;
fax: (212) 459-3007 or (212) 541-5567
Midwest Benjamin Cairns, (312) 445-6524
West Coast Karin litcher, (650) 712-1922,
fax (415) 680-2373; Sarah Allen, (415) 655-6636
Business Manager ryan lightbody;
(212) 488-4711
whITE PAPEr lIBrAry
Kimberly leon (sales manager), lee hsieh,
Holly Karasinski, Diego Rodriguez, Greg Wiener,
(646) 556-7655; fax: (212)459-3007
CFO COnFeRenCeS
SenIOR Vp & DIReCTOR Deborah patton
dIrECTOr OF sAlEs, COnFErEnCEs
Deborah Hatcher
SenIOR MARKeTInG MAnAGeR Joseph Zerba
DeSIGn DIReCTOR John Fischer
MAnAGeR, COnFeRenCe OpeRATIOnS &
sAlEs suPPOrT lisa nelson
CFO ReSeARCH SeRVICeS
dIrECTOr OF glOBAl rEsEArCh sAlEs
Mike Slomba
sAlEs dEVElOPmEnT mAnAgEr Jeffrey stevens
FInAnCe DepARTMenT
SenIOR Vp & CFO peter Spinelli
COnTrOllEr Pete Badas
SenIOR ACCOunTAnT Allison Gurvich
ACCOunTInG ASSISTAnT Tara Weaver
OpeRATIOnS
DIReCTOR OF OpeRATIOnS melanie K. Beaulier
pRODuCTIOn DIReCTOR laura l. Iverson
sEnIOr dIrECTOr, AudIEnCE dEVElOPmEnT
Teresa A. Green
dIrECTOr OF OnlInE dEVElOPmEnT
Jiun Jye Chin
IT MAnAGeR Ben radlinski
hr AssIsTAnT roshelle lowe
OFFICE mAnAgEr & CrEdIT COnTrOllEr
lucy E. Bean
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PRUDENTIAL CAPITAL GROUP
PROVIDING STRATEGIC
CAPITAL THROUGH
CHALLENGING TIMES.
Prudential Capital Group has provided private capital to help
a wide range of companies meet their strategic challenges in
good times and bad for more than 70 years. We bring you:
LOCAL KNOWLEDGE: Our regional offce network offers
clients in-depth knowledge of local companies and market
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to convenient access to capital, responsive execution and
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To see what our clients say about their long-term
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2011. All data as of 9/30/11. Prudential Capital Group is a unit of Prudential Investment Management, Inc. a Prudential Financial company. Prudential Financial and the Rock logo
are registered service marks of The Prudential Insurance Company of America and its affliates.
Wanted: a Voice for Small business
FASB as Private Company Standards-Setter? (November
2011) misses a major point. The three-decades-old issue of
private standards is being addressed, once again, and thats
good. The problem is that the solutions being put forth
have one major shortcoming: there is no real representa-
tion of small business on the Blue Ribbon
Panel, the Financial Accounting Standards
Board, or the standards-setting groups of
the American Institute of Certified Public
Accountants.
Specifically, the one organization that
represents only practicing CPAs, the Na-
tional Conference of CPA Practitioners
(NCCPAP), is not represented. These are
the CPAs who deal with small businesses
on a daily basis, who prepare the financial
statements for small businesses, who as-
sist small businesses with their banking
and credit needs, and who understand the
problems and opportunities of small busi-
nesses.
Both FASB and the AICPA have had
30 years to come up with standards to help
small business. But until the recent reces-
sion and downturn of the U.S. economy,
neither organization really seemed to rec-
ognize that small business was a major part
of the nations financial system. GAAP was
the rule that was promulgated primarily to place controls on
publicly held companies, and small businesses had to cope
with it, in spite of the difficulties it presented.
Now the Blue Ribbon Panel has come up with a plan
that is supposed to give relief to small business. The mem-
bers of the panel are well meaning, but none really repre-
sents small business. One would get the impression that a
small business, to the panel, FASB, and the AICPA, is any
organization that is not a public company.
To have a discussion or plan for standards for small
business without representation by the NCCPAP will prob-
ably produce a warmed-over model of GAAP, rather than a
clear, concise set of new rules, planned and designed for the
millions of U.S. small businesses.
edwin j. Kliegman
massapequa Park, new york
can We cure market Volatility?
I am encouraged that the structural trading weaknesses and
faults inherent in the U.S. equity markets are finally garner-
ing some attention. Follow the Bouncing Stock (Novem-
ber 2011) touched on many aspects of the problem, but ne-
glected to tell the stories of the genesis of these issues and
also the role of supplemental liquidity providers.
It is quite clear that exchanges/participants and regula-
tory bodies are not eager to effect the changes necessary to
reduce volatility and level the playing field.
I challenge the listed companies to speak up and voice
their concerns, backed by the threat of removing their list-
ings. Perhaps then we might see substantive change.
edWard collinS
rye, new york
The myth of

collective Standards
The notion that standards can be set outside
of the individual enterprises doing the ac-
counting is pure fallacy (New Leasing Pro-
posals Continue to Draw Heat, Topline,
November 2011). Collective standards la
the Financial Accounting Standards Board,
the International Accounting Standards
Board, and so on are nothing more than an
exercise in futility. The individuals exis-
tence is independent of the collective. The
same cannot be said of the collective, which
is but a group of individuals. Without the in-
dividual, there is no group.
The take-away here is that for FASB/
IASB to legitimately set accounting stan-
dards, they must have the consent of all the
individuals who would be affected by the
standards-setting. Universal consent for accounting stan-
dards is absent, so the very existence of collective standards
coming from such bodies is illegitimate.
name WiThheld by requeST
Via e-mail
calculating People
When I first became a manager, I often thought of staff train-
ing and development activities as similar to an asset on the
balance sheet, something that would be used through time
for productive purposes (Power from the People, Novem-
ber 2011). For some efforts, where the benefits are identifi-
able, it is even possible to do rough ROI calculations.
daVid K. WalTz
Via e-mail
Whos more important?
There is really only one question for companies here (An
Eroding Compact, From the Editor, October 2011): Who
are more important: your employees or the people that gam-
ble on your stock?
john j. houghTon
Via e-mail
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The FAFs Blue
Ribbon Panel has
come up with a
plan that is sup-
posed to give relief
to small business...
but none [of the
members]
really represents
small business.
l
e
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t
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r
s
topline
Pitchers and catchers report to spring training in
just a few days, but at hillerich & Bradsby, manufacturer of
the iconic Louisville slugger baseball bat, new cFO Lawrence
Writer has been on the field since november.
in a sense, Writer will serve as the corporate equivalent
of a player-coach, since he holds the dual titles of cFO and
cOO. he was brought into the 127-year-old, family-owned
company to help oversee day-to-day operations and to ex-
pand its global footprint.
that means he will build on both a historic product
legacy (the companys museum displays Louisville sluggers
used by Babe ruth and dozens of other baseball legends)
and a long-standing relationship with Major League Baseball
(MLB), while also addressing everything from nonwood bat
technology and gloves to a social media strategy that gets our
name out there for the next generation of baseball players.
the company makes all of its wooden bats in the Unit-
ed states, usually from ash and maple trees grown on 6,000
acres of land that it owns in new York and Pennsylvania. the
manufacturing process is highly computerized, but Writer
explains that the staining and engraving is all done by hand
in Louisville. its fun, he says. We put a board up that says,
now making bats for derek Jeter, or whomever.
One critical role that Writer will play is in guiding the
companys innovation agenda. sounding much like a major
leaguer himself, Writer says that you have only one product
season a yearyou get one shot. so the com-
pany holds an annual innovation summit that
brings together everyone from its own test
engineers to coaches and players from Little
ManuFaCturing
In the Swing of Things
Think Big:
Hillerich & Bradsby
wants its sporting-
goods products,
including the iconic
Louisville Slugger
baseball bat, to
become major
hits in emerging
markets.
New H&B CFO Lawrence Writer: pushing the family business to innovate and
produce products more quickly because you get only one shot each season.
T
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League to MLB. It debuts its concepts
in the spring and brings new products
to market in the fall. Those products
include not only the companys famed
baseball bats, but also PowerBilt golf
equipment and the Bionic Gloves line
of sports and outdoor gloves.
That schedule requires care-
ful coordination, because aluminum
and composite bats are now made in
the Far East, which poses a challenge
regarding manufacturing and ship-
ping lead times. (Writer, in fact, spent
a week in China almost immediately
upon assuming his post at H&B, so-
lidifying a spirit of partnership with
the companys vendors there.) Further
complicating the companys produc-
tion cycle, H&B must build in time for
quality testing and, in the case of Little
League and some other organizations,
certification testing.
As a result, Writer wants to revise
the companys production calendar
in order to bring products to market
more quickly. Were looking at what
that means for all pieces of the pie, he
says, from the supply chain to fore-
casting to the ways in which marketing
is aligned with operations.
As for expanding H&Bs glob-
al presence, Writer says that while
baseball remains a predominantly
American pastime, the Asian market
is growing, most notably Taiwan and
Japan, but also Korea. The Caribbean,
Mexico, and Latin America market is
promising as well, although it is con-
siderably more price-sensitive, which
further underscores the need for
greater efficiency.
An accomplished triathlete,
Writer did something of a farm-team
stint at H&B before assuming his cur-
rent post, by spending six months
with the company as a consultant
while a director at AlixPartners. He
reports to CEO John A. Hillerich IV,
who is part of the fifth generation to
run the family firm. (For more on the
dynamic between family-owned firms
and nonfamily CFOs, see In the Fam-
ily Way, page 25.) scott leibs
innOvatiOn
Forging Ahead:

How to Get

Innovation Right
Companies often declare that innovation is a top priority and spend
hours in conferences and meetings discussing it, to little effect. Thats because
many businesses dont know what innovation really meansor what challenges
it presents, says Steve Faktor, former vice president and head of the Chairmans
Innovation Fund at American Express and the founder of Ideafaktory, a company
that develops patents and incubates start-ups. When you have something that
sounds cool and gives you hope that creativity will flourish in your business, peo-
ple gravitate toward it, Faktor says. But the reality is that most large organiza-
tions arent built to innovate.
To succeed, Faktor says, companies must be willing to occasionally can-
nibalize [their] own business and endure some growing pains as a new product
finds a market. Those arent easy decisions, and thats where the CFO comes in.
If an R&D team came up with a new technology that would replace or make obso-
lete a product with a predictable revenue stream, for example, would the compa-
ny push ahead with it, even if it meant taking a step back today in order to even-
tually take two steps forward? Is the CFO
prepared to talk people down from unreal-
istic expectations or help them avoid analysis
paralysis?
Faktor says that CFOs should set rea-
sonable criteria, using an uptick in adoption
rate as a measure of success, for instance, or
establishing trigger points at each stage of
development that will determine whether a
new idea continues to receive funding. Com-
pensation plans that reward people for tak-
ing careful risks can also help, because they
send a powerful signal that the company is
serious about innovation.
Perhaps most important, innovation
should not be something people forget about
when they leave the conference room. If a
company is truly innovative, Faktor says, it
wont need to call meetings to discuss its in-
novation strategy, because that strategy will
have become part of business as usual.
Marielle Segarra
A World of
InnovAtIon
Top 10 countries for innovation
as ranked by Inseads Global
Innovation Index
Ranking
Country 11 10 09
Switzerland 1 4 7
Sweden 2 2 3
Singapore 3 7 5
Hong Kong 4 3 12
Finland 5 6 13
Denmark 6 5 8
U.S.A. 7 11 1
Canada 8 12 11
Netherlands 9 8 10
U.K. 10 14 4
Rankings are based on a wide range of weighted and
nonweighted measures, ranging from countries
political and regulatory environments to education
systems, financial systems, and specific outputs
such as patents awarded.
Steve Faktor will offer a detailed view of how CFOs can help drive innovation
at our CFo Leadership Summit Conference in Orlando, March 1114. For more
details, see www.cfo.com/conferences.
t
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What does an embattled, post-downturn company do when it looks
up and sees distressingly few growth prospects? It puts on its rosiest-tinted
glasses and looks again.
a recent study of 184 senior finance executives conducted by CFo Re-
search services in conjunction with Ibm suggests that companies face a grow-
or-die imperative. as markets continue to flounder, identifying new growth
opportunities will be key to maintaining profitability over the next two years,
say survey respondents.
after cutting to the bone during the downturn, many companies have all
but exhausted cost-control as a means of protecting the bottom line. Fully half
of senior finance executives agree strongly that cost reduction will not be suf-
ficient to maintain profitability over the next two years, and an additional 30%
agree to at least some extent.
at the same time, an overwhelming majority (83%) say that it will be more
difficult to maintain profitability now than it was the last time the economy be-
gan to rebound. Companies have little choice but to pursue growtheven if it
means taking on unprecedented levels of operating and financial risk.
Fortunately, senior finance executives appear to be optimistic about
growth opportunities. but to what extent that optimism reflects an actual eas-
ing of pressures, versus being fabricated out of necessity, is an open question.
Matt surka
grOwth
COmpanies
Squint
If You
Have To

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(
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,

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k

(
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m
)
why growth is
imperative
Which of the following statements
best describes your companys primary
business objective ...
over the past three years?
Controlling costs to maintain
profitability
43%
Identifying new growth opportunities
33%
Capturing market share from
competitors
19%
Other
5%
over the next two years?
Identifying new growth opportunities
52%
Capturing market share from competitors
26%
Controlling costs to maintain profitability
17%
Other
5%
Source: Strategies for Better Business Insight, CFO Research
Services in conjunction with IBM, November 2011
The U.S. Postal Services Decem-
ber decision to decrease the expected
standard delivery time of first-class
mail to two-to-three days could have a
negative impact on companies working
capital.
Indeed, the move could cost
a U.S. company with $10 billion in
revenues up to $100 million in working
capital, according to Veronica Heald,
a practice leader at REL Consulting,
a division of The Hackett Group that
focuses on working capital. She esti-
mates that 60% of payments received
in the United States are via mailed
checks; therefore a slowing of first-class
service could create a lag both in the
distribution of invoices and the receipt
of payments.
Smaller companies in particular
may feel the pain. Heald suggests that
companies that have yet to embrace
e-invoicing explore the option. (The
initial administrative burden can be
significant, however; a company has to
be sure customers accounts-payable
departments can accept invoices by
e-mail or other means, and establish a
way to acknowledge payment was re-
ceived.) Companies should also beware
of customers that want to continue
receiving paper bills (some companies
see it as a way to delay payments be-
cause they calculate the due date from
the date they receive the bill versus the
invoice date; companies should clarify
specific payment terms). And consider
billing more frequently. When trea-
sury comes knocking at the end of the
month, thats when everyone rushes
to get their invoices out, says Heald.
If there is a silver lining in the prospect
of slower mail, it could be that com-
panies will take a fresh look at how to
improve a basic, but important, aspect
of working capital. david M. katz
wOrking Capital
Mail Crawl
How a midsize restaurant group is earning a bigger piece of the pie.
On a smarter planet, midsize businesses need analytics to better serve their customers, operate more
efciently and foster growth. Papa Ginos Inc., the Boston-based pizza and sandwich chain with about 150
corporate employees, was sitting on a gold mine of untapped sales, marketing and operational data. However,
they needed a better way to leverage all this powerful data to make better decisions for their company. Working
with IBM
and Business Partner QueBIT, they deployed a business analytics solution based on IBM Cognos

software that quickly transformed their data into actionable business insights. Analytics helped them discover that
reward members visit their restaurants 35% more frequently and spend 50% more on online transactions. With
new insights into the impact of their loyalty program, they can develop offers based on purchase patterns
to increase the size of orders and purchase frequency. To see how IBM and our Business Partners can help your
midsize business work smarter, visit ibm.com/engines/pizza. Lets build a smarter planet.
Midsize businesses are the engines of a Smarter Planet.
How might analytics help your business? Tell us on:
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be trademarks of IBM or other companies. A current list of IBM trademarks is available on the Web at www.ibm.com/legal/copytrade.shtml. International Business Machines Corporation 2011. All rights reserved.
facebook.com/MidmarketIBM
twitter.com/MidmarketIBM
L
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In Its most recent 10-K fil-
ing, computer giant Hewlett-Pack-
ard lists among its business risks
the development of cloud-based
solutions, which would require the
company to transition to an envi-
ronment characterized by cloud-
based computing and software being
delivered as a service.
transition has been the order
of the day at HP for some time now,
and not just in terms of its tech-
nologies. Last August, former ceo
Leo Apotheker announced that HP
would abandon its touchPad tab-
let (hardware, not software), essen-
tially writing off its investment in
the Webos operating system it got
when it acquired Palm for $1.2 bil-
lion in 2010. About a month later,
Apotheker was gone, replaced by
former ebay ceo meg Whitman.
she announced in December that
HP would release Webos to the
open-source community for further
development and would not, in fact,
give up on tablets.
Whitman, HPs third sitting
ceo since mark Hurds August
2010 ouster (after a sexual-harass-
ment investigation) in August 2010,
also intimated that HP will pull back
from its recent acquisitions binge
in order to focus on organic growth
and the r&D needed to confront
the very trends it cited as risks,
namely cloud computing and soft-
ware-as-a-service.
cFo catherine Lesjak, a 24-
year veteran of HP, has not been im-
mune to the tumult; in fact, she con-
ducted a fierce and public bidding
war with Dell for storage company
3PAr while serving as interim ceo
strategy
HPs
Interesting
Times
t
o
p
l
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between Hurd and Apotheker.
But she says the deal was worth
it. 3PAr is the architecture of the
future for cloud storage, she main-
tains, defending a $2.4 billion pur-
chase price that was criticized by
some as too high. Its built to be
scalable and allows customers to
build capacity as they need it. that
said, Would I have preferred not to
have done [the deal] in public? Yes.
Last month, standard & Poors
downgraded HPs long-term credit
rating from A to BBB+, citing con-
cerns over the firms inconsistent
strategies and senior management
turnover. the last 12 months have
been difficult for HP, admits Lesjak.
the consumer market was difficult
in 2011, she says. the tsunami in
Japan and the flooding in thailand
affected HPs manufacturing, inven-
tory, and supply chain. Also, we
didnt lead as well as we should have.
In 2012, she continues, echo-
ing Whitman, well step back, focus
on our cost structure, and grow the
top line. the first facilitates the sec-
ond. Financial professionals need to
be adaptable, to help the business
understand and anticipate changing
market conditions.
Indeed, Lesjak says that the last
few years, tumultuous as theyve
been, have been critical to the devel-
opment of HPs finance team. turn-
ing the old chinese curse, may you
live in interesting times on its head,
she says, not to sugarcoat it, but if
everythings going well, it may be
lucrative, but its just not as inter-
esting. david Rosenbaum
HP CFO
Catherine Lesjak
(left) served as
interim CEO
during a period
that saw Mark
Hurd (below, left)
depart, followed
by Leo Apotheker
(bottom) before
Meg Whitman
took the helm.
bumpy Ride
The many changes at HP have not
helped its stock price.
Source: Yahoo Finance
20
25
30
35
40
45
50
55
60
Oct Jul Apr Jan
2011
Oct Jul Apr Jan
2010
Oct Jul Apr
(Left):
Resources Global Professionals
Elisabeth Dick
Regional Managing Director
Lead Client Service Partner
(Right):
Caesars Entertainment
Jonathan Halkyard
SVP & CFO
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J
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17 C F O | J a n u a r y / f e b r u a r y 2 0 1 2 c f o . c o m
making m&a Safer
Here are four ways companies can mitigate some of the largest risks
of acquiring another business. b y V i nc e nt R y a n
questions and demanding more accountability.
There is also less margin for error economical-
ly, points out Reeve Waud, managing partner at pri-
vate-equity firm Waud Capital Partners. The M&A
market has become much more efficient, Waud says.
Many potential buyers review the asset or business
thats up for sale, and the acquirer inevitably pays a
very full price. That leaves it less room if it is wrong.
To raise the probability of a deal being successful,
acquirers are rethinking how they underwrite risk, as-
sess value, and perform due diligence on previously ig-
nored aspects of transactions, like customer attrition.
They are also trying to prevent their share price from
getting slammed as a result of placing a fair value on
the acquired assets. Below are some of the things ac-
quirers will do to minimize acquisition risks this year.
efore Michael Hagedorn,
finance chief at $12.1 billion banking firm UMB
Financial, pulls the trigger on a deal, he tests it
using at least three sets of assumptionsopti-
mistic, neutral, and pessimistic. Sometimes he
uses five. Why? So that management knows
[just] how bad this thing could get if it were to
go bad, he says.
Overcautious? Some CFOs might say so.
After all, contemplating worst-case outcomes
in a merger or acquisition is not something
businesses are in the habit of doing. But in the
current climate, more executives are allowing
themselves to imagine the worst, gauging M&A
risk by scenario planning, stress-testing dis-
counted cash-flow models, or by just assuming
that a merger will have negative side effects.
Global economic conditions have height-
ened overall M&A risk and are making buyers skittish:
deal volumes cratered in the fourth quarter of 2011.
No one wanted to be the first to step out of line before
there was a better sense of the economys direction,
says John Bogush, a partner at The Highland Group,
an M&A consultancy.
This year, it seems, things wont get any easier.
The margin of error for management is smaller be-
cause shareholders and boards are much less will-
ing to accept the risk of an M&A failure, Bogush says.
Rich Jeanneret, Americas vice chair of transaction ser-
vices at Ernst & Young, says, Boards are very inter-
ested in top-line growth, and they are asking a lot more
capital markets
B

Focus on what
drives the business
When assessing an acquisition, the
deal team needs to weed through co-
pious amounts of data to focus on the
three or four key things that are most
important to creating value post-
acquisition. If you dont understand
[those items], you dont understand
the business well enough to buy it,
says Waud.
In the home-alarm industry, for
example, a sector in which Waud Cap-
ital has acquired 36 companies, the
drivers are the percentage of custom-
ers a company loses every year; the cost
to gain a new customer through the
companys own marketing efforts; and
the cost to acquire a customer in oth-
er ways, such as buying accounts from
a competitor. Its no coincidence that
all three drivers relate to retaining and
gaining customers; in a low-growth
economy, existing customers are gold.
Perhaps the greatest risks in
M&A, in fact, involve the intangible as-
sets of the sellerparticularly its cur-
rent customers, says Howard Johnson,
managing director of Veracap Corpo-
rate Finance. The question a buyer
should ask is, What creates stickiness
between a customer and the company
as an organization, as opposed to a par-
ticular individual? says Johnson. If
there is no barrier to exit, that should
send up a red flag.
dont rely on
revenue growth
In a recent Ernst & Young survey, 40%
of executives said that deals most often
fell short of expectations because rev-
enue gains didnt materialize. Stake-
holders are interested in the top line,
says Jeanneret. Companies that meet
earnings targets due to cost-cutting are
often punished by the market.
Knowing that, however, may
cause acquirers to overemphasize the
potential revenue boost from a take-
over. Generally, I dont like to assume
any revenue growth, says Waud, be-
cause that puts the success or failure
of a deal at the mercy of something he
cant control. I would rather deter-
mine whether or not a deal was going
to be good or bad based on flat revenue
and how I can improve the business,
he says.
Cheryl Beebe, CFO of Corn Prod-
ucts International, a $5 billion maker of
sweeteners and starches, says cash flow
and the value derived from cash flow
are key. As a publicly traded company,
Corn Products focuses on a deals re-
turn on invested capital. You can do
a strategic acquisition and get a boost
in revenues and operating income, but
that doesnt necessarily mean you get
c
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m
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k
e
t
s
a return on invested capital that ex-
ceeds your cost of capital, Beebe says.
Thats a little tougher criteria.
There are plenty of other cri-
teria that companies should be us-
ing to guide the deals they invest in.
For example, in 2010 UMB Finan-
cial diversified the revenue stream of
its mutual-fund business by buying a
fixed-income shop, Reams Capital
Management. Reamss offerings com-
plemented UMBs international and
midcap equity products. We saw what
was happening with interest rates, and
from a risk perspective decided that
getting into the fixed-income busi-
ness was something that made sense
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o

cheryl beebe, cfo of corn products international: It helps
a tremendous amount to really know what youre buying, and to know
how much you will and wont pay.

for us and our strategic plan, says CFO
Hagedorn. The revenue streams com-
ing out of our Scout mutual funds are
less risky because theyre not depen-
dent on equity markets.
Make risk Mitigation
central to the deal
Hagedorn does something that can
make his business managers scowl. He
runs different hurdle rates depending
on the riskiness of the investment. The
lower the hurdle rate, of course, the
more likely a given deal will get done.
Certain businesses just present more
risk. A pure banking franchise with a
balance sheet has a lower hurdle rate
than a fee-income business, he says.
While a fee-income business is com-
pletely dependent upon continuing to
perform a certain activity to get a fee-
income stream, a banking business
provides more levers to pull, like the
ability to raise or lower deposit pricing
and loan rates.
Risk management also can be in-
tegrated into other aspects of deal as-
sessment and execution, like the cal-
culation of proposed synergies. Corn
Products has found a way to manage
and minimize the risk associated with
delivering on a specific dollar amount
of synergies. For cost-savings syner-
gies, the companys management has
to be able to define the action associat-
ed with a cost savings. Process owners,
not just the corporate-development
staff, have to agree to the number.
So if Corn Products promises a $5
million savings in IT, the chief infor-
mation officer has to document how
that $5 million target will be achieved,
Beebe says. That contrasts with the
more common approach, in which
a top-level modeling assumption is
made that savings will amount to x%
of projected revenues.
A third way to incorporate M&A
risk mitigation is to put more structure
into a deal, which is especially useful in
purchases of private companies. Give
the sellers the price they want, but
structure the deal in a way that helps
to mitigate the risk, Veracaps John-
son advises.
More buyers are using instru-
ments like promissory notes attached
to liability and performance condi-
tions. They are also spending more
time on postacquisition contracts that
keep sellers engaged in the business.
UMBs Hagedorn says that five years
ago buyers couldnt get earn-outs, but
UMB has recently negotiated some
that last as long as five years.
Forecast
the accounting
With management on the hook for
delivering tangible results that boost
earnings per share, acquirers are more
aware of a deals accounting risk:
How will the transaction affect the
buyers financial statements, and in
particular will it be accretive to earn-
ings per share after the close?
We look at both cash flow and
the accounting, says UMBs Hage-
dorn, because oftentimes in the ac-
counting you have to record certain
transactions that have no bearing on
the cash of the company. Even though
cash is king in my mind, it is important
to know what is going to happen to our
financial statements as the public sees
them.
Foreseeing how the amortiza-
tion of intangible assets will play out
in future earnings periods and wheth-
er yearly impairment tests will cause
goodwill to be marked up or down is
difficult. Investment bankers dont
look at the accounting consequenc-
es of a deal, for one. And much of the
determination of how to allocate the
purchase price among tangible and in-
tangible assets, as well as goodwill, is
reviewed by auditors only after a deal
closes, points out Veracaps Johnson.
Says CFO Beebe: Even though you
paid a certain price, you still have to
go through all of the discounted cash
flows for all of the entities. There are
many unknowns until you get down to
the books and records, which you dont
typically get in due diligence.
With Corn Products Internation-
als $1.4 billion acquisition of National
Starch and Chemical Co. in 2010, Bee-
be and her team estimated the compa-
nys EBITDA before and after purchase
price allocation and presented the
numbers in the first earnings report af-
ter the deal was announced.
If there is a final risk-mitigation
technique that might be especially im-
portant in 2012, its patience. Compa-
nies that rush into deals are rarely glad
they did. National Starch and Chemi-
cal was put on the block by its owner,
AkzoNobel, in 2008. Corn Products
considered buying the food-ingredi-
ents business but thought the property
was overvalued, and the financial cri-
sis forced AkzoNobel to pull National
Starch from the market. Corn Prod-
ucts bided its time until 2010, when
AkzoNobel was in a selling mood again
and the price fell within the range
that Corn Products had determined it
would pay.
It takes discipline, but its impor-
tant to know how much youre going
to pay and how much youre not going
to pay, says Beebe. And it helps a tre-
mendous amount to really know what
youre buying. That minimizes the
risks and the surprises. CFO
VINCENT RyAN IS SENIOR EDITOR
FOR BANkING & CAPITAl MARkETS
AT CFO.
Give the sellers the price they want,
but structure the deal in a way that helps
to mitigate the risk.
howard johnson,
managing director, veracap corporate finance
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21 C F O | j a n u a r y / f e B r u a r y 2 0 1 2 c f o . c o m
Don t truSt, Verify
With antibribery actions on the rise, companies should monitor
their business partners more closely than ever.
b y S a r a h j ohnS on
FCPA provisions. Accused of facilitating bribes on
behalf of its corporate clients in several countries, in-
cluding Nigeria and Russia, the company agreed to pay
$82 million to the U.S. government.
Vetting Vendors
Companies FCPA compliance programs have gen-
erally focused on agents and freight forwarders, the
types of business partners that tend to get in trouble
with the law. Increasingly, however, companies are
scrutinizing suppliers as well.
Due diligence of suppliers is becoming tougher;
traditionally they have had to undergo only minimal
credit checks, but now they are being chosen and re-
viewed much more carefully. And suppliers increas-
he gist of the Foreign Corrupt pract-
ices Act is simple: U.S. public companies cannot bribe
government officials to win business. For the most
part, executives understand the point of the 34-year-
old law and have designed compliance programs to
minimize the risk of their company or business part-
ners violating the FCPA.
Yet, straightforward as such compliance may
sound, when you start drilling into implementing it,
its actually very complex, says Bruno Grandguillotte,
chief compliance officer of IT distributor Ingram Mi-
cro. Matters get complicated when companies have
third parties do business on their behalf. Those parties
may be tempted to use additional funds to win over
accounts, push through permits, or speed up services
in places where bribery may be considered a normal
course of business.
Adding to companies bribery risk is a law that
went into effect last July, the U.K. Bribery Act. The
law affects all companies that do business in the Unit-
ed Kingdom, and is expected to have a broader reach.
Meanwhile, the U.S. Justice Department continues to
file a relatively high number of enforcement actions.
In recent years, regulators have warned compa-
nies through such actions to keep a careful watch on
their third parties. This point was made in November
2010 when Panalpina, a Swiss logistics firm, pleaded
guilty to criminal charges and settled Securities and
Exchange Commission charges that it had violated
risk management
T

ingly have to sign contracts that give
their customers the right to audit
them, and may also include an indem-
nification clause.
Distributors like Ingram Micro
have received a flurry of questionnaires
from large IT manufacturers whose
products they offer to resellers. The
forms can be as long as 60 pages.
Some of the questions are the
same, but because every vendor works
independently, each questionnaire is
slightly different, notes Tim Curran,
CEO of the Global Technology Distri-
bution Council. Currans trade associa-
tion is working with manufacturers to
develop a consistent electronic format
and shared platform to make the pro-
cess easier.
Questionnaires are just the start-
ing point for better vetting. But the
extra work comes with a high cost.
Large distributors with hundreds of
thousands of resellers, for example,
would have to spend between $3,000
and $6,000 per third party for proper
due diligence, says Rebekah Poston, a
partner at law firm Squire Sanders. Fi-
nancially speaking, it is prohibitive and
impossible to perform the kind of due
diligence the government wants you to
perform, she says.
Still, executives are finding that
extra vetting feels safer and could out-
weigh the reputational and investiga-
tion costs that would arise if a supplier
is ever accused of violating anticorrup-
tion laws.
Prompted by the passage of the
U.K. Bribery Act, Kimberly-Clark, the
consumer packaged goods giant, bol-
stered its FCPA-related compliance
program last fall. We have enhanced
the contract language around third par-
ties representing us, specifically in con-
nection with corruption, says Thomas
Mielke, Kimberly-Clarks chief compli-
ance officer. Now, the companys busi-
ness partners are not just required to
note that they are aware of FCPA com-
pliance and will follow antibribery laws;
some must also agree to be subject to
audits and to keep complete records of
their payments.
Ranking the Riskiest
In addition to contract revisions, some
companies are picking out their riski-
est suppliers for more-intense reviews.
These business partners are chosen
based on several factors, including the
countries they operate in, their history
with anticorruption laws, and whether
their board members are affiliated with
any government officials.
But companies cant thorough-
ly evaluate every single supplier for
FCPA risknor should they. By rank-
ing their suppliers based on risk fac-
tors, companies wont waste time
on those with the lowest likelihood
of causing serious problems. You
may have 10,000 suppliers, but they
are not all creating risk for you, says
Brian Loughman, a leader in Ernst &
Youngs Fraud Investigations and Dis-
pute Services Practice.
In other words, a company proba-
bly doesnt need to be overly concerned
about a small shop that provides cater-
ing services to its European branch of-
fice. But a situation in which an agent
is helping the company set up a physi-
cal presence in India should be looked
at with special care.
To evaluate the compliance of
more-questionable vendors, compa-
nies may hire yet another third party,
such as Forensic Risk Alliance. The
r
i
s
k

m
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n
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e
m
e
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t
firm will, for instance, compare a ven-
dors pricing with that of peer compa-
nies, since inflated charges could be a
red flag that the vendor could be hiding
improper payments.
Another reason to do extra vet-
ting: regulators may look favorably at
past due-diligence work. Liability can
be greatly reduced if youre running
a clean shop and can demonstrate you
run a clean shop, says Steve McGraw,
chief executive of software firm Com-
pliance 360.
When the worst happens and an
FCPA investigation begins, regulators
will be scrutinizing the firms compli-
ance program. Under the law, authori-
ties can nab companies and employees
not only on bribery charges but also on
failure to keep proper books and re-
cords. At that point, providing docu-
mented proof of proper due diligence
may be all a company can do to distance
itself from a corrupt business partner.
Companies dont get into trou-
ble for doing their processes poorly,
comments Thomas Fox, a consultant
who advises companies on their FCPA
compliance programs. They get into
trouble when they dont have any pro-
cesses, or when they have a process but
they dont follow it. CFO
SARAh JOhNSON IS SENIOR EDITOR
FOR RISK & COMPLIANCE AT CFO.
riskiest areas
Countries Considered
the most Corrupt
1. Somalia
2. North Korea
3. Myanmar
4. Afghanistan
5. Uzbekistan
6. Turkmenistan
7. Sudan
8. Iraq
9. Haiti
10. Venezuela
source: transparency internationals Corruption
perceptions index 2011
Financially speaking, it is prohibitive
and impossible to perform the kind of due
diligence the government wants you to
perform. Rebekah Poston, squire sanders
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23 C F O | j a n u a r y / f e B r u a r y 2 0 1 2 C f o . C o m
The CosT of ConfidenCe

Two proposals aim to increase auditor independence, but may cause problems for Cfos.
b y Da v i D M. K a t z
f CFOs had any doubt
about whom the Public Compa-
ny Accounting Oversight Board
serves, the audit watchdog spells
it out in big capital letters at
the top of its Website: PCAOB
OVERSEES THE AUDITORS OF
COMPANIES TO PROTECT IN-
VESTORS.
In other words, the board
doesnt see itself as primarily serv-
ing finance chiefs or the com-
panies that employ themand
certainly not the audit firms it reg-
ulates. That distinction became
crystal clear last year with the
boards issuance of two concept
releases, one on providing more-robust accounting
reports and the other on boosting auditor vigilance. In
both cases, the board said it was responding to inves-
tor concerns.
With public comment on the releases in, the
PCAOB is now mulling whether to turn them into full-
blown regulatory proposals. Such proposals, if enact-
ed, would produce dramatic changes in the client-au-
ditor relationshipand finance chiefs see themselves
as being on the wrong end of those changes. The sug-
gested moves would create a lot of tension between
finance executives and auditors, says Clyde Hosein,
CFO of Marvell Technology Group, and a lot of work
for management that [would be] nonproductive.
accounting
I
ExpEnsivE narrativEs
The first concept release, issued last June, introduced
the idea of requiring auditors to supply a narrative
about their clients in addition to their usual pass/fail
opinions on company financial reports. Dubbed the
Auditors Discussion and Analysis (AD&A), the prose
paragraphs would resemble the Managements Dis-
cussion and Analysis contained in corporate quarterly
and annual reports.
While the cost of a mandatory AD&A report
may not be readily apparent, it could be sizable. Dee
Mirando-Gould, a director in the financial manage-
ment practice at consulting firm MorganFranklin,
recalls the issue being very actively discussed dur-
ing her tenure as an associate chief auditor with the
PCAOB from August 2008 through January 2011. In-

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24 C F O | j a n u a R y / f e b R u a R y 2 0 1 2 c f o . c o m
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vestors on the boards Standing Advi-
sory Group (which also includes audi-
tors and public-company executives,
among others) wondered why AD&As
would cost companies more money,
says Mirando-Gould. If the narrative
merely amounted to what the auditor
was already communicating to the cli-
ents audit committee, why couldnt
the auditor simply use that for the
AD&A?
The reason is that the report sup-
plied by the auditor to the audit com-
mittee is often a bare-bones summary
that the auditor elaborates on during
audit committee meetings. If an au-
ditor is going to prepare an [AD&A],
its going to take a lot longer to prepare
it, and a lot more review time, says
Mirando-Gould, who notes that as
many as three audit partners might
have to opine on it. The result: more
billable hours.
Auditors themselves have also
raised ethical questions about the
AD&A. Some say it would create an
awkward situation in that they would
be required to discuss the nature of
managements financials. Should the
auditor be in a position to create orig-
inal material [concerning] financial
statements, asks Mirando-Gould, or
is that really the responsibility of man-
agement?
Costly transitions
The PCAOBs second concept release,
issued in August, offered a plan to boost
auditor independence by mandating
audit-firm rotation. The plan would
limit the number of consecutive fiscal
years that a registered public account-
ing firm could serve as the auditor of
a public company. Among the ques-
tions the board posed in the release was
whether it should consider a rotation
requirement only for audit tenures of
more than 10 years or only for the audi-
tors of the largest companies.
Many finance chiefs think that be-
ing compelled to change audit firms
every 5 or 10 years would be especial-
ly disruptive. Roger Moody, CFO of
Nanosphere, notes that the medical
diagnostic toolmaker enjoyed a par-
ticularly smooth transition when its
auditor, Deloitte, had to switch lead
audit partners. Aided by a relation-
ship partner who wasnt involved with
the company on a day-to-day basis, the
firm and the client worked to find a
lead partner who was a good fit, ac-
cording to Moody.
Mandatory audit-firm rotation,
however, would make it much hard-
er to provide that seamless transi-
tion we had when we had the partner
transition, he says. Im quite sure it
wouldnt be as seamless, and could cre-
ate problems for shareholders by caus-
ing hiccups or confusion [in the com-
panys financial reporting].
Theres little doubt that such dis-
ruptions would have costs attached to
themespecially in the early stages
of the transition. If you have a whole
new engagement team with no history
[with the company], theyre going to
have to look at past work papers. Its
going to take longer to do the audit in
the first year, even the first two years,
says Mirando-Gould.
Another cost would come in the
form of the hours that CFOs and fi-
nance staffers would have to spend on
the auditor transition, instead of on
more-worthwhile endeavors. Theyre
all busy doing normal work, and they
dont necessarily build in time to deal
with the auditors in such situations,
says Mirando-Gould.
Whats broken?
In view of such arguments against the
two concept releases, some CFOs are
puzzled about why the PCAOB has
served them up now. Whats broken
that theyre trying to fix? asks Mar-
vells Hosein.
For its part, the board has alluded
to a growing number of auditor mis-
takes. The PCAOBs inspectors have
identified more issues than in pri-
or years, James Doty, the overseers
chairman, said in 2011. The board is
troubled by the volume of significant
deficiencies, especially in areas identi-
fied in prior inspections. The assump-
tion is that such errors stem from au-
ditors increasingly cozy relationships
with their clients. Hence the need for
audit-firm rotation.
But a more compelling reason
may be the loss of investor confidence
following the collapse of many prom-
inent financial-services firms in 2008,
starting with Lehman Brothers. Inves-
tor representatives have. . . made clear
to the PCAOB that they do not under-
stand how, during the height of the fi-
nancial crisis, virtually all companies
that received government assistance,
or went bankrupt, were given clean au-
dit opinions, Steven Harris, a member
of the oversight board, said in a speech
last fall.
As long as that question lingers,
the regulatory pressure on auditors
and their clientsis sure to grow. CFO
DAvID M. KATz IS NeW YORK
BuReAu CHIeF AND SeNIOR eDITOR
FOR ACCOuNTING AT CFO.
These proposed changes could create a lot
of tension between finance executives
and auditors and a lot of nonproductive
work for management.
Clyde Hosein, CFO, marvell teChnOlOgy grOup
J
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That shock thrust Leonard Jr. into the top post
overnight. He rose to the challenge; two decades after
the tax problems came to light, the company is thriv-
ing and bigger than ever, with four grocery stores, nine
wine shops, and 2,000 employees; revenue has grown
from $147 million in 1993 (when Leonard Jr. took
over) to around $400 million today.
But the story didnt have to turn out that way, and,
in fact, it rarely does. Few family-run companies make
it past the first generation; even fewer make it to the
third or fourth. When you get to the point of succes-
siona retirement or a sudden deathless than half
of all family companies have a formal plan in place,
says James Mattie, a partner with PricewaterhouseC-
oopers who specializes in family businesses. That can
rom childhood, Stew Leonard Jr.
was groomed to take over his fathers Connect-
icut-based dairy and retail grocery business. He
started by unloading trucks and stocking shelves
and moved into management roles after gradu-
ating from college with an accounting degree.
After a stint away at business school, he returned
to the company in the early 1980s, at which time
his father decided that Stew, who had expressed
some ambivalence in the past, was serious about
succeeding him. He gave his son the title of
president, not to mention a desk next to his in
the CEO office.
Still, the transition was bumpy. I had a ti-
tle, but it wasnt like I was really in charge, says
Leonard. His enthusiasm for helping the fast-
growing business grow even faster was mingled
with frustration at being in the long shadow of
his father, as well as several uncles and other
family members. His fathers shoes looked to be par-
ticularly difficult to fill, because he was a well-known
and well-liked entrepreneur who once received a Pres-
idential entrepreneurial excellence award from Presi-
dent Reagan and had been hailed in books and maga-
zines as a success story.
Then, the unthinkable happened. Leonards fa-
ther and two uncles were accused of tax fraud and ul-
timately convicted of evading $17 million in taxes over
10 years. Leonards father was sent to prison for more
than 3 years. (His brother was later convicted of simi-
lar but unrelated tax charges).
strategy
In The famIly way

cfos who work for family-owned companies can be invaluable advisers,
but often remain on the outside looking in. b y A l i x S t uA r t
F
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be especially devastating when family
members are at odds with one anoth-
er and when there are no outside board
members or others who can step in to
fill the gap.
CFOs can play a variety of roles
in helping family businesses avoid
such crises, though becoming the next
company leader is not likely one of
them. You come into a family busi-
ness knowing youre not going to be
the president or CEO as long as theres
someone in the family who can do it,
says Thomas Pohmer, CFO at P.C.
Richard & Son, an electronics retailer,
since 1991.
Mattie agrees: Our survey found
that 60% of family-business owners
expect family members to assume key
roles, but when it comes to the CFO
post, most CFOs are nonfamily mem-
bers. While a shock may thrust a non-
family CFO into the spotlight tem-
porarily, finance executives at such
companies can do themselves and
their companies a favor by encourag-
ing the family to plan ahead.
Hard-Won Wisdom
Today, rule number one at Stew Leon-
ards is to make sure that no one joins
the company out of a misguided sense
of duty or entitlement. With the old-
est of the next generation now in their
20s, Leonard says a new policy holds
that none of our kids can work at the
company until they work outside it for
three years after graduating college.
That fits the path he took, as well
as his two sisters, who are
also involved in the busi-
ness. One sister spent
time in France studying
baking and becoming a
cheese expert before coming back to
the business to start an in-store bak-
ery. The other studied management at
The Walt Disney Co. before returning
to the family business to build out its
human-resource function.
The company is currently in the
process of setting up an advisory com-
mittee of four nonfamily members, in-
cluding an industrial psychologist, to
review job applications from family
members who complete the three-year
requirement. Were trying to make it
so that family members dont have to
decide on their children; we want it to
be market-driven, says Leonard.
Whether or not family members
will be required to spend time outside
the business is a major decision, and
one that families should consider be-
fore the next generation begins to go to
college, says John L. Ward, co-director
of the Center for Family Enterprises
at the Kellogg School of Management
and a consultant to Stew Leonards. His
opinion: A significant amount of out-
side work experience is important. It
gives people an opportunity to learn in
a different environment. It also helps
them gain credibility at the company.
all in tHe Family
At P.C. Richard & Son, current presi-
dent and future CEO Gregg Richard,
47, says he learned the business at his
grandfathers knee, and sees no need to
go outside the company for training.
In business since 1909, P.C. Rich-
ard has grown from a hardware store to
a $1.5 billion company that competes
with Best Buy. Greggs father, Gary, be-
came president in 1980 and later CEO
when Greggs grandfather A.J. passed
away at the age of 95. Gregg, president
since 2004, is now following a similar
staged transition behind his own fa-
ther, who will certainly be involved
in the business until the day he dies,
Gregg says, though he has already be-
gun to lessen his involvement.
PwCs Mattie says the stay-in-
side approach can be as successful
as the one Stew Leonards is employ-
ing, provided the range of experienc-
es gained by the heirs apparent is still
broad. In a larger business, making the
rounds and spending meaningful time
in each department can be a good sec-
ond option to going outside, he says.
Serving on outside boards and other
nonbusiness projects can also help to
broaden a family members business
acumen.
Looking ahead, Gregg says its a
little early to set out a path for his own
children, who range in age from 12 to
23, though the conversation at home
often turns to the business. Absolute-
ly his preference would be for a family
member to take over, if they have the
ability and humility to run the compa-
ny, he says. But if theyre not capable,
were not going to put it in their hands
and put us out of business. CFO
ALIx STuART IS SEnIOR EDITOR FOR
GROWTH COMPAnIES AT CFO.
s
t
r
a
t
e
g
y
A fAmily AffAir:
The Leonards (left to
right): Stew Jr., Tom,
Beth, Jill, Stew Sr., and
Marianne. No family
member can join the
business until he or she
has worked outside it.
You come into a
family business
knowing youre
not going to be the
[company leader]
as long as theres
someone in the fam-
ily who can do it.
ThomAs Pohmer,
CFO, P.C. RiChaRd & SOn
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The new TalenT mix

finance chiefs are bolstering their strategic roles by hiring more fP&a help.
b y Da v i D Mc C a nn
Specifically, companies need finance people
who not only bring analytical skills but also influenc-
ing skills. They also require staffers with the ability to
work across functions and, most important, the confi-
dence to be credible business advisers, says Jeff Thom-
son, president and CEO of the Institute of Manage-
ment Accountants.
The most desirable finance staffer, says Donald
Kilinski, CFO practice leader at recruiting firm DHR
International, is a CPA who then gets an MBA. Such a
person may be more able to advise on strategic matters,
ts not news that todays CFOs are
more strategically oriented than many of their prede-
cessors. But they are now trying to bring more of that
analytical mind-set to their staffs, by adding more fi-
nancial analysts than other types of finance positions.
Compared with just two or three years ago, new
hires are more likely to be financial planning and anal-
ysis (FP&A) staffers than technical accountants ded-
icated to financial reporting. Companies have also
stepped up the training of existing accounting and in-
ternal-audit staff for redeployment to FP&A and man-
agerial accounting roles.
For many organizations, factors driving the shift
include a now-well-oiled machinery for achieving Sar-
banes-Oxley compliance that needs less maintenance
and three years of economic turmoil that make cre-
ative growth strategies more crucial than ever.
In the latest Duke University/CFO Global Busi-
ness Outlook Survey, 48% of responding CFOs said
that, given an opportunity to add head count, they
would most likely bulk up FP&A staff. Only 31% said
the same for accounting/financial reporting.
To be sure, firms are still adding accountants, and
finance departments are growing overall. More survey
participants (27%) said theyve increased accounting
staff over the past two years than decreased it (20%).
But there is clearly a growing preference for those
with broader business training. More than 2.5 times
as many survey respondents (16%) have added people
with MBA degrees than subtracted them (6%).
human capital
I

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c
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p
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a
l
such as what projects should be funded,
whether something should be acquired,
built, or bought, and whether products
or services should be eliminated.
At Sandoz Pharmaceuticals North
America, a $3.2 billion unit of health-
care giant Novartis, the number of peo-
ple in the business planning and anal-
ysis department has grown 25% since
2008. Thats good for the finance func-
tion overall, allowing it to be a bigger
player in the firms cross-functional de-
velopment efforts. We now have a bet-
ter seat at the table that lets us do our
jobs better, says CFO James Masta.
Mastas group now has dedicated
FP&A staff to support both business
development and research and devel-
opment. The former allows finance to
be at the forefront of negotiations with
its suppliers, for example. While busi-
ness development might just want to
go in and close a deal, we can tailor it to
fit with our budget constraints and to
what makes most sense in getting value
from that agreement, Masta says.
The added financial-analysis mus-
cle helped the company score a big win
in licensing contracts with drug com-
panies. Historically, Sandoz, which dis-
tributes generic drugs, profited in the
earlier part of the contract periods but
often got stuck near the end with inven-
tory that it had to sell for a loss. Now the
contracts carry stop-loss clauses de-
signed to prevent that scenario.
no longer sarboxed in
At Worthington Industries, the inter-
nal-audit department spent about sev-
en years focused heavily on perfecting
internal controls for Sarbanes-Oxley
compliance, says CFO Andy Rose. By
late 2008 the company was in good
shape on that front, so it shifted the
groups efforts to working more with
business units on process improve-
ments. Some people had to be trained,
and the company eliminated two posi-
tions from its internal-audit staff.
At the same time, Worthington
has doubled the number of people
dedicated to mergers and acquisitions.
The publicly held, $2.5 billion metals
manufacturer has made seven acqui-
sitions, as well as three divestitures, in
the past two years.
As a result, the M&A group ex-
panded from 1.5 dedicated people to 3,
including a new hire and 50% of a trea-
sury staffers time. The finance depart-
ment also redeployed people tempo-
rarily according to the requirements of
specific deals. For example, a regional
controller was assigned for 10 months
to one transaction, spending 6 months
on due diligence and 4 on integrating
the acquired firm into Worthington.
Smaller companies are experienc-
ing similar changes. In 2009, Safeguard
Self Storage shed two accounting posi-
tions after streamlining its transaction-
al processes and has not refilled them.
We have only 11 people in account-
ing and finance, so cutting 2 was a big
swipe at the staff, says Mark Rinder, a
CFO with executive outsourcing firm
Tatum who is currently Safeguards fi-
nance chief. Rinder says he now spends
most of his time with his head of FP&A.
It is with him that I am able to help
our CEO and vice president of opera-
tions achieve their strategic objectives
by mining data and finding opportuni-
ties, Rinder says.
The global imperaTive
Some argue that an emphasis on FP&A
over accounting is misguided. Jona-
than Schiff, an accounting profes-
sor at Fairleigh Dickinson University
and an adviser to large corporations,
points to new and pending regulation
from the Dodd-Frank Act and inter-
national financial reporting standards,
major changes in tax law, and the im-
pact of globalization as areas where
companies will need accounting ex-
pertise. In China alone, there are U.S.
GAAP, IFRS, and Chinese accounting
standards to understand and follow.
There is a raft of technical knowledge
thats needed, Schiff says.
Still, says Peter McLean, who
heads the global financial officers prac-
tice at recruiter Korn/Ferry, expanding
into emerging markets requires close
partnering between finance and opera-
tional management to allocate capital,
which translates into a need for great-
er FP&A expertise. CFO
DAvID McCANN IS SENIOR EDITOR FOR
HUMAN CAPITAL & CAREERS AT CFO.
PLAN ON IT
Given an opportunity to add
finance/accounting head
count, which area would you
most likely try to bulk up?
Financial planning 48%
and analysis
Accounting/financial 31%
reporting
Internal audit 7%
Tax 6%
Treasury 2%
Other 5%
Source for both charts: Duke University/CFO
Magazine Global Business Outlook Survey
ACCOUNTANTS WITH VISION
Which of these statements do you agree with?*
Many of our accountants could, with little or no training, 21%
be redeployed to more-strategic roles.
Many of our accountants could, with training, be so redeployed. 36%
Few or none of our accountants could be so redeployed. 34%
Accounting is a strategic as well as a technical endeavor. 44%
Accounting is not currently a strategic endeavor, but it should be. 20%
Accounting is not a strategic endeavor. 12%
*Participants were asked to check all that applied.
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Dot every i. Cross every
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Where the money is,

anD the security isn t

cyber thieves are increasingly targeting small and midsize businesses, and why not?
most smbs do little to protect themselves.
b y R us s b a nha m
esterdays hackers, whose
exploits were often designed to earn brag-
ging rights within the hacker community,
have given way to far more sophisticated
cyber criminals in pursuit of cold, hard
cash. Some penetrate databases to steal the
personally identifiable information (PID)
of employees and customers. Others steal
intellectual property and business data.
Some use it, while others sell it to other
criminals.
Which companies are hackers targeting? The
main focus of hackers seeking PID is midsize com-
panies, says Paul Viollis, CEO of Risk Control Strat-
egies (RCS), a security and investigative firm. Why?
Theyre perceived as the path of least resistance.
Midsize organizations with up to 100 employees
and $100 million a year in revenue lack the securi-
ty budgets of their big-business peers, explains Tim
Matthews, director of product marketing at Syman-
tec, a leading security systems provider.
A recent Symantec survey of more than 2,000
small and midsize enterprises found that 73% had
been victimized by cyber attacks, and the cost can-
not be measured by dollars alone. Theres always the
growth

companies
Y
risk of customers no longer conducting business with
you, Matthews says. Once your reputation is tar-
nished, shutting down becomes a very real possibility.
Breaking and entering
Midsize enterprises are vulnerable to a variety of ex-
ploits, including phishing, in which employees are
lured to phony Websites through e-mail or IM; SQL
injection attacks that invade operating systems to gut
the contents of poorly designed websites; bots that take
over machines, turning them into zombies that crim-
inals can controlthe list is long. Legacy systems that
havent been diligently patched or upgraded to guard
against new threats are particularly vulnerable.
Social engineeringthe art of tricking people
has caused more security breaches than all external at-

g
r
o
w
t
h

c
o
m
p
a
n
i
e
s
security guru, and implement encryp-
tion, firewalls, intrusion detection,
and other security tools. But today, as
RCSs Viollis notes, how many mid-
size enterprises have cash to spare?
There are, however, measures
that wont break the bank, notes Alan
Wlasuk, CEO of 403 Web Security. He
suggests starting with a relatively inex-
pensive scan of your IT system to de-
termine its vulnerabilities, educating
your staff about the threat of social en-
gineering, and keeping up with securi-
ty fixes.
And, since hackers arent the only
ones breaking into databases (dis-
gruntled employees and those experi-
encing tough financial times are other
threats), its smart for CFOs to insist
upon background checks for new em-
ployees and the implementation of
strict data-access rules, such as mak-
ing sure HR cant access customer data
and sales cant access employee data.
Other relatively low-cost mea-
sures include mandating strong pass-
words (at least eight characters, a mix
of numerals and upper- and lower-
case letters). Customer data should
be kept off of laptops, smart phones,
and USB drives unless encrypted or,
at least, password protected. Also,
its not smart to store unneeded data;
erase it.
Finally, consider buying cyber in-
surance. The cost has come down by
more than 20% from five years ago,
according to Robert Parisi, senior vice
president of insurance broker Marsh.
Plus, he says, insurers are tossing in
freebies such as security assessments,
victim breach notification, and credit
monitoring.
In an era where a lot of compa-
nies have cut into IT resources, in-
surance can be as important as the
firewall, Ponemon says. With cy-
ber insurance, ACEs Merrill adds,
sounding like a salesman, youre buy-
ing more than coverage; youre buying
peace of mind. CFO
RUSS BAnHAM IS A COnTRIBUTIng
EdITOR OF CFO.
tacks combined, according to 403 Web
Security, a web-application develop-
ment company.
Social engineering was behind a
March 2011 data breach at security firm
RSA. Employees received an e-mail and
an attached spreadsheet with the sub-
ject line, 2011 Recruitment Plan.xls.
Once opened, the spreadsheet installed
a backdoor in RSAs system that com-
promised the code of RSAs SecurId
token. Estimates of what RSAs parent,
EMC, spent to clean up the fallout have
run north of $66 million.
Weve estimated that a data
breach costs companies an average of
$214 per compromised record, and
this excludes litigation and reputation-
related issues that are difficult to mea-
sure, says Larry Ponemon, founder of
the Ponemon Institute, which focuses
on data-protection practices.
Ponemon agrees that today mid-
size enterprises are in the crosshairs.
Why hack into a major retail bank that
has topnotch security when you can
hack into a much smaller enterprise
that has access to the banks data?
Ponemon asks. Its easier to break into
the side door than the front door.
And those side doors arent locked
at many midsize organizations. Of the
761 data breaches investigated in 2010
by the U.S. Secret Service and Verizon
Communicationss forensics analysis
unit, 63% occurred at companies with
100 or fewer employees.
Most of those breaches were not as
sophisticated as the RSA hack. A recent
Ponemon survey cites lost or stolen
mobile devices as the greatest trending
security risk. The risk doesnt necessar-
ily decline when the focus shifts. Com-
panies think because they outsource
services or security they also outsource
liability, says Toby Merrill, vice presi-
dent at insurer ACE Professional Risk.
Theyre wrong.
you will be sued
Forty-six states have data-breach laws
that require organizations to notify
anyone whose personal data may have
been compromised. Massachusettss is
the toughest, stipulating penalties of up
to $5,000 per violation. Multiply that
by thousands of affected customers,
and the potential cost to the enterprise
is staggering. These laws make it clear
that responsibility lies with the com-
pany that collected and stored the data.
That's who will be sued, Merrill says.
But many midsize businesses be-
lieve the cloud offers greater security
Boloco, a $20 million chain of 18 bur-
rito restaurants stores customer in-
formation in the cloud via netPOS, a
point-of-sale systems provider. no
credit-card swipe lives in our system,
says Boloco CFO Patrick Renna. Our
philosophy is to leverage the security
expertise of much larger companies
that have resources we dont.
Boloco requires its various soft-
ware-as-a-service providers to comply
with the payment-card industrys data-
security standard and with the SAS 70
auditing standard, which permits an
independent auditor to evaluate and
issue an opinion on the providers se-
curity controls. Boloco also assesses its
providers finances. Thats smart, says
Tracey Vispoli, global cyber solutions
manager for the Chubb group of In-
surance Cos. If youre suing, you want
your provider to be solvent.
Hack counterattack
What else can midsize companies do?
If they had the cash, they could hire a
From 2005 to 2011, the average cost of
a data breach for organizations with
fewer than 500 employees was $410,047.
U.S. Cost of a Data Breach studies, 2005 to 2011, Ponemon Institute
C
a
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f

B
r
o
w
n
DashBoarDs Can now

gauge more Data

Cfos are expanding their use of dashboards to capture a wider range of metrics.
b y Ma r i e l l e S e ga r r a
t Brightpoint, a global
communications technology company, CFO Vince
Donargo spends plenty of time studying both
operational and financial metrics. But in order to
track key data points, such as receivables and on-
time shipping performance, he must sift through
separate daily reports that land in his in-box as
e-mails or spreadsheets sent from the companys
many global business units.
Although Donargo says this approach works,
its far from ideal. So this year Brightpoint will im-
plement a formal, integrated dashboard that will
enable Donargo and other executives to monitor
a wide array of key metrics through a single plat-
form. The move will streamline financial analysis
by integrating the numbers so that executives can
more easily monitor them and communicate them to
the CEO. There is also a cost-saving aspect to having
a dashboard, Donargo adds, because it can save em-
ployees the time and effort they currently expend cre-
ating and disseminating multiple separate reports.
Dashboards have been around for many years,
but it has taken time for their actual usage to catch up
with their intuitive appeal. As business conditions be-
come ever more volatile, however, and as companies
lose what little margin for error they had in terms of
responding to unpleasant surprises, interest in dash-
boards is accelerating. Companies are also starting
to broaden the range of metrics they can access from
technology
A
dashboards, says David White, a senior research ana-
lyst at Aberdeen Group. While in the past senior exec-
utives might have focused solely on high-level metrics
like sales revenue and profitability, they now use dash-
boards to track operational and tactical metrics, such
as how many new accounts sales representatives have
acquired in the last quarter.
when you need to know now
One major appeal of dashboards, according to White,
is that they can help executives narrow the decision
windowthe period of time they have to make a de-
cision after a business event. A recent Aberdeen study
found that 64% of business managers have seen their
decision-making time shrink over the last year. A dif-

warehouse technology and related in-
frastructure continue to make it faster
and easier to glean insights.
Costs and implementation times
vary enormously. One consultant said
he built a simple dashboard for a client
whose data was in good shape in a mat-
ter of hours, for just over $1,000. On the
high end, a global system with many
users may take months to develop and
cost in the high six figures. Its hard to
give a price, one expert quips, but its
always between $1 and $1 million. CFO
MarIelle Segarra IS Staff wrIter
at CFO.
ferent aberdeen survey found that 28%
of business managers said they needed
data to make decisions within an hour
of a business event; another 42% need-
ed information within a day.
theres a lot of pressure on the
organization to take in raw data and to
turn it into useful information in a time
frame that suits the business, white
says. theres tremendous pressure on
these operational managers to respond
faster, and old-fashioned business in-
telligence is just not intuitive enough.
as an example, if a dashboard
showed that sales revenue was not on
target, a CfO would want to know
more, like what region had the low-
est sales, or what product was lagging.
for some finance chiefs, getting those
numbers often means asking a junior
finance staffer or someone in It to dig
them up, which could take days. De-
ploying dashboards that allow CfOs to
drill down to the specifics themselves
enables them to make decisions faster.
a leg up
Kevin Knapp, CfO of the online re-
cruitment site CareerBuilder, agrees.
the importance of dashboards has
increased as the speed of change has
increased, he says. every organiza-
tion today needs to adapt quicker than
its competitors. to that end, he says,
companies should include operational
metrics in their dashboards to gain a
competitive advantage. financial re-
sults are really just the consequence
or byproduct of daily operational deci-
sions, Knapp says. If you solely focus
on financial targets, you can neglect the
inputs that truly drive those results.
at CareerBuilder, operational
metrics have a more prominent share
of our executive dashboards than our
financial results, Knapp says. the
sites number of unique visitors, job
listings, and applications per job seeker
or job posting are all significant pieces
of information.
Still, financial metrics remain crit-
ical. By and large, companies. . . are in-
terested in the basic revenue cycle and
cash cycle fundamentals, says David
Pefley, former CfO at software maker
Virtutech and now a consulting CfO
for several technology firms. I think
[most businesses] should be focused
on bookings, the sales funnel leading to
the bookings, the revenues, the receiv-
ables, and collections, he says.
Dashboards can be designed to
enable CfOs to combine the two ap-
proaches, providing both a financial
overview and a deeper look at granu-
lar operational data. and they will
continue to evolve, says Knapp. the
world has become so much more data-
centric, and the advancements in data-
f
e
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o

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a
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b
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y
Finance and IT:
A Beautiful Friendship?
CFOs looking for profitable growth
are working more closely than ever with their
IT departments, according to a recent sur-
vey conducted by CFO Research Services for
Hewlett-Packard. The survey, which included
interviews with more than 30 senior execu-
tives with finance experience at large com-
panies, found that several factors have fos-
tered this burgeoning symbiosis, including
technologys potential to promote top-line
growth by driving better decisions.
Just as the right technology can help to
increase revenue by enabling executives to
make timely inventory and marketing de-
cisions, outdated, slow systems can stunt
growth, said some surveyed executives. Erick
Haskell, current chief operating officer and former CFO of Adidas China, learned
this lesson the hard way when demand shrunk in a key region, but the companys
IT systems did not reveal which specific products were laggards. Without this
data, the company could not accurately predict how many of each item it should
continue to stock.
Adidas has since invested in a system that allows its CFO to see consumer-
level sales data almost immediately. I now have direct interfaces with all of my
retail distribution partners and can read my retail sales on the ground, Haskell
said in the study. I can pull up data not only at the store level but down to the
SKU level. I can see which products are selling, and that means we can react
much faster to those trends.
While CFOs cited several other drivers for a closer finance-IT partnership
such as the need to balance technological innovation with budget considerations,
and the technology challenges associated with integrating global acquisitions
they also noted the pressure to turn data into actionable information. As Tony
Ho, corporate finance funding director in China for U.K. grocer Tesco, says, We
are in an industry that needs a lot of information. If we dont have the technology
we need to support that, we will not be the winner in the marketplace. M.S.
9good fIt: Technology
investment helps Adidas deter-
mine the right product mix for
stores like this one, in Beijing.
The Most Respected Companies
in North America Trust Ryan
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But, our value proposition is far greater than the industry-leading tax recovery
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Please visit us at www.ryan.com or call 800.545.1856 to learn more about how
our services can beneft your business.
Ryan has been a trusted
partner that has delivered
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savings for many years,
while sharing their vast
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Tax Director
At GE Capital, were not just bankers, were builders. Because we
focus on the sectors where GE has real-world expertise, we can
apply insights to our financial products like no other bank.
From asset-based, cash flow and structured loans to equipment
financing, well make sure your capital is working its hardest for you.
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SMART FINANCING CAN
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A WELL-TUNED MACHINE.
AND WE REALLY KNOW
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GE Capital
Corporate Finance
50
55
60
65
70
75
80
China
Asia
Europe
U.S.
Q4 11 Q3 11 Q2 11 Q1 11
ven as the global economy con-
tinues to be volatile, U.S. CFOs are slightly more op-
timistic than they were three months ago. The latest
Duke University/CFO Magazine Global Business Out-
look survey finds that the CFO optimism index has
moved up to 53 (on a scale of 1-100) from 47 last quar-
ter. However, that level is still below the surveys long-
term average of 60. Finance chiefs plan to increase hir-
ing this year but are still cautious, putting the chance of
the United States entering a new recession in the next
six months at 31%.
These mixed signals reflect the very mixed re-
sults across individual businesses. For example, on one
hand, says Mark Muskevitsch, finance chief at Wiscon-
sin-based JX Enterprises, a heavy-duty-truck dealer,
Our little corner of the economy is doing very well,
thanks in part to customers increasing need for parts
E
and service as they keep old vehicles on the road.
On the other hand, Milton Bulloch, CFO at Al-
pha Steel, a steel-fabrication company in Texas that has
seen its business fall by half over the past few years, re-
ports that the economy for the year ahead is brutal,
business outlook

survey
Proceeding

with caution
while the global outlook is mixed, u.S. cFos are somewhat more optimistic.
b y K a t e o S ul l i v a n
37 C F O | j a n u a r y / F e b r u a r y 2 0 1 2 c F o . c o m
g
o
r
d
o
n

S
t
u
d
e
r
/
t
h
e
i
s
p
o
t
Europe Feels the Pain
CFOs rate their optimism about their companies
financial prospects compared with last quarter .
Glums the Word

CFOs rate their optimism about their domestic or
regional economy compared with last quarter.*
pU.S.
pEUROPE
p
ASIA
p
CHINA
pU.S.
pEUROPE
p
ASIA
p
CHINA
40
45
50
55
60
65
70
75
80
China
Asia
Europe
U.S.
Q4 11 Q3 11 Q2 11 Q1 11
*CFOs were asked to rate their optimism about the economy on a scale of 0100,
with 0 being least optimistic.
CFOs were asked to rate their optimism about their companies on a scale of 0100, with
0 being least optimistic.
b
u
s
i
n
e
s
s

o
u
t
l
o
o
k

s
u
r
v
e
y
citing a lack of demand for the com-
panys products, mainly used in build-
ing schools, strip malls, and multisto-
ry office buildings. The business has
shifted to focus on federal-government
contracting in recent years, with good
results. Thats whats kept us going,
says Bulloch.
Rob Ogilbee, CFO at Wish Farms
in Florida, says his business is rela-
tively insulated from the economy, as
demand for the companys produce
typically outstrips supply. As for the
broader economy, he says, I think
were basically going to have a repeat of
2011. Its a perception issue. We may
see growth in some sectors, but the
typical American sees a bad economy,
and thats what theyre reacting to.
At Measurement Inc., an educa-
tional testing company in Florida, CFO
Alex Avila echoes Ogilbees view on
the year ahead. With his business de-
pendent on state and federal education
standards and budgets, Avila says, ev-
erybodys kind of in waiting mode.
Still Spending
On average, CFOs do plan to boost ex-
penditures in key categories such as
capital spending, which they say they
will increase by 8% over the next 12
months, a marked increase from their
plans last quarter, when they said capi-
tal expenditure would rise by just 4.5%.
Technology spending will grow by 6%,
also an increase from last quarter, while
research-and-development spending
will increase by just under 3% and mar-
keting and advertising spending will
grow by about 2%, both in line with the
levels forecast three months ago.
On the critical jobs front, finance
executives have a somewhat improved
outlook compared with last quarter,
now saying they plan to increase their
full-time domestic workforces by 1.5%
on average over the next year, up from
just under 1% last quarter. Such an in-
crease would yield enough new jobs to
bring the unemployment rate to near
8% by the end of the year.
At JX Enterprises, Muskevitsch
says the firm is struggling to fill some
55 open positions. Wed hire service
technicians all day long if we could, at
probably every one of our locations,
he says. The firm is having trouble
finding workers with the appropriate
skills, and those with the right train-
ing are in demand at a range of differ-
ent kinds of companies. Its just a high-
demand, low-supply field, says Mus-
kevitsch. Recruiting is a big challenge.
Muskevitschs fellow finance ex-
ecutives cite consumer demand, fed-
eral-government policies, and price
pressure from competitors as top con-
cerns. The ability to maintain margins,
the cost of health care, and the ability
to forecast results lead the list of inter-
nal, company-specific concerns. Just
over half of the CFOs surveyed say they
have contingency plans in place should
another recession occur, including
layoffs as well as reductions in capital
spending and R&D outlays.
OceanS apart
CFOs are also worried about global fi-
nancial instability, with nearly a quar-
ter saying their businesses would ex-
perience a significant effect should
multiple European banks become in-
solvent and an additional 59% saying
they would feel a minor effect.
Europes finance chiefs, not sur-
prisingly, are markedly less optimistic
this quarter than last, with 66% say-
ing their level of optimism has fallen.
Ninety percent say the debt crisis has
negatively affected their businesses,
with 45% calling the impact signifi-
cant. Europes CFOs put the prob-
ability of their countries entering a
recession in the next six months at
nearly 50%.
In Asia, CFOs are less optimistic
than they were last quarter, but remain
more positive about their regional
economy than their U.S. and European
peers. In a dramatic contrast with their
counterparts, Asias finance chiefs plan
to expand their workforces by 5% on
average in the next year and expect
wages to rise by 7%. CFO
KATE OSUllIvAN IS A DEpUTy
EDITOR AT CFO.
Source for all charts: Duke University/CFO Magazine Global Business Outlook Survey of 1,050 CFOs: 551 from the U.S., 166 from Europe, and 333 from Asia (including 102 from China)
0%
1
2
3
4
5
6%
Wages
Q4 11 Q3 11 Q2 11 Q1 11
. . . But Wages Are Flat
12-month percentage change predicted by U.S. CFOs
pWages
Strength in Spending
12-month percentage change predicted by U.S. CFOs
pCapital
spending
p
Technology
spending
pR&D spending
pMarketing &
advertising
spending
0%
2
4
6
8
10
12
14%
A&M S
R&D S
TS
CS
Q4 11 Q3 11 Q2 11 Q1 11
-2%
-1
0
1
2
3
4
5
6%
Number of domestic full-time employees
Number of domestic temporary employees
Number of offshore outsourced employees
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
09 | 2010 | 2011
Top Concerns of CFOs
About the mAcro economy:
1. Consumer demand
2. Federal-government agenda/policies
Price pressure from competitors
3. Global financial instability
4. National employment outlook
Credit markets/interest rates
Federal budget deficit
5. State/local government budget deficits
About their own compAnies:
1. Ability to maintain margins
2. Cost of health care
3. Ability to forecast results
Attracting, retaining qualified employees
4. Working-capital management
Maintaining morale/productivity
5. Balance-sheet weakness
Managing IT systems
note: concerns that received identical scores are grouped together.
pnumber of offshore outsourced employees
p
number of domestic full-time employees
pnumber of domestic
temporary employees
12-month percentage change predicted
by u.s. cFos
Jobs Still Wanted Inflation
Worries
Recede
inflation (change
in prices of own-
company products)
*numbers may not add
to 100%, due to rounding.
European
Relations
if multiple european banks
were to become insolvent,
how would this impact your
business?
Borrowing:
Status Quo
relative to fall 2010, does your
company find borrowing
now:
psignificant effect
p
minor effect
pno effect
peasier
p
About the same
pmore difficult
24%
59%
17%
21%
57%
23%
0%
1.0
2.0
3.0
4.0%
Inflation
Q4 11 Q3 11 Q2 11 Q1 11
Recession Ripples
pyes
p
no
54%
46%
Do you have a plan
in place for actions your
company would take in
response to a recession?
percentage who would cut dis- 68%

cretionary spending (such as r&D)

percentage who would dip into
44%

cash stores to avoid making layoffs

or cutting expenses

by what percentage would 30%

you reduce your capex budget?

what percentage of your 8%

workforce would you let go?
iF yes
What is the probability that
the U.S. will enter a recession
in the next six months?
31%
Have $1 Billion,
Will Spend
Alliance Data has shown strong growth
through the downturn. How were you
able to do that?
Fortunately for us, when we went into the
downturn we had very low debt levels and we
had the ability to generate strong liquidity. So
the company took what I call controlled risks.
When many companies were going into their
shells and protecting liquidity at all costs, we
were deploying that liquidity to take advan-
tage of disruptions in the market and buy
undervalued assets.
With our private-label operation, we
were aggressive in trying to acquire credit-
card portfolios because no one else was show-
ing up to bid. Internally, we saw that our own
stock was undervalued, so we were very ac-
tive in repurchasing shares. Our stock had
dropped into the 20s, and we said, Lets be
very aggressive. We bought back close to 40%
of our company at an average price of around
$50, and currently we trade at $104.
When you have market disruptions,
thats when the best opportunities present
themselves. Companies might be in trouble,
and thats when you get your best price mul-
tiples.
40 C F O | j a n u a r y / F e b r u a r y 2 0 1 2 c F o . c o m Portrai t by Scogi n mayo
As companies invest more money in
customersboth to win them and to analyze
their preferences and behaviorsAlliance Data
Systems (ADS) is positioned to reap the rewards.
Based in Dallas, the affinity-card and customer-
loyalty program provider outperformed the gen-
erally sluggish economy last year, watching its
sales and earnings grow and its share price soar
as all three of its divisionsprivate-label and
co-branded credit cards, loyalty marketing, and
a Canadian marketing businessbenefited from
a recovery in consumer credit and an increase
in retailers spending on loyalty programs.
As his company enters 2012, ADS finance
chief Charles Horn says he expects continued
growth at home and in new and existing ven-
tures abroad. The company is also launching
a push to buy back up to $400 million of its own
stock this year. Here, Horn describes the
capital structure needed to support the compa-
nys growth, as well as the potential challenges
that ADS may face in the months ahead.
on the record:
charles horn, CFO, Alliance Data Systems
Alliance Data is building its war chest in anticipation
of serious deal-making.
o
n

t
h
e

r
e
c
o
r
d
How are you thinking about the companys capi-
tal structure today?
If you look at where we are from a funded-debt-to-
EBITDA standpoint, were about 2.3:1, so we have a very
good position. So over the next year we will probably add
an incremental $1 billion of liquidity, about half from free
cash flow and about half from new debt, again building
up a war chest, so that down the road when opportuni-
ties present themselves we will be able to take advantage
of them.
As you think about raising debt right now, how is
the market looking?
Id call it choppy. If youre investment-grade and youre a
seasoned issuer, meaning youve been in the public mar-
kets many times, youre in good shape. But if youre not
like us, weve never done public debt beforeits a very
choppy market. Windows of opportunity present them-
selves, then concerns about sovereign debt pop up, ev-
eryone pulls back, you have an outflow of funds, and the
market closes. So what were looking to do is just be op-
portunistic. We can be ready to access a number of dif-
ferent markets on a moments notice based upon when
those windows open up.
We have good, strong liquidity right now. We dont
have to do anything, so we dont have to chase higher
rates. We can just wait, let the windows of opportuni-
ty develop, and then when they are open we can step in
quickly.
Where are you looking for growth?
We are very focused on organic growth. That would be
especially true within our Epsilon marketing division,
where we can look to expand into new channels to pro-
vide our services.
Overall, we really have a four-pronged approach.
First, we want to drive the organic growth we just talked
about. Second, we want to continue to find portfolios for
our private-label operation that make sense and fit within
our expertise. Third, we want to expand our internation-
al operations for our LoyaltyOne business out of Canada;
we think the opportunity to go into markets like Brazil
and India is very much there, and we may add a tuck-in
acquisition if it makes sense. And then the fourth piece
will be continuing to invest in the company through our
share-repurchase program.
How much of the companys business is based
overseas?
Its still pretty small aside from our operation in Canada.
That is by far the biggest piece, at about 25%. In Brazil
we have a joint venture where we are a minority owner.
And in India our business is a start-up. We havent even
moved to a pilot yet.
How long have you had the joint venture in Bra-
zil, and how did you find that opportunity?
That opportunity [presented itself] in the third quarter
of 2009. We liked the management team that was trying
to start up the effort in Brazil. They needed a little bit of
intellectual property and they also needed some capi-
tal, and thats where we fit in nicely. Its a market that is
very receptive to coalition programs, meaning compa-
nies dont mind working together with a common card or
common royalty mechanism, and consumers are very re-
ceptive to it as well. (See related story, Global Position-
ing, page 50).
In a country like Brazil, it can be very useful
to have a joint-venture partner that really knows
the local market. Have you found that to be
the case?
Definitely. Their relationships and their knowledge of
the market are very important. From both the tax and
regulatory standpoints its a unique market. I cant think
of a better way to go into that market than with a joint
venture.
What do you see as the biggest challenges to Alli-
ance Datas growth right now?
Like any CFO, I worry about two things. First, liquidity.
You always want to make sure youre prepared before
theres a disruption in the market so that you have money
before you absolutely have to have it. The second thing
is to make sure that when youre growing quickly, as we
are, you have the appropriate controls and structures in
place, and the proper oversight in place. While we love
international expansion, and we like the green-field op-
portunities, we want to make sure that everything is be-
ing done correctly.
A related challenge is the pace of change in
accounting regulations.
When I first started as an accountant, everything was
about matching revenues and expenses. Now its more
about fair value, and it seems like the pace of rule-setting
is very fast. But if you look at the Securities and Exchange
Commission, it seems very focused on enforcement.
That will drive it more to a specific rules-based environ-
ment versus a guidelines-based environment, because
the SEC wants specific things that it can point to and say
a company did them right or it did them wrong. I think
thats going to put us further away from IFRS [interna-
tional financial reporting standards] convergence down
the road.
One scenario I could see happening is having gen-
eral guidelines for IFRS but then having region-specific
accounting rules underneath those.
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By David Rosenbaum
CFOs cant ignore
social media.
WHOS
OUT
THERE?
In 1775, when Boston silversmith Paul Revere
famously rode northwest to alert the country-
side that British troops were on the move, Bos-
ton tanner William Dawes, bearing the same
message, rode not so famously southwest.
When the British arrived in Lexington and Con-
cord, they did not meet many militiamen from the
towns Dawes visited. Why? In The Tipping Point, Mal-
colm Gladwell suggests that whereas Revere was
a connector, blessed with unique social skills,
Dawes was an ordinary man lacking Reveres social
network.
Today, wed call Revere an influencer. Hed have
thousands of Twitter followers and Facebook friends.
R
o
b
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r
t

H
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s
e
r
45 C F O | J A N UA R Y / F E B R UA R Y 2 0 1 2 C F O . C O M
Weve seen the biggest transformation
by using social media internally. Its like an internal
Twitter feed, integrated with sales to create a
different system of communication.
SCOTT TRAVASOS, CFO, Blue Shield of California Foundation
46 C F O | J A N U A R Y / F E B R U A R Y 2 0 1 2 C F O . C O M
Hed belong to the Dont Tread on Me group on
LinkedIn. Rather than knock on doors, hed tweet @sam-
ueladams @johnhancock Citizens, militia, resist. #red-
coats #toarms #bostonpostroad. Sound crazy? Consider
that #Egypt was 2011s most used hashtag and that Arabic-
language tweets soared from 99,000 a day in October 2010
to more than 2 million a day by the following October as the
revolutionary movement took hold in that part of the world.
The power of social mediaor, at least, its potential
poweris not lost on American companies. Many are using
it successfully for everything from new-product marketing
to employee collaboration to innovative and very effective
forms of customer service. But most companies are strug-
gling mightily to turn nascent, ad hoc efforts into something
resembling an actual strategy.
Clearly, social media engages enormous numbers of
people: how else to explain how Starbucks got 8,006,349
Facebook likes (as of early December 2011) for its Frappuc-
cino. Thats a lot of thumbs up for water, salt, erythritol, xan-
than gum, carrageenan, maltodextrin, citric acid, milk, and
coffee. More broadly, the numbers on social media adoption
are spectacular. As of December, Facebook claimed 800 mil-
lion active users worldwide, with 50% logging on every day.
Twitter reported an average of 460,000 accounts created per
day late last fall, with an average of 1 billion tweets per week.
As of November 3, 2011, LinkedIn had 135 million members
in more than 200 countries; two new users join every second.
That action is not just limited to consumers. A survey
of 4,261 global executives conducted by McKinsey late last
year found 72% reporting that their companies deployed at
least one social technology. A November 2011 Towers Wat-
son study of 604 global organizations found 69% planning
to increase their use of social media tools over the next 12
months.
And, while Coca-Cola claims top honors for Face-
book fans (32 million), its not just giant companies that are
staking a corporate presence in the social media world. A
November 2011 survey by Social Strategy1, a social media
data-mining service, found that 63% of small-and-midsize-
business owners have a social media presence: 61% on Face-
book, 48% on LinkedIn, 37% on Twitter.
To date, however, much of this activity has been akin
to an aspiring actor having a professional head shot taken:
its standard practice, but it doesnt guarantee youll land any
roles. As they rush to put their best faces forward, companies
increasingly want to know just what they can expect to gain
for their trouble.
ROI Is Where You Find It
According to a recent IBM report on social media, the top
social media challenge for companies is establishing an ROI
strategy. However, many experts caution CFOs against in-
sisting upon traditional metrics to determine ROI for such
a young technology. As Forrester Research principal ana-
lyst Nigel Fenwick says, If you were a CFO back in the early
1990s and I came to you and said I wanted to implement e-
mail, and you asked, Whats the ROI? could you have got-
ten an answer? Social media has become table stakes. Or,
as Kelly Dempski, director at Accenture Technology Labs,
says, There are 800 million Facebook users. Thats not a fad.
According to Justin Fogarty, social media manager at
Ariba, a business commerce network, CFOs should avoid
relying on whats easy to measure. If, for example, you start
incentivizing around website visitors or page views, people
will [find a way to] hit those numbers. But did they do it by
finding the right customers, or by cheap tricks?
More often, customer demand is driving the adoption
of social media. At BookRenter.com, CFO Gene Domecus
says, I cant impose only financial-return expectations on
social media investments. Social media is how the customer
chooses to interact with us.
BookRenter works like Netflix for college students, al-
HOW T0 MEASURE SUCCESS?
Most-common methods by which companies
measure social media marketing effectiveness:
Numbers linking as friends, followers, likes
60%
Sharing, forwarding, retweeting, or posting brand content
39%
Qualified leads from social media
35%
Visits or time spent with branded social content
35%
Incremental sales attributable to social media
25%
Brand awareness/favorability (measured by surveys)
18%
Source: Chief Marketer, 2011 Social Marketing Survey, October 2011
Whos Out There?
If you were a CFO back in the early 1990s and I came
to you and said I wanted to implement e-mail, and
you asked, Whats the ROI? could you have gotten an answer?
NIGEL FENWICK , FORRESTER RESEARCH ANALYST
lowing them to save money on textbooks by rent-
ing instead of buying. College students live on
Facebook, says Domecus. Thats where we now
find out about customer issues and challenges
before anybody actually contacts our call center.
When we hear about an issue, we reach out to re-
solve it, reducing help-desk costs. Indeed, many
companies are beginning to monitor and interject
themselves into customer conversations before
those conversations turn into a wave of bad PR.
Method Products CFO Andrea Freedman,
whose company sells eco-friendly cleaning prod-
ucts, got a related, and unexpected, ROI from
social media. In 2010 she received a cease-and-
desist order from Clorox objecting to Methods
use of its daisy logo, which Clorox argued it had
trademarked. Method made a video proposing
that no one could trademark a daisy and posted
it on YouTube. Method never heard from Clorox
again. The video got brand awareness up, solved
our legal issue, and was much cheaper than law-
yers, says Freedman.
Begin by Listening
Most companies start their social media initia-
tives by monitoring whats going on out there
so they can understand whats being said, discov-
er influencers, and target their audience, says
Christopher Koch, an associate vice president at
B2B research and consulting firm Information
Technology Services Marketing Association.
Nutritional-supplement retailer GNC sells
vitamins and other health products primarily to
a young, athletic audience. Listening to and ana-
lyzing online conversations with the help of soft-
ware from Radian6, GNC noticed its target audi-
ence was suddenly talking about coconut water.
GNC wanted to get in on the trend but, says Chris
James, GNCs director of social media, coconut
water by itself tastes terrible. Thats what people
were saying online.
So GNC partnered with Pepsi and in May
2011 launched Phenom, a flavored coconut-
water drink. Part of its marketing campaign in-
cluded a multipronged social media strategy, re-
plete with a Twitter hashtag, buying the keyword
Phenom on Google AdWords, creating a mi-
crosite dedicated to the new product, and work-
ing with Radian6 (which, according to its vice
president of marketing, Rob Begg, crawls north
of 150 million sources) to target influencers and
gauge early reaction.
Ultimately, GNC discovered it needed to go
R
o
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t

H
o
u
s
e
r

Social media
65%
2%

Website upgrades
56%
6%

Content creation
53%
2%

Landing-page optimization
51%
1%

Search (SEO/PPC)
49%
5%

Online advertising
42%
7%

E-mail
39%
5%
Source: 2011 MarketingSherpa Social Marketing
Benchmark Survey
InvestIng In socIal MedIa
Where will marketing departments invest their online dollars?
Budgets will increase
Budgets will decrease
I cant impose only financial-return
expectations on social media investments.
Social media is how customers prefer
to interact with us.
Gene DoMecuS, cFo, BookRenter.com
had people in Singapore order from us because they have
Facebook friends in the U.S., says Parks. Who would ever
have thought that? Its crazy. And its so inexpensive. It costs
me roughly $500 to $1,000 a month for the sweepstakes with
Wildfire. With Google AdWords, I was spending $2,000 to
$4,000 a month.
Measuring a reduction in cost is not the same as calcu-
lating a true ROI, however. And if matching a social media
investment to an income-generating return is tricky, imag-
ine trying to put a price tag on the ways that social media
can enhance corporate performance. Yet that may be where
the most promising payoff beckons. Weve seen the biggest
transformation by using social media internally, says Scott
Travasos, CFO of Blue Shield of California Foundation.
A longtime client of Salesforce.com, Blue Shield ad-
Even as companies grap-
ple with how to do social
media right, they must also
be careful not to do it wrong.
Consider Netflix CEO Reed
Hastingss blog-heard-
round-the-world, in which
he announced that Netflix
would spin off the streaming
side of its video rental service,
forming Qwikster, with fees
adjusted in a way that struck
many customers as unfair.
The blogosphere and Twitter-
sphere exploded with appro-
bation, and Hastings quickly
reversed himself, but not
before Netflix lost 800,000
subscribers in one quarter and
saw its stock fall 25%.
Companies should take
note: as theoretically desir-
able as transparency may
be, social media can shorten
considerably the distance
between a bad decision and
its consequences. Another
potential pitfall is violat-
ing Securities and Exchange
Commission and Financial In-
dustry Regulatory Authority
(FINRA) rules around online
communications. Jim L. Pier-
son, a manager at Beacon Hill
Fund Services, which provides
compliance and other services
to funds, points out that fi-
nancial institutions registered
with the SEC or FINRA must
now capture and track every-
thing relevant to their busi-
ness in social media just as
they are required to monitor
and archive e-mail.
According to FINRA
Notice 10-06, Every firm that
intends to communicate, or
permit its associated persons
to communicate, through so-
cial media sites must first en-
sure that it can retain records
of those communications....
(Technological help is plenti-
fulSocialware, Actiance,
and Hearsay Social all provide
social media compliance soft-
ware; Arkovi and Erado spe-
cialize in archiving services.)
John Calvin Slemp,
managing director at risk and
internal-audit consultancy
Protiviti, suggests that CFOs
make sure people are trained
not to tweet or post anything
that could be deemed rel-
evant to the business, such
as, I cant wait for the party
on Tuesday after the earnings
report comes out!!!
With most IT initia-
tives, training comes at the
end. Social media demands
it up front. Weve all been
burned by sending an e-mail
we shouldnt have, says
Slemp. Social media is much
worse. Youve got to com-
municate that risk to employ-
ees and have a response plan
ready in case someone says
something they shouldnt
have. D.R.
When
mum
s not
so dumb
It used to be that
for every 10 hours
of downtime, a woman would spend
9 hours reading or watching TV.
Now she spends those hours online,
most of them on social media.
IAN MARSHALL OF BENEFITS COSMETICS
back to the drawing board: Phenoms taste was still unsat-
isfactory, and GNC is reforming the product. Social media
validated what we were seeing in our other data feeds, James
says, including point-of-sale information from GNCs brick-
and-mortar stores. Social media couldnt light a fire under a
less-than-optimum product, but it could give a fast and de-
tailed read into the nature of the problem. Social media, says
James, is a tool. Its not the tool.
From Listening to Engaging
After learning how to listen, businesses must learn how to
engage. One way is the popular like approach. As Bruce
Parks, CEO of Chocolate Bakery, explains, When we run a
sweepstakes, you click like on our Facebook page in order
to enter. That increases our potential marketing field. We
send out e-mails inviting the entrants friends to enter. Us-
ing Facebook is brand-building, versus simply showing up
in a Google search if people are looking for your product.
Parks read about Wildfire social media marketing tools
in a tech magazine, and became a subscriber in February
2010. That helped him to connect to a Facebook fan base,
grow it, build an e-mail list, and automate Facebook contests.
Parks says social media has transformed Chocolate
Bakery from a company whose customers could all be found
within an 80-mile radius to an international concern. Weve
SILENCE IS GOLDEN:
Netflix CEO Reed Hastings
learned the hard way
that social media works.
Whos Out There?
E
n
r
i
q
u
e

M
a
r
c
a
r
i
a
n
/
L
a
n
d
o
v
opted the tools new communication
platform, Chatter, which in many
ways mimics a Facebook page. When
an employee opens Chatter, she sees
profiles of people and groups (with
pictures and icons); a separate col-
umn allows her to search for any-
thing stored by the applicationcli-
ent histories, analytics on deal close
rates, price approval points, and so
on. She can make recommendations,
record likes, post stories about cli-
ents or events, or share files. Access
is role-based, so people see only what
they should.
I post three to five messages a
day in Chatter to update my depart-
ment, Travasos says. Things like, I
was scheduled for noon to complete
this part of the close; I wont. Its like
an internal Twitter feed, integrated
with sales to create a different system
of communication.
As employees have rushed to
adopt Facebook and other forms of
social media in their personal lives,
says Chatter senior vice president
Kendall Collins, their workplace tech-
nology arsenal can seem like an IT museum. The very simple
premise of a photo doesnt exist in enterprise software. There
are tables and data, but no pictures of customers. All enter-
prise systems are based on reporting and control. New sys-
tems will be based on people and interaction.
Its hard to put a dollar figure on the collaboration ad-
vantage we get from Chatter, Travasos says. Its about ef-
ficiency. We spend less time on transactions and more time
on strategic analysis.
Getting Social
Sometime this spring, Wall Street is expected to value Face-
book at an estimated $100 billion. Its shareholders arent the
only ones who anticipate big things ahead for social media.
We have a team of five people spending their whole life
on digital marketing, says Ian Marshall, managing director
for the U.K. and Ireland for quirky San Franciscobased
Benefits Cosmetics. The company tripled its spending on
social media last year and expects to follow suit this year.
At the beginning of 2011, we had about 15,000 Facebook
fans in the U.K., he says. We ended the year with 100,000.
This year were shooting for 250,000. It used to be that for
every 10 hours of downtime, a woman would spend 9 hours
reading or watching TV. Now she spends those hours on-
line, most of them on social media. Wed be crazy to keep
trying to speak to our customers through the old model.
Aribas Fogarty suggests that companies get started by
targeting the areas most relevant to them. Its not about big
numbers, he says. Its about the right numbers.
Fogarty also encourages companies to make sure IT is
in the loop so that systems can be properly integrated. At a
higher level, social media effort needs to be coordinated and
planned, not ad hoc. Too many companies, Fogarty says,
want to have a Facebook page just because everybody else
does. While ROI may be hard to measure, companies can
track metrics to gain a sense of confidence. How long does
it take a customer to find what hes looking for? You can
take that metric to see if social media is lowering your call-
center costs, or lowering time-to-resolution, or improving
customer satisfaction, Fogarty suggests. Given that 60% of
the people who use social media also post reviews on prod-
ucts and services, the line between customer service and
marketing has virtually disappeared.
That blurring further complicates ROI analysis, but also
illustrates how transformative social media may be. Put an-
other way, #movefast #movesmart #movenow.
Or run the risk of becoming William Dawes rather than
Paul Revere. CFO
DAVID ROSeNBAUM IS SeNIOR eDITOR FOR TeCHNOlOGY
AT CFO.
Communicating with customers
74%
Responding to customer questions
65%
Promoting events
60%
Generating sales leads
52%
Selling products/services
50%
Soliciting customer reviews
48%
Capturing customer data
46%
Brand monitoring
46%
Customer research
43%
Recruiting employees
43%
Employee-to-employee interactions
41%
Soliciting customer ideas
40%
Providing support
40%
Expert insights/thought leadership
38%
Training/education
37%
Customer-to-customer interactions
35%
Vendor or partner communications
27%
Source: IBM survey of 351 social media executives
SOCial Media PriOritieS
Top goals cited by companies regarding their social media strategies
As finAnce chiefs help their compAnies search for growth

opportunities, more and more often they find themselves looking outside the
United states rather than at home. While the domestic market remains
plagued by a seemingly endless slow-growth recovery, not to mention the fierce
competition endemic to a highly developed economy, emerging markets offer
the allure of double-digit growth. But cfos knowoften from hard-won
Expanding abroad has lots

of potential, and plenty of risks.
Here are some quick tips to
help you avoid problems with
stafng, regulatory requirements,
joint ventures, and more.
By Michelle Celarier
Illustrations by Chris Buzelli
Global
Positioning
CFO/360
RepORt
0
experiencethat those developing markets not only offer
the promise of great reward but also pose many risks.
How should finance executives proceed in foreign mar-
kets in 2012 In our inaugural CFOi360 report, we offer ad-
vice from several distinct vantage points, as determined by
the editors who oversee our coverage of each topic area. Our
goal is to provide highly focused, actionable insights to help
you navigate whichever challenge is most relevant to your
companys situation. Of course, you may well decide that our
entire package is indispensable. Either way, this CFOi360
report will be a very useful and efficient way to enhance your
knowledge of global business practices. Throughout 2012
we will bring you quarterly CFOi360 reports on a range of
core finance challenges and opportunities.
HUMAN CAPITAL
THE HELP
LOGISTICAL AND LEGAL CHALLENGES
ABOUND WHEN HIRING OVERSEAS.
Wnv cosui:: Biii Hi:v :oio Nv Hrvsnivv
client who wanted to expand into Europe that in some coun-
tries he would have to offer not two weeks, nor four weeks,
nor even six weeks of holiday pay to locals who work more
J
a
s
o
n

G
r
o
w
than a 35-hour week, but a full 36 days worth, the CFO
balked. At the U.S. company, the most vacation time award-
ed was four weeksand that was only for the chief executive.
He could not get his head around it, recalls Hite,
whose firm, Hull Speed Associates, helps companies set up
subsidiaries around the world.
U.S. companies have been expanding globally for de-
cades, but its still hard for many U.S. executives to fully
grasp that theyre not in Kansasor New Hampshireany-
more. A common initial stumbling block as companies skip
down the yellow brick road is the realization that while in
the U.S. most employees are hired at will and can be let go
with no strings attached, in many other countries workers
have employment contracts that spell out compensation,
working hours, vacation, termination, and severance
much of it more generous than what U.S. companies typi-
cally offer.
To avoid incurring such expenses unawares, finance
chiefs should do their homework for each local market.
Small to midsize companies that are moving abroad for the
first time but are highly U.S.-centric are the most like-
ly to get into trouble, says Shan Nair, founder of human-
resources and accounting-services firm Nair & Co., whose
clients typically have sales between $300 million and $3 bil-
lion, with anywhere from 20 to 1,500 employees worldwide.
The temptation is to do things on the cheap and cut cor-
ners, to think, Were small and wont be on anybodys radar
screen. But when things dont work out, employees may
CFO/360 REPORT
GLOBAL POSITIONING
0
If youre going into a joint venture,
you have to figure out what the
management structure is. Who has
the decision-making power?
LARRY HARDING, President, High Street Partners
at multinationals, or those who have studied extensively
abroad. Career-oriented social media sites such as LinkedIn
are becoming a major source for leads in many countries.
NetSuite CFO Ron Gill says his firm has increasingly relied
on the service to help identify local finance talent in Manila
since establishing a shared-services center there in 2007.
Foreign companies should not expect such talent to
come cheap, especially in booming economies. Professional
salaries in emerging markets like the BRIC countries (Bra-
zil, Russia, India, and China) are fast approaching, or even
exceeding, those in the U.S.
Local finance executives also need to understand the
ethical and compliance standards they are expected to
uphold. For example, U.S. companies must comply with
the Foreign Corrupt Practices Act, which prohibits mak-
ing bribes to win business. But in a number of countries,
like China and Saudi Arabia, such practices are common,
says Blythe McGarvie, a former CFO and now CEO of LIF
Group, a strategic consultancy. She says one of the biggest
risks is hiring someone who is rooted in the local traditions
and feels pressure to conform rather than uphold U.S. law.
Ive had to fire people for that, she says.
Internal checks and balances are crucial to avoiding
such problems. Brown recommends that the CFO establish
a direct personal relationship with outside auditors and law-
yers in the foreign country; such advisers should report to
him. The CFO should hold in-person meetings with local
finance staff once or twice a year, and the parent company
should conduct surprise audits of the local unit several times
a year as well, says Brown.
complain to the authorities, and the costs of ignoring local
laws can pile up.
Companies just starting to do business abroad may be-
lieve they are on safe ground by hiring localsparticularly
salespeopleas independent contractors until they deter-
mine whether the market proves profitable. But that tack
can prove problematic if the person works for just one com-
pany, carries a company laptop, or drives around in a com-
pany car. Under those circumstances, he is likely to be con-
sidered an employee. In Brazil and China, in fact, its actually
illegal for a foreign company to employ individuals as con-
tractors. One option for new market entrants in Brazil is for
the foreign company to partner with a local company that
can then hire local staff. In China, foreign entities need to
either establish a wholly-owned foreign subsidiary or find a
joint-venture partner.
In Europe, contractor agreements can workbut typi-
cally for assignments of no more than a year. After that, Nair
says, the individual gains additional employment rights. For
those entering the European market for the first time, Nair
recommends hiring people on a short-term contract, with
no responsibilities beyond that, so that the company doesnt
incur ongoing employment liabilities.
Its hard to undo the damage if contracts arent writ-
ten properly. In certain European countries, for example,
employees are entitled to the equivalent of an extra months
worth of their annual base salary to pay for their vacations;
U.S. employers must take care to ensure that contracts stipu-
late that the amount is included in the yearly salary, or they
may have to provide it as an additional payment.
Meanwhile, in Finance
When it comes to establishing a finance department over-
seas, many global companies use a mix of local talent and ex-
pats. As youre getting started, it makes sense to have some-
one from within your company relocate to the new market,
says Thack Brown, SAPs CFO for Latin America. You need
to make sure you have someone you trust who can keep an
eye on things and extend the culture of your organization.
That person also needs to be adaptable and willing to learn
what are typically quite different tax and labor laws.
Brazil, where Brown has lived for the past 10 years, is re-
nowned for its Byzantine tax structure (see Brazil Is Boom-
ing [and Maddening], CFO, July/August 2010). New pro-
nouncements or interpretations are made every single day,
he says with a sigh. Ive spent a lot of time educating my
parent-company counterparts on what is going on here. So
many things come up and they say, That cant be right. Is
that really the way things work? If you dont have someone
in the parent company who is open to hearing about these
differences, you can really struggle.
When hiring locals as finance-department managers,
Brown recommends looking for people with experience
When it
comes to
establish-
ing a finance
department
overseas, many
global companies use
a mix of local talent and expats.
You need to make sure you
have someone you trust who
can keep an eye on things,
says Thack Brown, SAPs CFO
for Latin America.
D
a
n
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l

H
e
n
n
e
s
s
y
GROWTH COMPANIES
HOWDY, PARTNER
IDENTIFYING A LIKEMINDED VENTURE
PARTNER CAN BE THE KEY TO SUCCESS
IN A NEW MARKET.
Biii Cnovn, CFO or iov:io-svvvicvs vvoviovv
NineSigma, is a fan of what he calls a de-risking approach
to global expansion: joint ventures. We prefer to dip our
toe into a market, rather than doing a swan dive, he says. By
working with a local partner, his company can get the lay of
the land as it develops its expansion strategy.
The companys caution is due in part to the nature of
its business, which involves providing everything from fa-
cilitated technology services to coaching and consulting to
helping companies enhance their innovation capabilities.
With significant intellectual property at stake, Chorba says
NineSigma cant be too careful.
We look to where there is a cultural and phil-
osophical alignment regarding the treatment of in-
tellectual property, he explains, singling out South
Africa and Brazil as countries he has found to be im-
pressive on that score.
To make joint ventures work, companies must
be clear about their objectives, says Larry Harding,
founder and president of High Street Partners, a con-
sulting firm that assists clients with overseas expan-
sion. Harding notes that in a joint venture, youre
replacing one set of risk variables with another. And
while the CFO may not be the one making all the de-
cisions regarding a partnership, hes typically the one
charged with making it work out financially.
If youre going into a joint venture, you have to
figure out what the management structure is, says
Harding. How do you split the profits What do you
do if its a loss-making enterprise And who has the
decision-making power
Evaluating the risk and figuring out how to un-
wind the marriage if it doesnt work are typically the
issues foremost in a CFOs mind. One way to handle
such challenges is to adopt a revenue-sharing mod-
el, an approach that NineSigma favors. We dont
commingle funds. We dont invest in them, and they
dont invest in us, says Chorba. Working with a third
party in another country might slow market penetra-
tion, he acknowledges, but NineSigma has built that
lag time into its business model.
We need the common understanding up front,
Chorba says, explaining that the company will have
a memo of understanding to state the objectives.
While not a binding agreement, it lays out the compensation
and revenue-sharing models and explains how each party
will benefit. The company then creates a pilot to test how
effective the union is.
Management from afar can be tricky, so its important to
provide guidance and resources to help the local expansion
teams without micromanaging them, Chorba adds. Instead,
ongoing collaboration among the delivery teams is essential
for quality control and consistency. NineSigma also has a
global team of executives who spend days at a time meeting
with its partners at least a few times a year.
The lack of control that a partnership involves is one of
the pitfalls of going the joint-venture route, says Jeff Wakely,
CFO and treasurer for TechTarget, an online business me-
dia company. He cites the companys partnership in China
as an example. To go into China and start from a dead stop
is very difficult, he says. But forming a partnership there
can be a nightmare in its own right. Managing accounts re-
ceivable is one challenging arena. Wakely says that Chinese
companies may take as long as a year to pay. Moreover, ex-
penses are often reimbursed in cash. A lot of practices arent
When creating an offshore shared-services
center, make sure the infrastructure is there and
the political environment is stable.
SCOTT DAVIDSON, CFO, Quest Software
CFO/360 REPORT
GLOBAL POSITIONING
0
tain low-cost areas. Davidson has nixed India for its limited
infrastructure and higher employee churn rate, and China for
its political environment.
Depending on the complexity and scope of the process-
es involved, the move to an offshore operations center can
vary widely, from mere weeks to many months. Working
with an outsourcing partner can help accelerate the process
and smooth over bumps. For example, EXL, a provider of
outsourcing services, has successfully migrated key business
processes for clients like American Express, Travelers, and
Centrica. Initially, the firm staffs these locations with both
locals and employees from corporate headquarters for six
months to a year. The most difficult and most important de-
cision is hiring the right leadership for the center, says Rohit
Kapoor, president and CEO at EXL. That person will be re-
sponsible for building the corporate brand in the region, and
needs to be connected with regulators and be knowledgeable
about local regulations.
Processes that can be standardized and centralized can
more easily be moved to offshore locations, but those that re-
quire substantial human interaction or language fluency, or
that have specific regulatory requirements, can be more diffi-
cult to move to a shared-services center. For example, vendor
payments can be made from virtually any location, but sen-
sitive employee records are harder to aggregate offshore be-
cause errors can create huge employee dissatisfaction. Pilot
programs can help smooth the transition, says Kapoor. CFO
MICHELLE CELARIER IS A NEW YORK-BASED WRITER.
Management
from afar can be tricky, so its
important to provide guidance
and resources to help the
local expansion teams with-
out micromanaging them,
according to NineSigma CFO
Bill Chorba.
well documented. You have to be in front of that, he says.
After participating in a partnership in China for two years,
TechTarget has taken over the operations of the partner
company, Keji Wangtuo Information Technology, to ensure
tighter control of the operation.
A joint venture is not always an alternative to setting
up a permanent office or hiring employees. More often, it is
a step in the process. But since the agreement is with a busi-
ness entity, not an individual, the U.S. finance chief does not
have to worry about complying with local labor laws or pay-
ing employee-related taxes, which are the responsibility of
the local partner. Thats a huge benefit to us, says Chorba.
TECHNOLOGY
LEARNING TO
SHARE
CFO NEED TO LOOK BEYOND COST
SAVINGS WHEN WEIGHING A MOVE TO
SHARED SERVICES.
Wniiv rucn ovvvsvs vxvsio is ovivv nv :nv
desire to tap into a new universe of customers, there are oth-
er motivations. Often U.S. companies see a chance to save
by establishing shared-services centers overseas, where the
cost of providing IT, finance, and a range of back-office func-
tions can be considerably less than providing them from a
U.S. base of operations. While the global reach of the Inter-
net certainly makes such efforts more viable than ever be-
fore, a host of other factors play a role in finding the right
site for an offshore location.
In 2011, Quest Software CFO Scott Davidson set up a
shared-services center for the firms European operations
in Ireland. Now a predominant portion of the sales support,
finance, and accounting for its European offices is consol-
idated through the Irish shared-services center. The move
helped Quest save money, but Ireland is not purely a place to
go because its less expensive, says Davidson. While pricier
than Asia, Irish labor costs are about 10 cheaper than the
rest of Europe, and labor laws are more employer-friendly.
More important, the government has invested in education
and technology infrastructure development, so the country
now has well-trained engineers and finance professionals
who have experience with the shared-services model.
Before deciding where to set up a shared-services center,
companies should decide which regions they want the cen-
ter to support, which functions staffers at the center should
perform, and what the time line will be for making the transi-
tion to the new structure. Davidson can tick off a number of
countries where he would not want to put a shared-services
centerand why. The risk of political instability and the lack
of broad language skills are high on his list of concerns in cer-
A n s w e r s : 1 A ; 2 C ; 3 D ; 4 B ; 5 D ; 6 C ; 7 B ; 8 D
Deal with It
As we report in this months cover story (Whos Out
There? page 44), companies can no longer afford
to ignore social media. A recent IBM survey found that
most companies are, in fact, doing something in the
social media realm. But not always the right thing.
See whether you fall into the perception vs. reality gap:
t
h
e

q
u
i
z
2
3
Of companies with a social media presence,
the percentage that solicit customer
reviews is:
A. 13%
B. 29%
C. 35%
D. 48%
Asked which function is responsible for
managing and implementing the companys
social media strategy, what percentage of
companies said Finance?
A. 0%
B. 7%
C. 14%
D. 21%
Asked to identify their top three social
media challenges, companies cited estab-
lishing ROI strategy as the top challenge.
Coming in second was:
A. Negative brand exposure
B. Monitoring employees use of social media
C. Lack of analytics
D. Industry regulation
According to a 2011 study from the Univer-
sity of Maryland, the Facebook Apps Econ-
omy created, at a minimum, how many
jobs in 2011?
A. 30,000
B. 90,000
C. 120,000
D. 180,000
6
7
8
1
4
5
The percentage of consumers who have a
presence on a social media site ranges from
72% (baby boomers) to 89% (Gen Y). The
percentage of surveyed companies with
such a presence is:
A. 79%
B. 68%
C. 55%
D. 41%
Asked why they go to social media or social
networking sites, how did consumers rank
interact with brands (that is, companies)
among a list of the 14 most commonly
cited reasons?
A. 5
th
B. 8
th
C. 10
th
D. 14
th
When they do interact with companies
via social media, the top reason cited by
consumers is to pursue coupons or other
discounts. Asked why they think consum-
ers follow them via social media, companies
ranked that reason:
A. 5
th
B. 8
th
C. 10
th
D. 12
th
Almost three-quarters of companies say
they think consumers top priority in fol-
lowing the company via social media is to
learn about new products. What percentage
of consumers cite this as a reason to inter-
act with companies via social media?
A. 34%
B. 51%
C. 70%
D. 88%
S
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Read CFO magazine

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