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Convincing the CFO – A How-To guide for compelling business cases

Last week I wrote about a telephone company (Avaya) that achieved a 2,000% ROI through their Data Quality COE.  They achieved this payback by focusing on the income side of the business; that is, driving revenue growth and reducing operational costs by improving the quality of integrated customer and business data.

But is it possible to develop a business case for an investment that doesn’t improve profitability?  The short answer is yes. The long answer (including a comprehensive business-case methodology) is explained in the ICC workshop at the Global Integration Summit, but here is a real-world example.

Coincidentally, this is another TELCO example. In 1997 I led a project to implement an enhanced collections management system for a regional telecommunications company. The company had over 1,000 staff whose job was to chase down customers who were delinquent on their payments. The new system provided tools to make the staff more efficient and also provided an integrated and holistic view of each customer’s history so that the collections treatment could be adjusted accordingly. For example, if a telephone customer habitually paid their bill several days late (but always paid), then the company could save money by not sending late payment notices – just wait a few days. But if a customer was frequently 60-90 days past due, then a more aggressive collections treatment could be used (such as bypassing the first and second reminder notices and going straight to a phone call from the collections rep).

The business case for the new system was to reduce the overall accounts receivable for the organization by $100M while reducing operational costs and net bad debt. This is a big number and sounds impressive – until taking into account that the total size of the receivables on the balance sheet was $3B. Nonetheless, $100M is nothing to sneeze at and probably is sufficient to make the point with the head of the collections department. But the reality is that reducing receivables doesn’t impact top-line revenue growth (since the revenue has already been recognized as income) and it doesn’t directly reduce operating costs – it’s simply about collecting the cash more quickly. Do the CFO and CEO care about accounts receivable? Probably – but we need to translate the benefits into terms that they can relate to. So what really is the impact to the business of reducing AR and why should senior executives care?

This scenario is a little tricky since it depends on what the company will do with an extra $100M in cash. Will it simply increase the amount of operating cash or will it pay down debt, invest it back into operations, or return it to shareholders in the form of increased equity? We don’t know the answer but we can do a “what if” analysis to see the impact it would have on shareholder returns if we hold everything else constant and decrease equity by $100M (e.g. buy-back $100M of shares so that the remaining shareholders each own a larger share of the company).

For the non-accountants that are reading this, I should probably explain a bit further why equity decreases in this example. AR is an asset; it is money that has been earned by the company but not yet received from customers. When we reduce one asset (AR) by $100M we have to either increase another asset (such as Cash) by the same amount or reduce a liability (such as loans payable or shareholder equity) so that the balance sheet still balances. If we assume that the $100M in cash is used to buy-back company stocks, the net shareholder equity is reduced by $100M. And since ROE is calculated as Net Income divided by Shareholder Equity – if we reduce the size of the denominator, the ratio increases.

In 1997 the company had Net Income of $2.3B and total Shareholder Equity of $8.3B which results in an ROE of 27.71%.  By reducing the Equity by $100M to $8.2B, the ROE increases to 28.04% – an increase of 34 basis points. To the CFO and CEO, this is a big deal!

As I mentioned in the prior posting, in today’s world integration practitioners need to be equipped with business skills. To learn some of these skills, you could attend the www.GlobalIntegrationSummit.com to hear a collection of real-life case examples about the payback from integration. You can also attend my pre-summit workshop on June 2nd where I will be spending a good part of the day on a methodology and tools for developing compelling business cases for COE’s, ICC’s or any kind of shared infrastructure investment. Learn more and sign up at www.globalintegrationsummit.com/Pre-Summit_Workshops.

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One Response to Convincing the CFO – A How-To guide for compelling business cases

  1. Lodewyk Schuermans says:

    Very convincing justification and I liked the ROE angle.

    Many years back I justified a Document Management solution for a Transportation & Logistics company on a very similar basis. Their AR was dramatically shortened and reduced and interestingly the typical late payers started paying up sooner because they felt “intimidated” by the fact that they could not use the excuse of “not having received the delivery note”.

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