more-arw search

Opportunities and Threats of Globalization From a CFO's Perspective

Opportunities and Threats of Globalization From a CFO's Perspective

In anticipation of ProformaTECH 2013 we are introducing you to some of the best presentations from past Proformative Conferences.  If you haven't already, please visit the ProformaTECH conference page and discover the amazing lineup and content we have planned.

In this video, Thack Brown of SAP Latin America discusses some of the threats and opportunities of an ever expanding global market.  He discusses new pressures and responsibilties of CFO's, including fueling growth and managing new technologies.  Watch the conference recording to learn more...

Full Transcript:

There's a lot of increased opportunity and threat that comes from globalization, so it simply can't be ignored. In Latin America, we're going through now, what a lot of North American and European countries have already gone through. The Chinese finally managed to get most of the manufacturing out of North America and Europe, and now they've gotten extremely interested in Latin America.

Now many Latin American companies are going through the same challenges trying to deal with the entrance in the tremendous economies of scale that the Chinese market has. We've been seeing our customers struggling with that and trying to deal with it.

At the same time, we've seen customer's who've been very successful getting proactive, just like many companies here in the U.S. and in Europe have done in getting into China and figuring out how China, or Africa, or India, or the U.S., or within the other countries in Latin America, and form an important part of the supply chain, make them stronger, and improve their possibilities. That's something we'll talk a little bit about.

Of course, with us, continuous pressure - it was always a little bit of pressure, I think on the margin side - but more and more pressure coming to the CFO about what are you doing about growth? That we have to respond to for our board and for our investors. Last but not least, a lot of new and disruptive technologies that are coming on the scene that if we don't pay attention to will move the business model, it will dramatically change the supply chain, other companies will take advantage of that, and it will put us at a disadvantage.

All of a sudden, as opposed to focusing maybe more on the regulation side, where's the bottom line coming in, etc., managing cash flows and all the standard things that we would do, CFOs are now being asked to do a whole lot more. That's putting us on a different trajectory here in terms of the balancing act that we have to work through.

That's really come down now to three key pieces. One is ensuring the regulatory compliance in the risk management. Second, on the far right, how do we deliver superior service while we keep the cost down, or continuously trending down?

Finally, how do we out perform on the financial objectives and get growth going? Today's leaders and managers are all looking for us to do a little bit of all of that.

How can finance run better? I actually - don't worry, I'm not going to put you guys through a lot of detailed Powerpoint slides - but I thought this was a particularly nice one that our marketing team had put together so I left it on here. Really, there's a number of elements, and we'll talk about all of this.

How do you put a less amount of revenues at risk, for example, as you go through on the compliance side in risk management to make sure that your revenues stay strong on the other side, on the cost side? How do you keep cost of finances a percent of revenue under control and moving in the right direction? How do you get your growth engines going again?

I think what really is key now, today, is we have a very interesting opportunity as finance professionals. I think we can all look back to mid-
2000, when everything was growing really well and what was the role of the CFO. What you had of that chart that was new was maybe more of the risk management side; but not as important as it is today. Because of the global environment, we've all opened up a tremendous window for the CFO to take charge and get more engaged in strategic decisions.

In the mid-2000s, you really didn't as much, because in the mid-2000s with all the growth that was going on, what everybody was focused on was mostly the sales organization. When you have booming global growth, you kind of throw investment at just about anything that moves, and if you've got a relatively confident sales guy, he sells something, and you make money, right?

In that environment, the CFO just kind of just needs to tally up the score at the end of the day, and walk in and show it to the board and say,
'Here's how we did.' Right? We're now in a completely different environment.

If I take this back to Latin America, in 2009 we had the world economies really still on the ropes, except for the emerging economies, and it became very evident that China was coming out of the slow down very well. Brazil, in addition to all of the export that was going to China, India, and the other BRIC countries, also had it's internal growth engines going and a lot of internal consumption.

Amazingly, all of a sudden in 2009 the world was focused on Brazil and every single business leader I talked to was telling me about their Brazil plan, and all the investment that they were going to do in Brazil, and how they were coming strong into Brazil.

I sat down with our local team at the time and said, 'We do quarterly reviews of our business, and what was going on,' and we got to the end of the first quarter and we did our review, and I said, 'Thank you very much, very nice, good results, growth is looking good. Fantastic.

I would like to come back in three months and see a very aggressive growth plan, because Brazil is about to take off. I'd like you guys to show me what you think could be done, so that we can work on getting investment funneled into the Brazilian operation and make that happen.'

I came back three months later and once again they presented me a very nice Powerpoint deck on how they'd done on growth and etc. We went through a multi-hour review and I said, 'Thank you very much, that's very nice. Now let's take a look at the growth plan.' No growth plan. That's kind of typical in Latin America. You ask for something and if you don't follow up continuously you may or may not get it, right?

I left it with the team, walked away, and I didn't get it. I sat down with them and I said, 'Guys, I want you to understand something. Right now the world is focused on Brazil, because the rest of the world is not doing very well, and there's a lot of quantitative easing going on, there's a lot of capital running around. You're either going to take advantage of that now, jump on it, get the investment, and take your business and your business to a completely different level.

Or, in a couple of years Europe may get itself back together, the U.S. will get things sorted out, and all of a sudden the competition for scarce capital is going to ramp up tremendously. So do you want to continue being OK, with a nice little comfortable job, or do you want to put your job on steroids and really have the opportunity to do something fantastic?' That got them really going.

When we came back for the next review, we had a very nice foundation for a growth plan going. When I compare that to the moment that CFOs are in today, that's exactly where CFOS are right now. Right? We have a tremendous demand on us because of the environment that we're living in. Because you can't just throw up any old business plan and expect to sell into it and get good results. The world's a lot more complicated than that right now.

The world is not going to stay that way. We all know that economies and everything that goes on are cyclical. It's going to stay that way for probably another three to four years, is what we can see right now, give or take. A little bit better here, a little bit worse there, but eventually the world economy will come out of that.

We as CFOs will have decided in the middle of that to jump on the opportunity, to get engaged in the strategic decisions, to get engaged with the Board, to get closer to the business, and take advantage of that and really ramp up what we're doing to the tremendous benefit of our companies.

Or we will not, and in three to four years we'll go back to reporting the results from the money that the sales guys threw out there and something stuck, and they got sales, and etc., and that's where we'll be professionally and we'll be with our companies.

I think we really have to take that seriously. Now, a very brief summary of Latin America. I mentioned the effect of the crises and sort of the turbulence, and that's our day to day. I'm not going to spend a lot on this, but I wanted to run you through it, because quite honestly, when the 2008 financial crisis hit, those of us who had been down in Latin America for a while, and of course the Latinos, who've been there forever, we had a pretty good laugh watching all you guys trying to figure out what to do.

We do that pretty much every year. Every year, some country in Latin America typically has some form of crisis going on. Either caused internally, or as some sort of an external shock, and so when you go through and you go, 'Hm. Let's see, so what is it this year? Oh, we have major financial system melt down. OK. I think I've got that manual here. Dig that out dust that off. So what do I start doing? Step one: I do this. Step two: I do this. Right? Oh, major slowdown in growth markets. Wait, I've that. Pull that one out.' So we've kind of got all of those books written.

As we watched what was going on with companies in North America and in Europe, we all sort of sat around scratching our heads going, 'Don't they know how to manage a crisis?' Because it sure didn't seem like it. There was a lot of running around, there was a lot of panic, there was a lot of things happening. I thought I'd tell you a little bit about that.

If I just go through really briefly - Argentina. I lived in Argentina in 1999, we had 1:1 dollar/peso, today it's official rate government held at 4.6, the parallel rate is about 6.5, so we've devalued by about 600%. From to 1999 until now we had tremendous growth a few years ago, probably not going to happen in growth this year to potentially negative. Take a look at Brazil. Brazil is a little bit of the opposite.

When I first went it was struggling to get off the ground, we had presidential elections, the currency went from 2.2 to the dollar to 4 to the dollar in a space of about three months, over the course of the next couple of years it came back to about 1.5, 1.6, we came out of the financial crisis very, very well, went to 7 and a half percent growth, and have already slowed back down again to about 2%, but are predicting somewhere around 4 for next year.

Venezuela was one of the darlings of the market. Second largest oil reserves proven in the world, went through tremendous economic growth, currently really on the ropes and really struggling. Columbia had a little bit of a rebel insurgency going on for many decades, 2000, 2003, 2004, not a lot of investment going on, not a lot of companies there.

Columbia today is probably one of the best countries in Latin America where you can put your money. Tremendous economic growth. The violence and the difficulties have very much gotten under control, not fully resolved, but very, very isolated now. Amazing growth going on. Peru, the same thing.

Mexico at the end of the financial crisis, 2008 because of the close ties with the U.S., 8% decline in GDP gross, real struggles with what was going on with narco-traffic that's made headlines and etc. Today all of a sudden, this is where investors are putting their money, the economic engine has stoked back up.

Where they were suffering against the Chinese, now we've got labor productivity times labor cost pretty well equal to China. Mexico is back on the map for the U.S. supply chain. Right?

That's just going through the various countries, not even touching all of them, very briefly in a decade. We're very, very used to managing all of this turbulence. Just to give a little bit of context, and I'll go through this very quickly, SAP, in terms of 2008, 2009, not only were we looking at all this turbulence which continues to happen in the region, and now added to it, globally, we were at a very serious inflection point.

We had a lot of these pressures, a lot of emerging middle class coming out, and emerging markets, not traditional markets necessarily for us, massive explosion of data, mobility coming onto the scene, all of these different things starting to impact us that said, 'On one hand we've got to try and struggle with everything that's going on in the global market, and how do we manage that?

On the other side we've got to reinvent our business, because there are a whole bunch of challenges coming out from a technology point of view that because of the crisis, now got tremendously accelerated.' So we made some pretty big strategic bets.

This is a nice way to put it in terms of what's the market size for the various markets that we were in. We said in 2010 the markets, essentially within the core, what everybody knows SAP very well for, the core ERP applications and some business analytics that we had, in the market of about $110 million.

By 2015 there are three key segments that we have to get into in order to stay relevant for our customers. We've got to get into mobility, get into database and database accelerations, and we've got to get into cloud applications. That takes our addressable market to $230 billion.

In the middle of all of this, with all of the turbulence, we have to reinvent ourselves, get into important technology spaces where our customers need us, so that we can help them through these same struggles that they're having, and continue to stay extremely relevant to them, and that means we have to transform our business while we manage all of this global volatility and all of these new pressures.

All of that falls down of course, as I mentioned, emerging markets, when we took a look at this plan, what we put underneath of it, was today we are a 10 billion Euro - this is 2010 - a 10 billion Euro company. In 2015 we want to be a 20 billion Euro company.

Now, North America, Europe - stuck in a crisis. BRIC countries - growing. It doesn't take a genius to sit down for very long and figure out, 'Well, I guess we're going to be where most of the growth is going to happen. Right?
So if we want to double as a company that means within the emerging markets we're probably going to have to do 2 and a half to 3 times growth. So how are we going to do that?' We'll talk a little bit about how we did that.

A couple of lessons from Latin America, and I'll start out on the regulatory and compliance piece, a little bit about what we have done. I think Latin America, one of the really key pieces, is compliance. Compliance, [Sarbanes], all of the things that we mentioned here.

A couple of things that we have done: we've put together a very, very dedicated competent team to work on compliance exclusively. Some of that's in SOCs, some of that is everything related to foreign
practices, to the requirements that we have now with the legislation from the U.K., and etc. How do you do good, clean, business, in a region that's known for having difficult places to do that?

We got a specific focused, small but very competent team together that worked on that, and we made it a significant leadership priority. Whenever we have leadership meetings, compliance office is always invited. They are always at the table. They are always talking to the leaders about what's going on.

When we do our sales kickoff every year, we get the entire sales team together. During the keynotes, the compliance office always has an hour to talk about what's going on and what you need to be aware of. The sales team knows that we're serious about it.

When we get together with our eco system, when we do our partner events, the same things. In the keynotes, the compliance office is there, and explaining what the expectations are. We've built a whole infrastructure behind that, but at the same time we've made it very clear. We have the compliance office, there's a job that they have to do, the ownership of compliance starts with the entire leadership team. Beginning with myself as CFO, our COO, our head of sales, and the president for the region.

Every single person knows that we take it very, very seriously. It's not just something that you push to the compliance office and say, 'They're dealing with it.' You get it into your day to day. Doing that reduces our risk tremendously.

In Latin America, like many of the emerging markets, what you will see is there are a lot of very serious professionals who take this very seriously. I don't know how many of you have a lot of detailed Latin America experience, but there tends to be a bit of a stereotype that says, 'You know, in Latin America everything's kind of side agreements, and etc. You can't do business with the government.' Incorrect. That's not the case.

There are places where that happens, there are a lot of places where it doesn't. If you demonstrate that you're serious about compliance, and you make that part of your interview process, and you make it very clear to people what your expectations are, and you show it daily, the guys who don't want to live in that world just won't come work for you. The guys who do, will be delighted to come work for you. That will be a key differentiator for you.

One of the other key things that we did was within shared services. Latin America still has a lot of small markets. One of the key things for us to getting compliance under control, especially on the SOCs side, was getting that pulled in, the key SOCs elements, pulled in to a central location. We built out a shared services center in Argentina several year ago, and our key SOCs processes run through the shared services.

It would be impossible to try to control that on the ground in each one of the countries in Latin America. Not impossible, but it would be very difficult, it would be very expensive.

By pulling that all into the shared services and getting many of those key processes lined up on SOCs, I can now be comfortable that that's taken care of.

Finally, know of a good cloud computing conference? Share it with the Proformative community.

Don't miss next years action at ProformaTECH 2013, where you can learn how to leverage technologies to maximize business results.

Products and Companies: