Notes and Observations from the MIT CFO Forum

This year’s forum, held on November 15, was the seventeenth in the series.  It kicked off with Co-Chairman Jeremy Seidman highlighting the planning process for the event.  Each year, about a month after the current forum, Mr. Seidman, Co-Chair Jack McCullough and team begin exploring what is top of mind for CFOs.  For this year’s version, the team recognized that CFO’s are stronger, more powerful than ever within their organizations.  The team also saw that while being different works, being bold is better: it often leads to greater success.  Smart strategic decisions are important.  M&A can have a big impact.  But most important of all, CFOs should not let doubts and fears get in the way or compromise their opportunities.  More than ever, he asserts, CFOs need to take risks.

Hal Gregersen is the Executive Director of the MIT Leadership Center and the author of “Questions are the Answer: A Breakthrough Approach to Your Most Vexing Problems at Work and in Life.”  MIT attracts people who are problem solvers and who generally seek to solve the toughest problems.  As the world has become more complex, asking the right questions is more important than ever because they put us in a better position to obtain the right answers.

David Neeleman the founder of JetBlue and Azul Brazilian Airlines, has said that behind every breakthrough is a better question.  This approach helped Needleman and his teams create electronic ticketing at JetBlue and acquire a large regional Brazilian carrier (TRIP Linhas Aereas) in part to gain slots at Rio De Janeiro Santos Dumont airport.  Richard Branson, the founder of Virgin Group and one of the world’s most successful entrepreneurs, records his observations and questions on every business trip in a journal.  Life coach Tony Robbins defines problems as unanswered questions.

Questions are a way to peel back the obscuring layers of a fuzzy problem to get at core issue(s).  They provide a framework for problem solving that can avoid hurt feelings and make it safe for people to discuss problems and propose solutions.  Many CEOs view questioning as an essential skill.  Effective CEOs are often adept at posing questions and then waiting for the proper time and conditions to ask more.

Years ago, as his business scaled up its operations, Fadi Ghandour, the founder of transportation and logistics provider Aramex, arrived in Dubai, a key hub, for meetings with the local staff.  Rather than take a limousine from the airport, he arranged to have one of Aramex’s couriers pick him up in a delivery truck.  During the ride to the hotel, he quizzed the courier intently about local operating conditions.  He then raised the same issues at his meeting with local managers (and a smattering of invited delivery drivers), helping them address previously unknown operational problems.

In 2002, Rose Marcario, a financial executive at a private equity firm, was stuck in traffic in New York City near Rockefeller Center when she saw that a woman with obvious mental problems was the cause of the tie-up.  After working herself up over this delay, she saw her tense face in the car window and asked the driver to pull over and let her out.  From there, she walked to and around Central Park and asked herself: “Is this what I’ve become?  Is this success?”  Upon further reflection, she quit her position and eventually took the job of CFO of Patagonia, the outdoor clothing and sportswear company.  She was appointed CEO five years later.

Through his research, Mr. Gregersen has discovered the benefits of the question burst, in which a small group is given the task of coming up with as many questions as possible about a particular problem in a very short time.  Groups employing this technique usually find that the initial anxiety that they experience when first exposed to the problem melts away as they begin to scope out questions that may lead to a potential solution.

Besides scoping out questions, Gregersen also describes a process by which organizations can help promote creativity and innovation.  Asking questions, it turns out, is often not encouraged or rewarded in our culture, from early childhood education on.  Questions can rock the boat, so posing them frequently requires a willingness to take risks and to move out of our comfort zones.  Consequently, organizations that want to foster innovation or get to the core of key operating problems often must take steps to embed questioning in their cultures.

Pixar, the animated film producer, has developed Brain Trusts, that allow film directors to assemble a peer group to question their thinking, helping them overcome a creative block or see new creative possibilities that will ensure that the film resonates with viewers.  After Pixar was acquired by the Walt Disney Company in 2006, Disney Animation adopted its own form of the Brain Trusts, which it calls story trusts.

Fireside Chat with John Murphy, CFO of Adobe.  Hal Gregersen then discussed the challenges and opportunities of Adobe’s digital transformation with its CFO, John Murphy.  Mr. Murphy joined Adobe from Qualcomm in 2017 as Chief Accounting Officer and Corporate Controller.  He was appointed. Adobe’s CFO in April 2018.

With the rise of cloud computing, Adobe decided to shift from offering its software products on CDs to a subscription-based online model.  This was a major strategic shift that required considerable planning.   In order to encourage customers to sign up for an annual subscription, the cloud versions of Adobe;s product line-up, including Photoshop, Illustrator, Premiere, and Acrobat, among others, had to be compelling.  A major benefit of the shift:  Adobe would get lots more data about how its products were being used which would help inform its product development process.  The company would also be able to deliver upgrades quickly.

Going forward, Adobe is looking to deploy artificial intelligence to its data to predict what customers may want to do with its products.  While the shift online has greatly expanded the volume of data available for analysis, management must focus on the data that is most relevant.

Besides the technical aspects of the change in product delivery, Adobe had to assess how the shift would impact its financial performance, both short- and long-term.  Many analysts were skeptical about Adobe’s ability to make the change successfully, so Adobe gave them three year financial targets and updated them on its progress every quarter.

As measured by share price performance, the shift to the cloud has been a spectacular success.  Over the past three years, ADBE has delivered an average annual return of 38.7%, far better than the S&P 500’s 11.7%.

Morning Keynote: “Everyone Has a Story” with J.T. McCormick, President and CEO, Scribe Media.  Mr. McCormick is the author of “I Got There: How I Overcame Racism, Poverty and Abuse to Achieve the American Dream.”  His talk focused on his growing up in a totally dysfunctional family – His mother was a white prostitute and his father was a black pimp.  Without going into the details – I suspect that they are covered in his book – it is quite amazing that Mr. McCormick was able to emerge from that experience and work his way out of poverty.  From his first job cleaning toilets, he rose to become the President of several companies.

Strategy Beyond the Hockey Stick.  (A panel discussion with Diane Basile, CFO, CFA Institute; Justin Crotty, CFO Anaqua; Robert Gibney, CFO and Kenneth Goldman, CFO, Everbridge; moderated by Werner Rehm, Partner, McKinsey & Company.)  The title of this panel discussion is also a book by McKinsey partners Chris Bradly, Martin Hirt and Sven Smit.  The book seeks to help companies overcome the social dynamics that impede the achievement of breakthrough performance in most organizations.  This includes transforming the typical annual strategic review and budgetary process to enable companies to shift resources quickly to exploit identified opportunities.

Mr. Gibney discussed his experience as CFO of various divisions of Thomson Reuters (TR), which held quarterly strategy meetings that developed a cadence of trust in the resource allocation process.  At these meetings, the group would decide to allocate funds for one bold move that offered superior performance potential.  TR also pursued mergers and acquisitions in a programmatic fashion, forming integration teams charged with identifying and achieving targeted savings and new growth opportunities as quickly as possible.

At Monster, Mr. Gibney has also promoted monthly strategy meetings with teams to advance and prioritize revenue and cost efficiency initiatives, including managing the company’s new product pipeline.  Gibney joined Monster Worldwide in 2017, nearly a year after the company was acquired by Dutch human resources provider Randstad.  Prior to his arrival, Monster’s brand had lost some of its cache.  Mr. Gibney and his team are committed to restore the Monster brand to leadership status.

Kenneth Goldman is the CFO of Everbridge, a company whose mission is to keep people safe in critical situations.  It has a suite of critical event management solutions that allow customers to assess risks, locate employees, automate standard incident response procedures and analyze and refine response performance.

The company offers its solutions on a subscription revenue model delivered as a cloud service.  To date, it reports that 95% of its customers renew their services annually and expand their use of the platform each year.  Everbridge’s customer base has also grown at the rate of about 20% annually.  Its revenues increased at an average annual rate of 33% from 2015 to 2017 and so far at an accelerating pace each year, with 2018 YTD revenues up 40%.

With such strong growth comes big investments.  Everbridge has been investing in salespeople, with the expectation of a 2X-3X payback within nine months of hiring.  It is also investing in new products, 7X24X365 operations centers and other infrastructure to ensure and enhance the reliability of its services.

To manage this rapid growth, Everbridge holds quarterly business reviews.  It knows that its budgets will be wrong within a few quarters, so there is no way to prepare precisely for the future.  Instead, the company recognizes the need to be agile to respond both to the challenges and opportunities to accompany its rapid growth.

The CFA Institute, a global association of investment professionals that administers the Chartered Financial Analyst (CFA) designation, is a mission driven-organization that is not subject to the same 90-day cadence and pressure to grow the top line as the publicly-traded companies that many of its members follow.  The Institute maintains a three-year strategic plan which is up for renewal this year.  Its strategic plans usually focus on allocating resources to serve the needs and interests of its members and also to maintain and promote the rapid growth in the CFA designation worldwide.  Diane Basile, the Institute’s CFO, has recently worked on replacing the organization’s ERP system and developing its forecasting tools.

Justin Crotty, the CFO of Anaqua, a privately-held provider of web-based solution that help organizations manage their intellectual property, oversees the company’s global finance and accounting functions, as well as its M&A, human resources, legal, sales and cloud hosting operations.  Anaqua likes to make big bets to expand its offerings as quickly as possible.  It has most recently adopted a buy-and-build approach, acquiring small companies (i.e. ideaPoint and AcclaimIP) with cutting-edge technology in new product or service areas and then investing heavily to scale them up quickly.  This has allowed it to acquire new capabilities at a reasonable cost (compared to larger acquisitions), while avoiding the pitfalls of starting from scratch with the resources of existing operations that can sometimes be entrenched.  The company has also made a big bet in Asia, a significant source of new intellectual property, by establishing a physical presence there to gain global market share.

Chutzpah in the CFO Suite: Bold Decisions, Actions and Outcomes.  (A panel discussion with David Frear, CFO, Sirius SM; Glenn Schiffman, CFO, IAC; and Michael Sheridan, CFO, Docusign; moderated by Kimberly Johnson, Professional Products Editor of the Wall Street Journal.)  “Going Bold” was the theme of this year’s conference.  This panel highlighted bold calls that conference organizers see as an imperative for today’s business leaders.  Specific consequential outcomes are sought but not guaranteed.

Glenn Schiffman said that IAC has not made one bold move, but rather Barry Diller, its Senior Executive Chairman and its Board of Directors has empowered the team to make better decisions.  The key, as far as the Board is concerned is whether the company is making progress.  IAC has 30 companies under its umbrella with a wide range of performance.  Two of its companies, Match Group and ANGI Homeservices, have minority stakes that are publicly-traded.  Consequently, Mr. Schiffman and his team are charged with preparing quarterly earnings reports and hosting quarterly conference calls for three companies.

IAC’s acquisition of Angie’s List in September 2017 qualifies as a bold move.  ANGI was merged with IAC’s Home Advisor to form ANGI Homeservices, which remains publicly-traded under the symbol ANGI.  The combination gained operating synergies (even though IAC still maintains separate websites for each).  Since the acquisition, ANGI’s share price gained 92% at its Sept. 2018 peak, but the recent market sell-off has reduced the gain to 42%.

SiriusXM, the provider of satellite-based audio entertainment which is now part of the Liberty Media (LBTYA) empire, has made at least two bold moves over the years.  In July 2008, Sirius acquired its main competitor XM Satellite, creating the sole U.S. satellite audio provider.  Although the stock plunged sharply during the 2008 financial crisis, it recovered quickly and is up four-fold since the merger.  In September 2018, SiriusXM agreed to acquire Pandora, a leading audio streaming company for $3.5 billion.  The acquisition, which is expected to close in early 2019, will give the combined company 106 million subscribers.  SiriusXM will use Pandora to expand its reach beyond its current base of mostly automobile drivers, especially into ad-based services.  The acquisition will also allow SiriusXM to bring Pandora’s unique streaming offerings to its existing subscriber base.

Docusign completed its IPO in May 2018 and a follow-on equity offering for selling shareholders, mostly venture capital investors in September 2018.  In the September offering, it floated 8.1 million shares (not including the overallotment option) at $55 for total proceeds of $443.3 million.  Simultaneously, the company also offered $575 million of its 0.50% Convertible Senior Notes due 2023.

The company, which offers electronic signature services for legal documents, has reported rapid growth over the past few years.  It more than doubled its revenues from fiscal 2016 to fiscal 2018 and reported a 35% increase in fiscal 2019 first half revenues vs. the prior year.  Despite the rapid growth in revenues, however, the company is still not profitable.  In fact, its fiscal 2019 YTD operating loss of $305 million was up nearly 10-fold from the comparable fiscal 2018 period.  Consequently, CFO Michael Sheridan said that the decision to bring a large convertible note offering to market was somewhat of a bold move because debt investors typically expect the issuer to have profitable operations that are either stable or growing.

Digital Finance, Digital World.  (A panel discussion with Doug Baker, Principal, KPMG; Tiffany Freitas, Chief Business Officer, PathAI; Anitha Gopalan, CFO, Catalant Technologies and Dr. Michael Siegel, Principal Research Scientist, MIT Sloan; moderated by Ash Noah, VP, CGMA External Relations).  The finance function has long been a source and target for technology innovation; but times and technology continue to change.  This panel started with the premise the CFOs are at a crossroads, with 47% of respondents to a CIMA survey citing concerns over the future and specifically whether the finance function currently has the right mix of capabilities to meet the future demands.  56% of respondents cited tensions between old and new processes as key, with compliance costs having risen sharply over the past decade.  The survey concluded that the new model for finance expands its strategic role within institutions.

The panel discussed various technologies that are seen as playing a key role in the future of finance and where they currently reside on the adoption curve.  Technologies like cloud computing and advances analytics are nearing maturity, while others such as blockchain and cognitive computing are still in the early adoption phases.  In choosing whether to implement these newer technologies, panel members suggest starting small, building support and then going bold.  It is important to know both where you want to go and make plans for how you expect to get there.  Once a specific technology is chosen, it is important to focus on its impact or potential in changing underlying business processes.  Attacking the low hanging fruit – i.e. areas that offer big gains at relatively low costs – can help build support for the new technology.  It is important in the implementation to focus on the long-term, to avoid the mistake of dropping a technology that may likely prove to be valuable.

Cyber risk has been the number one issue over the last three years and continues to be an area of great concern.  Although it has received the attention of nearly all Boards of Directors, most CFOs agree that it has not received sufficient resources to mitigate the risks.  Of course, not all cyber risk can be mitigated; there will always be some exposure to black swan events.  Many organizations have purchased cyber insurance but believe that such insurance is not sufficient to address all vulnerabilities.

Blockchain: Brilliant or Bandwagon?  (a panel discussion with Julia Abramovich, VP of Sales, IBM; David Garrity, Co-Founder and Partner, BTblock; Naeem Ishaq, CFO, Circle; and Steven Pipp, Research Manager, Silicon Valley Bank; moderated by Silvio Micali, Professor, MIT Computer Science and Artificial Intelligence Laboratory (CSAIL).)  Although blockchain technology has received a lot of hype, the panel argued that it has many practical applications which are worthy of the time and attention of CFOs.

Blockchain technology is useful in situations where costs, complexity and determining cause are consequential.  The technology operates on a single ledger on which all parties in a transaction agree.   Roadblocks to adoption include trust (especially the willingness to share data), regulatory uncertainty, newness (with few applications and success stories to date), the cost of implementation, a lack of available infrastructure and the difficulty sometimes of measuring return on investment.

Large companies – like retailers Walmart and Carrefour – have adopted it to enhance food safety.  Blockchain tagging makes it possible to trace the origin of food products in seconds rather than days.  (The recent nationwide dumping of romaine lettuce due to an e-coli outbreak may have been avoided if the growers had implemented blockchain technology.)

In 2017, Softbank announced that it was exploring the use of blockchain technology in communications applications such as mobile payments in a consortium with Sprint and FarEasTone of Taiwan.  Softbank is reportedly dedicating a portion of its $100 billion vision book to the application of the technology.

Blockchain has many potential applications across many industries– for example, in the tracking of ocean-based cargo containers, global financial transactions and management of working capital and assets.  Implementation of blockchain technology is therefore a potential source of competitive advantage.

The Business of Cannabis.  (a discussion with Mark Castaneda, CFO, Tilray and Tim Saunders, CFO, Canopy Growth Corporation, moderated by Scott Stern, Professor of Management, MIT Sloan).  Cannabis stocks have had a wild ride in 2018.  The participants highlighted the opportunities that these fledgling consumer product companies have (it’s not all about smoking).  While the companies are focused on global expansion and product development, their CFOs are concerned about maintaining sufficient capital and human resources to maximize their growth potential.

Parting Thoughts.  While the theme of the conference was to “go bold,” CFOs may find it useful to employ Hal Gregersen’s question burst to determine what exactly going bold should mean to their own organizations.  What are the available choices for going bold?  How can or should they be implemented?  What are the short- and long-term implications?

November 30, 2018

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 448-2246

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