Good evening. I must thank all of you for being here and in the coming hour or so I would like to have your views on couple of threads, which are very relevant in the current context. One – what are the makings of the new Chief Financial Officer, Two–how to raise capital in tough times, Three – managing costs effectively and Four – the current spate of accounting scams. First and foremost let me begin by asking each of you what qualities make for the new age CFO and what do you see as his role?

Ravi Ramu: The qualities that I definitely do not possess I think!! Jokes apart, before I answer the question, I would like to give you a background perspective to what is the reality on the ground today. In India, we are all great accountants, we have a very strong fundamental understanding of how accounts are produced and a thorough knowledge on its practice. But we tend to be poor when it comes to finance. In the US, if you see, most CFOs would be management grads with the odd one being a CPS.

First and foremost I believe every CFO to be successful in today’s context has to be a risk taker which is at odds with the conventional model of him being just a bookkeeper. He needs to apply his instinct or gut feel too to take decisions and move forward. You might make a mistake with a few of them. That is better than making none by just doing number crunching. What use are numbers if they do not translate into decisions? So, if you send five signals, and four of them succeed then it is good for the organization. If all five succeed, then you get the CFO of the Year Award!!!

Second he needs to be very proactive, has to see the trends and send the warning signals early.

Third he needs to be a great people’s person and a good communicator. You need to walk the corridors, talk to people, smell business as it happens within the company and build confidence both internally and externally.

Having said that, another great quality I would see in a CFO would be the level of understanding of the business and the industry the organization operates in. I emphasize this point because of all functional heads, only the CFO is involved in every aspect of the business. Plus, you are expected to communicate all the time to the bankers, shareholders, creditors, employees and it is critical to be able to develop the right communication with the right balance and present it at the right time. Without domain knowledge all you would be doing is historic data crunching. Last year so.. this year so and so.. etc. etc…

Finally, any good CFO of today has to command the respect of the entire senior management. Otherwise he will not be delivering fully on his job.

Narasimhan: I would equate the role of a CFO to that of a goalkeeper. A goalkeeper is active only at the most crucial moments of the match. The rest of time he is the only one who can observe what his team is doing, what the competition is doing etc. You have got to be using that position to advantage and provide the right strategies to your team for its success and also warn them of potential lapses much before they happen or likely.

Srinivas: Let me build on what Raviramu said. Today’s CFOs need to be entrepreneurs themselves. They cannot see themselves as accounting and finance people just advising somebody else.

Ravi Ramu: Having spoken about the makings of the new age CFO I must add here that it would be difficult to get a topnotch finance professional as CFO if the environment is not conducive. For example, in a promoter driven company, where the strategy and business model is all done by the owner and the CFO is just expected to take care of the book keeping you cannot have a strategic CFO.

Xavier: One quick question, before we move to the next thread. Can outsourcing of the CFO function possible?

Narasimhan: Definitely not. CFO is a function core to the business and operations of any company and the incumbent has to be a full-time dedicated person. What you can have is an advisor who adds value to that function or role. But not complete outsourcing.

Ravi Ramu: During the startup craze of the late 90s, one found lots of companies having part-time CFOs primarily because of the cost of having a full-time inhouse. Thus you had senior professionals doubling as part-time CFOs for handful of companies and spreading their time with each company over the week. But once you grow, only accounting can be outsourced and the function cannot be outsourced. By the way outsourcing works only when mechanical processes are involved, but as we are now discussing, the role of a CFO is more strategic and thus it cannot be outsourced.

Xavier: What is the mode that CFOs should be in when times are tough?

Ravi Ramu: Right now, the times are tough and the stock markets are behaving crazily. So, I think it is time for us to put our heads down and just work through this difficult period. One attribute to avoid is being creative and trying to innovate. I think the right time for all that is later once the market picks up. I have been a consultant for many years and it is easier for the consultant to tell you to be different. For example in the 80’s no one understood or knew the effect of derivatives. Investing in one in such a case is a clear risk, which one should avoid.

Xavier: Can we elaborate on one aspect, which is critical at this juncture – cost cutting. How does one go about it without affecting future competencies/plans?

Ravi Ramu: I think employee strength reduction is not one of the first and recommended steps. It would be important to look at productivity gains. Take our own example, we improved our utilization rates from 65 to 75% level.

The second is an increased focus on internal systems and processes. When boom times are there companies run after business without worrying about in-house backbone. The downturn gives you a great opportunity to look inward closely at what your internal processes are especially if the fall is immediately after a peak. Take our case. We grew at 85% previous year and by the time we merged and about to grow better, we hit the roadblock. And that also coupled with other things I have mentioned is a great opportunity to look inward. We have a BPO venture called Msource and communication costs are a substantial part in that business. We looked around and shopped for the best deal and we did end up saving substantially and that we are passing it onto the clients.

The third is, if you have surplus cash, this is not the time to put into risky investments.

Another way one can look at cost reduction is to look at the financial cost.
Personally, I believe that lack of resources is a great incentive. For, cash itself cannot create success stories. Otherwise all venture-funded companies in the world would have done well. There would not have been any failures.

Narsimhan: I would like to highlight a basic issue here with regard to the way most IT companies manage their corporate finances. They want to be zero debt and prefer equity over debt when it comes to funding their expansion plans or further investments? While there might be no explicit cost to equity there is a substantial implicit cost. One way, IT companies can reduce their cost is to reduce the equity and return the surplus cash to the investors and substitute it with borrowing, particularly since taxes are going up. The traditional companies are a lot better. Most of them are net borrowers.

Ravi Ramu : I would agree with the logic but it is not realistic in the Indian context. Take the example of our financial institutions or banks. When I go to borrow, the first thing they ask me is what is your collateral. They want security like computers. But do not understand that by the time one pledges the PCs and takes the money the PCs would have become redundant. We do not have an evolved financial industry here which is why IT companies prefer to take the equity route.

This debt route might work in let us say California, where you will get 10 banks to give you money based on the audited balance sheet of your company. We have not reached that stage here. I will tell you my own experiences. People are keener to lend to our BPO business than IT because they think there is lot more collateral there. Here I must add that we are not talking about the big ones, which anyway do not need the money, but our banks would be only too keen to lend to them.

Xavier: In these days of accounting scams, on whose shoulders lies the onus?

Ravi Ramu: I think the onus is more on the corporate. In India we seem to be very keen to blame it on some regulators or some auditor, or some old practices inherited from the British Raj days. Let me put it this way. If the intention is right ad there is an internal motivation, companies would be transparent. But if you start regulating, then they will all find ways around it. Over regulation cannot be the answer. But self-regulation is. I will narrate an example. There is a publicly listed company in the US, which runs over 100 schools. What they have been doing is recognizing the salaries they pay their teachers as income through some practice. Now, that is allowed under some section of whatever act that is there to regulate.

Narasimhan: I would not agree. One needs to factor in that most Indian businesses are still promoter-owned and there is not much onus on them to be transparent. Second, the maturity level of our markets and investors is still not to the US levels and hence there is a clear and strong case for a third party intervention. It could be government or a statutory body, which lays down some regulations and says it is mandatory to adhere to it.

Srinivasan: I must add here that we need to clearly distinguish the IT sector from the traditional ones. IT companies have been accustomed to being global businesses right from day one and have a different corporate culture and way of doing business. That is why you would see many of them voluntarily adopting to new accounting standards. The old economy ones, would be different.

Ravi Ramu: To me corporate governance is like a necessity. We do not go about telling everyone that I woke up this morning and had breakfast. We take it for granted. For companies transparency or governance should become like that. Infact, regulators in
the worst case scenario can actually be deterrents. You can’t send inspectors all around the world or all over the country fishing for problems. So regulation is just like the traffic rules. We all know the traffic rules, yet we don’t follow the same. We would not have followed it much of the time, if we did not have the police people around. I think it is more just a cautionary thing that we have these regulations, and believe me regulations have been there for the last 5000 years that we know and human beings have found always new ways to break those rules. In some cases, a thrill in doing it. We can’t eliminate it, we can only bring in corrective measures. That is why I ardently espouse self regulation.

I just read a McKinsey report, which says that there is a premium of 25% in valuation of better managed companies with higher transparency levels.

Narasimhan: I would like to just give an example here for the need for a regulator even in matured markets. Till 1990 Oracle recognized the revenue of licensing fee the moment they receive the order. They did not wait for the license to mature. In this particular period they were doubling their revenues. There were two potential violations on basic accounting principles and this got corrected only after the regulator stepped in. Till then every other fellow in the industry did it. Subsequently we discover and identify the problem. Till then not much of importance is given the to the issue since the income is very small. However when magnitude becomes very large and the same accounting practice continues, only then the regulation is passed. Whether it is lack of knowledge, intentional one or just by omission, people tend to continue with the same mistake. Unless somebody points it out and corrects them by regulation, I doubt the practice would change on its own.

Xavier: How does one raise capital in these tough times?

Ravi Ramu: Like I mentioned earlier, we have a serious issue with the maturity levels of the finance industry here. They all want security or collaterals. They fail to recognize that IT as a business is driven by people. Most of us consciously do not build assets. For example, we never buy any of the property our facilities are situated in. We just rent or lease them, to keep the capital investment down. Unless, something changes, equity will continue to be an attractive option for many IT companies. The other related perspective I would like to offer here is that because of these reasons, it is better to be proactive and to some extent address the need for further working capital. For example, once we realized that onsite rates were falling we quickly moved people to India and shifted focus. Thereafter, though our revenues fell for one quarter compared to the previous one, we were able to sustain the bottom line through quick changes like these.

Xavier: Thank you gentlemen for a very insightful discussion

Issue BG17 Aug02

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