Choose Wisely

When FDs are quizzed about their best advice for deals and corporate governance, one warning crops up time and again: make sure you get the right advice. Whether launching an MBO, buying a competitor or simply streamlining the audit function, having the best people on your side can make the difference between a smooth deal and a time-consuming and expensive headache.

So how do you find the best people for the job? And when you’ve found them, how do you keep them on the straight and narrow, and are the days of the one-stop-shop adviser over?

Ludwig Gold is head of corporate finance at Salzburger Aluminium in Austria. After several years of sourcing and managing a portfolio of advisers, he has a long list of headaches. ‘It’s difficult to find the right advisor with the requested skills; we had many disappointments especially with SAP consultants,’ he says. ‘It’s also been a real issue to get common agreement about what is included in an advisory contract. We always want to have a lump sum for a project to be done – whereas the advisory firm guarantees only that they do their best. They do not take any responsibility for not achieving the goal.’

Gold has also experienced a problem that gathers little comment, but that can set an adviser-client relationship off in the direction of trouble. KPIs are often trotted out as a simple way of keeping advisers: set the parameters and if they don’t deliver the targets then the client is protected. However, as Gold points out, it’s not always that simple.

‘We’re always told to control advisory with KPIs,’ he says. ‘But since they are specialists and work in a very specific area where our knowledge is not sufficient, it makes it hard to set the KPIs. Furthermore, the advisor usually offers two or three alternatives, so our decision would also influence the measurement through a KPI.’

The thorny issue of setting the parameters of the work and measuring performance has become a common one for European CFOs, and it’s clear that clients are now demanding more clarity and transparency from the advisory community when embarking on projects.

Simon Burt is CFO of training firm 2e2, which is private equity backed and has a turnover approaching £300 million. For him, setting up the relationship with certainty and transparency avoids trouble further down the line and, given that 2e2 has been on the acquisition trail, ensuring best value from advisory relationships can turn a good deal into a great one. ‘For acquisitions, we agree a price at the beginning and then generally agree a whole different price at the end’, Burt says. ‘Other assignments are usually in line with prices fixed at the beginning. We also ask for quotes from a couple of providers and it is surprising how close they usually are to each other.’

This points to the need for CFOs to take a lead on finding the best advisers through canny selection processes. For Ludwig Gold, it’s a straightforward question of clarity at the beginning of the relationship. ‘It’s imperative you define the scope of work very accurately in a contract,’ he says. ‘We define the milestones in the advisory and for M&A activities we use a timetable to understand who is doing what and when. This is very important because when you buy or merge a company, the lawyer, the tax advisor, the head of finance and the notary need to work together very closely, with a tight schedule and in the right sequence.’

Andrew Telfer was FD of publicly traded housing service provider InSpace until it was acquired by Wilmott Dixon earlier this year. He says his dealings with advisers are founded on one principle: keep talking. ‘From a practical point of view, communication is very important. Regular meetings with your advisers, in what has been a rapidly evolving environment with standards being introduced in the UK and internationally, can make the relationship work much better,’ he says.

A two-way street

While the CFO might understand the business intimately, the same is not usually true of advisers. Yet they are expected to come up with solutions to often intractable problems, which does place the onus on the clever CFO to keep external advisers in the loop.

Indeed, a partner at a leading audit firm, speaking off the record, told FDE that clients need to make a little more effort with this. ‘Being a good adviser in today’s market is about having the right tool kit and making sure you’ve got everything you should have for clients. You will want people to understand your business, but you have to accept that there is an investment of time for both parties in doing this. You can’t say you want them to understand your business and then devote no time to helping them to do this, or start being sensitive about what you will and won’t share with them.’

So making sure your advisers understand the real issues within the business will allow you as FD to make the best use of them. Michael Nelson, FD of recruitment firm SThree, says this is fundamental. ‘I think it’s very important that they understand the business culture and cashflow situation of a company, as a precursor to what they’re auditing or advising against.’ As he says, if you don’t have that, or the team changes, you lose that intellectual capital.

And it’s not a one-way street. Being open with advisers will always pay dividends. As Telfer says,

‘You need to provide a dialogue on how your business is evolving and you must be on top of international standards.’ Telfer has found that, away from the distraction and hubbub of the year-end, advisers (and the CFO) can take a more considered look at your company. As he says, ‘Quarterly meetings with your adviser are good because it moves the focus away from just the year’s "punctuation marks" – the year-ends and the interims – to a more regular schedule.’

So how do you make sure you’re both reading from the same hymn sheet? Nelson thinks clarity and firmness are key to a successful relationship. After all, there’s sometimes that sneaking suspicion that advisers are playing for time. ‘I think it is about being clear what the rules are – and those rules can change over time,’ he says. ‘There’s always the chance with a professional adviser that they can see companies as a gravy train so you do need to be clear on the rules of engagement.’ So it’s classic CFO work – getting in place a system whereby you’re properly served for a fair price.

But there’s best practice and then there’s staying on the right side of the law. Many FDs are still grappling with the new auditor independence rules and are concerned that some audit partners are more wary about offering advice on the accounts. The rights and wrongs of the post-Enron response to auditors’ rules and liabilities have been raked over many times, but this has made the FD-auditor role, traditionally a slightly tense one, even more fraught in recent years.

Bring it in-house

Of course, one possible remedy for this is developing capabilities in-house. In many areas – corporate finance, legal, HR and so on – once scale is sufficient then most corporates will look start to think about building internal resources.

However, Salzburger’s Gold says this is not as straightforward as it might seem. ‘Of course at a certain size of the company you need to develop the know-how internally,’ he says. ‘But we sometimes see a big brain drain as our internal resources are not fully involved in processes. That means for any additional question we have to go back to the advisor. And what is really cumbersome is that our internal team has to brief the advisor anyway and the flowback of information is limited, sometimes to the board only. That shows that we train the advisor to enable him/her to tell us what we told him before. Of course, if we run the project internally, we also keep the know-how internal.’

For Simon Burt, the issue is one of scale. ‘We have internal corporate finance expertise, but that’s really because of the type of business we are,’ he says. 2e2’s strategy of pursuing growth through acquisitions has meant deal-doing expertise has become invaluable. ‘The business was a buy-and-build from a start, but we would not look to develop internal capability in other areas. I will always gulp at the fees but a £300 million turnover business simply does not justify these overheads.’

Are you being served?

So are the firms adequately serving their clients? Are they providing the promised one-stop-shop or are divisions of expertise still rife, causing greater delays and confusion? Telfer says a more unified approach on the part of firms’ departments would benefit CFOs. ‘From a customer perspective, for accountancy firms generally, the mentality needs to be one of joined-up thinking, across various disciplines.’

Telfer’s suggestion is that advisers nominate an individual with a brief to have an overview of the various strands of customer interaction. ‘If he sits outside a particular function, he could coordinate the audit firm’s approach’, he adds. ‘It depends if you want a bundled service or one from experts in other areas, but if your approach is to do with procuring the same services from one firm it’s good if they have one perspective.’ This, for many FDs, is vital.

And of course, the tricky issue of fees is ever-present. While CFOs will admit the value of good advice, there is a mood among many that advisory firms have lost sight of fair value when it comes to their own services.

Gold is unsurprisingly proactive on this front. ‘It is very difficult to control the full cost as you have always issues which are outside the original scope and the are to be paid separately,’ he admits. ‘But we find it helpful to set a system of monthly invoices with the listed milestones and activities. If it is an IT project, then the Head of IT should sign every completion of the milestones – and without that we do not pay the invoice.’

But what of mission creep – projects simply running away on cost and scope? ‘We try to negotiate low rates for everything which is outside the scope, with the hint that the advisor gets a large lump sum anyway,’ he says. ‘And it’s also useful to involve the department heads in the controlling process of the advisors.’

So, it’s simply a matter of setting the goals, controlling costs, demanding progress reports and keeping milestones in place – all in a day’s work for the average CFO.