Building profitable growth and maintaining capital efficiency: FDE breakfast review

21 December 2012

The Q4 2012 FDE breakfast briefing in Stockholm saw Peter Wallin, group CFO of Skanska, highlight how the construction giant is growing profitably and maintaining capital efficiency in a climate of economic uncertainty.

On a snowy morning in December, sandwiched between the Nobel prize-giving ceremony on the 11th and Saint Lucia's day on the 13th, FDE held its Q4 breakfast briefing at the Grand Hotel in Stockholm.

The keynote speaker was Peter Wallin, group CFO of building and construction giant Skanska, while Lena Bertisson, executive director of corporate coverage at RBS and Genpact's Nordic leader, Pieter van den Goor, provided the supporting addresses. The topic of the morning was how companies should go about maintaining capital efficiency and profitable growth in the current economic climate.

FDE's Steve Dunkerley broke the ice with a short welcome address before handing over to Lena Bertisson, whose introduction highlighted some of the ways companies are responding to the challenges caused by continuing poor economic conditions. These included utilising the capital markets for funding or more prudent cash management.

Divestment and rationalisation

In his keynote address, Peter Wallin referenced some of the points raised by Bertilisson and began by showing a slide depicting a torn-down building, the proposed site of the new Skanska headquarters. This acted as a metaphor for the way in which the SEK125 billion company responds to difficulties by changing business models, divesting poor-performing assets, deploying capital and creating value. Wallin went on to explain the rationale for a recent business model change.

"Fifteen years back, the company was more of a conglomerate, owning a large residential and commercial property portfolio that was held to be managed," he said. "We held a lot of blue chip stocks like Sandvik and we had a lot of cash on our hands; that was an impact of the currency restrictions we had and a result of the extraordinarily high marginal tax."

Skanska was in need of structural change and this required a substantial amount of divestment and rationalisation.

"We handed out a large part and floated the properties on the stock market," Wallin said. "We sold off the blue chip companies. We acquired a lot of businesses to create the footprint we have today, in combination with organic growth in a number of selected markets and segments."

"As a CFO you can also see that crises are needed from time to time because with crisis you can drive efficiencies, you can light up all the burning platforms you need. Then you need to be good at putting out a fire."

One of the key tools driving the new Skanska was an EVA model known as Skanska value added (SVA), which focused on changing behaviours within the decentralised Skanska business.

"We drove old behaviours out of the system with SVA," explained Wallin. "It gives a straight line of sight with how we control the business and scale it internally as well as the way the outside world - including analysts investors and banks - are looking at our type of business."

Wallin went on to highlight how negative working capital accumulates and is managed throughout the lifecycle of an external construction contract.

"Do we put the money in the bank for 0.25% interest? No, we have a different way of doing it," he explained. "We put the money in project development, which means both residential and commercial development, as well as infrastructure development."

While Skanska is engaged in the early stages of project development, it is also very much involved in the actual construction. Wallin highlighted the current example of New Karolinska Solna hospital, Skanska's largest-ever project with over 2,000 people involved in its day to day construction.

Capital-intensive projects

Next, the CFO talked about the funding requirements for both construction projects and the more capital-intensive development projects. For construction projects, the role of the bank, according to Wallin, is to support cash management and assist in the origination of shorter duration bonds, and guarantees and warranties.

He stressed that, because of the EVA model adopted by the group, there were limits on how much capital is plugged into the development business, as well as the importance of a performance-based incentivisation programme.

"Because we are decentralised, we need to equip the people out there with the right tools to help them assess their own profitability; when you are way out in the projects it is hard to drive processes," he said. "We have a winning mindset in our business. People don't have a big fixed salary but instead have a variable bonus component, so they need to hit their targets. The most important tool is people and their need to excel in the organisation."

In terms of the future, Wallin acknowledged that the market is challenging and changing, and concluded by highlighting the importance of the CFO in times of economic crisis.

"Clearly, we can see Europe slowing down. The Nordic tiger has become a kitten," he said. "The US, however, is starting to rev up quite a bit... As a CFO you can also see that crises are needed from time to time because with crisis you can drive efficiencies, you can light up all the burning platforms you need. Then you need to be good at putting out a fire. We need crisis internally and externally in order to develop as a company. So capital efficiency is never an end target but instead a moving target."

Shared services and BPO

Pieter van den Goor in his supporting address focused on the role of shared services and business process outsourcing in supporting capital efficiency and profitable growth. He presented two case studies that not only demonstrated how efficiency gains can be achieved in specific business processes, but also how a deeper, more substantial business impact can be achieved when business processes are more carefully examined and re-engineered on an "end to end" basis.

The first of these related to the reengineering of "indirect source to pay" for a client that moved part of its payables to one of Genpact's nearshore locations in Eastern Europe. Van den Goor recollected an exchange he had with the company CFO, who was focused on improving discount capture and paid-on-time metrics and wanted to achieve such through tighter KPIs on booking turnaround time of the Genpact team. Having examined the client's entire source-to-pay cycle, Genapct process engineers discovered many improvement areas up and downstream at the client, which caused a lot of rework.

According to van den Goor, there were an extremely high number of employees that were approving invoices (there were 1,000 approvers out of a total workforce of 3,000 people).

"Pretty much anyone who did not work on the production floor was able to approve an invoice," he recalls, "which made it very complicated and time-consuming for our staff to identify the right approver. We also found that the accuracy of the POs that were being entered was around 60%, which meant our team had to do a lot of manual rework. We found that the average time it took our client to approve an invoice was 21 days, with outliers of 121 days."

With this discovery, the Genpact team executed an entire reengineering of the client's source-to-pay process and, according to van den Goor, the impact of reengineering the process on the discount captured was ten times the impact the client set out to achieve by just tightening the KPIs.

The second example he presented was in the order-to-cash area, whereby the client's sales function was controlling the collections process. Genpact proposed this process be decoupled from the sales function and centralised, which lead to a lot of resistance from the sales force, who felt they 'owned' their clients.

"Our team implemented a central collections team and the improvements on the DSO were very significant," he said. "The most interesting part was that once things had settled down and after the new process had stabilised and was operational, many of the sales guys reported back to the CFO saying 'Thanks, I'm so happy I don't have to make these awkward calls at the end of the month anymore'. So many sales people saw the benefit of having more time to focus on value-added activities."

Driving growth in the US

Following van den Goor's presentation, Lena Bertisson from RBS hosted the Q&A session. Among the questions was one that probed the extent to which Skanska has a centralised back office functions. Peter Wallin acknowledged that while the company has a mature shared services organisation in the US, it is a topic very much on the agenda for the Nordic region.

"I would say continuing to drive that transactional business in the Nordic region is something we have in the gold card for the next couple of years. But to be able to that efficiently, you really need to map and have a good control of your processes."

The Q&A session also focused on profitable growth and in particular growth in the US, which is currently a focal point for Skanska. The manufacturing and energy sectors within the US being particularly attractive to the Swedish firm. Lena Bertisson from RBS raised the question of the types of challenges the US presents Skanska with. Wallin highlighted the challenge of developing new business in the parts of the US where Skanska did not have a presence.

"Do we put the money in the bank for 0.25% interest? No, we have a different way of doing it. We put the money in project development, which means both residential and commercial development, as well as infrastructure development."

"The challenge with the US is that it is a country and a nation, yet at the same time it is made up of so many different markets and conditions," he explained. "Being local out there not only means a presence in the US; you need to be present in the local environment and community.

"So the greatest challenge in the US is how we continue to drive organic growth because we have been very successful in the north-east, where the New York construction is a very tough construction market to be in," he continued. "The challenge now is to take some of that expertise - since New York is slowing down a bit - and reallocate it in other parts of the country and we actually closed our first PPP projects in the US during the summer - a tunnel in Virginia.

"The number one challenge for all of us is how to deploy this expertise, which projects to go for and how you retain the key talents. Good people are always fought for out there in the marketplace, so we need to be a really good employer and create opportunities for people to develop and get well remunerated when they do a good job."

Click here to read the interview with Peter Wallin published in the winter 2012 issue of FDE magazine.

Peter Wallin, group CFO of Skanska, addresses delegates at FDE's breakfast briefing in Stockholm.
Lena Bertisson, executive director of corporate coverage at RBS, explores the types of funding strategies being adopted by corporates.
Genpact’s Nordic leader, Pieter van den Goor, highlights the role of shared services and BPO in driving profitable growth and capital efficiency.
Tom Bennet from RBS takes an active role in the Q&A; session.