Michael Sutcliff is the managing partner of the Accenture Finance & Performance Management service line. Mr Sutcliff has extensive experience in strategy, business architecture, systems integration, business transformation and outsourcing engagements across multiple geographies and industries. His responsibilities include developing new service offerings and alliance relationships, and managing Accenture’s consulting services of interest to senior finance executives.  Since joining Accenture, Mr Sutcliff has specialized in large-scale finance transformation programs involving financial and strategic planning, enterprise performance management, finance operations and reporting, shared services and outsourcing, and tax compliance. In addition, Mr Sutcliff was involved with launching Accenture Finance Solutions as a new outsourcing business unit.

Michael Donnellan is an executive partner in the Accenture Products operating group, which covers both the outsourcing and consulting businesses. Mr Donnellan has more than 20 years of experience in the professional services industry. He has also worked extensively on the research, development and deployment of innovative operating models. An engineer by background, Mr Donnellan has spent the last decade focusing on the new role of finance in the modern corporate enterprise. In 1997, he co-authored CFO: Architect of the Corporation’s Future, which resulted in the adoption of new finance and accounting organizational models by numerous corporations around the world.  In 2004, he co-authored CFO Insights: Achieving High Performance through Finance Business Process Outsourcing.

CFO Insights

Delivering High PerformanceBy Michael R. Sutcliff Michael Donnellan

John Wiley & Sons

Copyright © 2006 Michael R. Sutcliff
All right reserved.
ISBN: 978-0-470-02696-0

Chapter One

What it Takes to be a High-Performance Business

PURSUING EVER-HIGHER LEVELS OF PERFORMANCE

Today's global business environment is marked by unprecedented complexity, uncertainty, and competition. Why are some companies able to increase shareholder value despite these challenges? How do they continue to thrive and innovate, year after year, regardless of disruptive industry shifts and unpredictable circumstances? What sets these companies apart?

By definition, few companies are able to consistently outperform their peers over multiple economic cycles. In an extensive research project, Accenture analyzed the high performers to determine what set them apart from the rest. Among many variables, we examined whether the ability to both generate and sustain high performance was linked to an organization's capabilities in finance and performance management. Not surprisingly, we found a strong correlation between those companies that were masters of finance and those that were high performers in their industries.

We also discovered that chief financial officers (CFOs) in these high-performance businesses are operating outside of their traditional roles. Instead of managing routine finance operations, they are much more engaged with their senior executive teams in helping to identify value-creating opportunities and in supporting the business in leveraging those opportunities. Such changes are exemplified in the leadership of Dave Burritt, Caterpillar's CFO, as the story of his effort and success demonstrates.

THE LINK BETWEEN FINANCE MASTERY AND HIGH PERFORMANCE AT CATERPILLAR

Dave Burritt, CFO Caterpillar Inc.

Dave Burritt is a keen advocate of high-performance finance. His $30+ billion company is one of 600 enterprises worldwide in the intensely competitive industrial equipment industry. Buoyed by strong global demand for its products and services, Caterpillar is successfully contending with major challenges: rapidly accelerating commodity prices (steel prices have increased from $387/ton to $877/ton since 2002 and crude oil is now trading close to record price levels), hypergrowth in China and across Asia, and tightening regulatory standards for hydrocarbon emissions.

Along with Caterpillar, a small group of companies in the industrial equipment sector excel in managing change and creating value. Among these top performers are Kone, ITT, Cooper Industries, Sandvik, and Danaher. Collectively, they stand out from the crowd in the total returns they have delivered to shareholders.

Among these companies, we have chosen to focus on Caterpillar for three reasons. First, its distinctive franchised selling model, supported by its CFO's commitment to innovative finance strategies. Second, its consistently superior profitability, as measured by a 50%+ growth in revenues since 2002. And last, because Caterpillar continues to reinforce and extend its outstanding leadership position as the world's largest engine manufacturer and one of the most strategically astute players in its industry.

We asked Dave Burritt to describe Caterpillar's current outlook and where he sees the company heading over the next couple of years. "Right now," he noted, "we are in the sweet spot of the economic cycle and our business model. Our numbers have just skyrocketed. While past performance is no guarantee of future success, last year was remarkable: we delivered an 85% increase in profits and a 33% increase in sales. Historically, we have to go back to 1947 to find percentage increases in sales and revenue like these. While winning market share in an upturn, we've also responded exceptionally well to some serious industry issues.

"Who knows how long the current market will last? Whatever happens, we are going to be prepared for the future. We're spending a lot of time on increasing our flexibility, on scenario planning if you will, so that we can take advantage of the continuing upturn while also modeling possible responses if things shift and turn against us. We're raising the bar, looking at our metrics and repositioning the business. We are setting lower breakeven targets across the company and measuring them at the individual business-unit level.

We reach $30 billion in sales and revenue two years early, but haven't hit our return-on-sales metric. We'll have a lot of work to do in the short term. Over the long term, we plan to reframe our metrics. They need to be more asset-based and more value-based - and to reflect a stronger emphasis on cash. Eventually, we want a totally value-based management environment."

Dave went on to explain his leadership posture and how he and his senior finance team are supporting Caterpillar's drive to push its performance to the next level. "We're working this issue very hard," Dave commented. "We have restructured our entire finance organization. Until recently, it consisted of traditional accounting, treasury, tax, and investor relations departments. But today, we've added new functionality, such as our Strategic Consulting Organization, which works closely with our company's Executive Office and Strategic Planning Committee. Our finance resources now include Product Source Planning, a group that focuses on our vision for the future and our global footprint by identifying the investments we should be making around the world. Then we have our M & A team, which is charged with searching out opportunities in adjacent space.

"Finally, we have very rich and deep thought leadership in our organization. Our Business Strategic Support Group has a very strong knowledge of economics, but it also leads our initiatives in competitive intelligence, market research, and product and technology innovation. This group helps us monitor our competitors' global footprints so that we know what actions they're taking and how to respond. The goal is to be able to drill down into our competitors' statements as well as our own. This gives us greater granularity and connectivity. We have all the pieces in place to enable our company to become a 'master of the business.' As we strengthen our ability to team across the organization, we see a marvelous opportunity to point Caterpillar's leadership towards new pools of value - areas where we can leverage our strategic assets to out-compete our industry peers."

Caterpillar has been improving performance year after year. We asked Dave to identify the factors that have propelled his company to ever-higher levels of achievement. "If we go back to the 1990s," he explained, "the most significant event for us was our decision to restructure the company into individual business units. At the time, we had reached about $10 billion to $11 billion in sales and our business units were, in effect, operating as cost centers. We decided to push authority and full P&L accountability down to the business-unit level. This really made a huge difference.

"I believe that the other significant factor is the mindset that we have now as a Six Sigma company. This has given us discipline, structure, and a common language to achieve shared goals on big projects. It is helping us with our quality and growth, helping us control costs, and helping us with innovation. Currently, we have over 500 breakthrough projects in development. Our mission is to attain world-class status. We measure our progress with a lot of rigor. Every month we reconcile ongoing results with our bottom line. For us, the brand of Six Sigma is rugged, tough, reliable, durable, enduring, disciplined. It's a great cultural fit with our business."

In the late 1990s, Caterpillar introduced value-based management into its European finance operations. Dave led that initiative, so we asked him to explain the rationale behind it. "We saw an opportunity to improve people's understanding of the business and help them focus on what drives value for Caterpillar. I think we were successful in educating people and in putting in place a framework. I believe that the strong value-creating metrics within our Six Sigma model have become the enduring legacy of that project. We folded what we learned from our value-based management initiative into the rollout of Six Sigma, so that the numbers generated from Six Sigma projects capture true performance. Our strategic selection filters use a value-based approach, so that new projects are screened to ensure that they'll deliver the greatest value for Caterpillar. Some units are better at this than others, but today, everyone takes potential projects and drops them into this filter. So I would say that the value-based management work that we did in Europe became a good foundation for our deployment of Six Sigma metrics that are very robust.

"Some of the things we talk about at Caterpillar are meaning, action, structure, and truth (MAST). Meaning is the burning platform for us. We are good at painting a picture of why something's important and getting people all fired up about it. We take action We're a results-oriented organization. We know how to move forward and make things happen. Structure involves process, people, and resources. When we trip and fall, it's usually because we didn't do a good job of putting the right structure in place. Finally, there's the truth. For us, this is about capturing value in a quantifiable way that reconciles with SEC published reporting. When people see the numbers coming out of any project or initiative, we want them to know that those numbers are accurate, reconciled, auditable, and enduring. If you don't have truth in your numbers, your structure will fall apart. If you don't have a strong structure - the resources and the people to get something done - you won't take any action. The result? You won't be able to achieve the meaning or the burning platform that you aspire to."

CFOs today are confronted with competing priorities. On the one hand, finance activity has never been more intensely focused on conventional technical accounting issues, basic financial management, and corporate governance. On the other hand, even as demands for core finance capabilities are escalating, CFOs are being asked to operate far beyond traditional boundaries and become directly involved in leadership, strategy, and execution. We asked Dave to comment on balancing these divergent finance agendas. "The majority of my time is focused on the question, 'What does value look like from a stockholder's perspective?' - and on helping to create and execute strategies to keep us on an upward performance curve. We are increasing our transparency to support these efforts.

"For example, we've completely revamped our reporting. We've moved all supplemental information to our Web site, tabulated our published information to enhance readability, and added bucket or waterfall charts to capture our corporate outlook. We've also added a Q&A document to help people understand our business better and to reinforce our key messages, headlines, and proof points. When the investment community sees into our business with more depth, it understands the issues that we need to fix as well as the things that we're really good at. Instead of just giving numbers, this new reporting approach reflects all the dimensions that we see. It also provides targets for us to aspire to.

"I also work with our economists on competitive intelligence and with our Strategic Planning Committee. However, the lion's share of my time is spent on people issues - helping my direct reports better integrate their functions with one another. A good bit of time is devoted to succession planning: who we need to develop and who we need to move around the world. Overall, I'd say that my time revolves around managing the critical success factors for my organization - and making sure we have the right people in the right place at the right time.

"We are refocusing our finance organization on this notion of 'being world class or finding somebody else to do it for you.' We are creating greater alignment with both short-term results and the drivers of sustainable long-term value creation for our entire company. We want everyone focused on stockholder value, improved cash flow, and greater profitability. We also want to make sure that we're offering the great leadership training provided by Six Sigma."

Dave Burritt's experience at Caterpillar clearly demonstrates how and why finance has come to play a pivotal role in driving corporate performance. Dave's dynamic approach also illustrates the many ways in which forward-thinking chief financial officers are reshaping their finance organizations to meet rapidly evolving global challenges. As his comments suggest, Dave and his finance team are involved in every aspect of Caterpillar's operational, strategic, and value-driving agendas. His views confirm our findings on the rapid convergence of strategy with economics and finance.

In addition to this strategic thrust, however, CFOs face continuing pressure to handle the basic blocking and tackling of accounting and finance. Many fully expect their workloads to grow over the next several years. In particular, emerging regulatory and statutory reporting requirements created by the Sarbanes-Oxley Act (SOX) and the recently introduced International Financial Reporting Standards have dramatically increased complexity. The CFOs we interviewed also face tough capital allocation decisions. They must address rising costs for financial transaction processing, controls, and reporting - the first such increase in 13 years - while trying to invest in developing new capabilities that really drive their businesses forward.

We are witnessing a fundamental overhaul of the finance function and its footprint across the enterprise. The way that CFOs and finance leadership teams engage with alliance partners and the 'ecosystem' of company networks so vital to many industries is changing dramatically. As more and more companies collaborate more closely to deliver new products and services around the world, performance management has become more about managing an extended network of companies than simply managing vertically integrated enterprises. This presents significant challenges to the legacy finance operating model.

CFOs face major challenges in helping their organizations achieve high performance. They will be better prepared if they have a full understanding of what the task entails. In the remainder of this chapter, we explain the metrics that define a high-performance business, why scale alone is not the answer, and the three building blocks of high performance.

IDENTIFYING AND EVALUATING HIGH-PERFORMANCE BUSINESSES

The Accenture Institute for High Performance Business has analyzed the performance of hundreds of leading organizations worldwide across multiple industry sectors. One of the key objectives of our research is to help companies understand and methodically emulate these model enterprises - that is, to learn from and apply their successful approaches. From the outset, it has been our view that the drivers of high performance are identifiable and measurable - and that they can propel a company to new levels of growth regardless of history, circumstances, or industry dynamics. Equally important, we've determined that, with sufficient time and commitment, these drivers can be replicated.

High-performance businesses outpace their peers in total returns to shareholders, revenue growth, and spread performance (ROIC minus WACC) over three-year, five-year, seven-year, and fifteen-year time frames. They are rewarded with superior valuation multiples compared with their lower performing peers, and expectations about their future success are higher. They benefit from the perception, both internal and external, that they will continue to achieve stronger relative performance going forward, regardless of the trends and demands affecting their competitors and industries. Figure 1.2 identifies the industries that we have researched and analyzed.

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Excerpted from CFO Insightsby Michael R. Sutcliff Michael Donnellan Copyright © 2006 by Michael R. Sutcliff. Excerpted by permission.
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