Back to Basics

Keeping the metrics simple and learning when to distrust information are two key qualities that make a good CFO, says Darren Shapland of Sainsbury’s. And he should know. 2009’s top FTSE 100 FD speaks to FDE's Nigel Ash.

Reminded that some commentators have spoken of ‘the Shapland effect’ when characterising the financial turnaround at Sainsbury’s, FD Darren Shapland insists that he was merely part of a team effort led by CEO Justin King. Nevertheless, he concedes that when he moved into his new office at 33 Holborn in London, he did have to take the finance function ‘a bit by the scruff of the neck’.

"When a company has been under-performing for a period of time, which unfortunately Sainsbury’s had, I think the morale across the business, including in the finance function, suffers."

Because three of the six key roles in finance were vacant, Shapland was able to bring in new people. He took none of his former team from Carpetright but hired from outside or promoted internally. One early change was having the existing group treasurer Richard Learmont report to him directly.

Shapland says he homed in on establishing a team that had good strength and depth at finance manager and senior manager level. He notes that these individuals were considered capable of doing bigger jobs.

"Indeed, a number of them have moved on to do the biggest jobs here in the company and that has been very pleasing," he says.

A priority was to make sure that everyone in the finance function had a clear understanding of the new goals.

"Justin King, who joined the business a year before me, had done an excellent job in terms of creating and presenting the outlines of the plans and demonstrating

that the business wasn't in significant long-term trouble, but had experienced some quite serious operational blips.

He had got that process going and I played my part in terms of making sure this was properly communicated through to the business and to finance in particular,’ Shapland explains.

He had some core financial issues to deal with. ‘Our debt had been downgraded two or three notches, which was not ideal, and we had a big pension deficit that had not been dealt with which we had to sort out.’

In addition, the proceeds of the sale of its US business had been given back to shareholders rather than invested in paying down debt. Meanwhile, on the operational side, a number of metrics had not been going in the right direction for a period of years.

Hands-on attitude

Shapland made a point, wherever possible, of investigating these things for himself.

"I’m a very hands-on sort of chap, so I was everywhere in the early period. The fact that there were not two or three direct reports in place meant that I could get much more into the detail of what was going on with the business. We didn’t at that time change any major systems. Changing systems in a business like this is a very big task and it cannot be done overnight. What we did do was move to a simplified set of metrics and report on them rather than the many that had existed previously."

Indeed, he has little sympathy with those among his peers who believe that they can never have too much information about their business and therefore amass KPIs.

"In my view, businesses with too many KPIs hope that if they can get all of those metrics going the right way, then the overall result will be right. However, the reality is that there are only a very small handful of measurements that really count. Typically for a retail business, if top-line sales is not growing on a like-for-like store basis, then you’ve probably got a problem. It doesn’t mean that it can’t grow, or that it has to grow all the time. But, over a trend period, if it is not moving up then there’s an issue."

Four to look out for

Four other essential measurements are operating margins, stock and cash positions and customer service. Sainsbury’s KPI scorecard, says Shapland, has only a dozen metrics, divided into primary and secondary tiers. This, he believes, is plenty. Further down the business, departments such as trading may have their own discrete metrics, such as supplier information. But those KPIs stay at that level.

"What the CFO needs to know is how the total business is running and if it is not running well, or something else is going wrong, that you can spot it quickly enough."

From the day he arrived at Sainsbury’s, the prime consideration, Shapland says, was cash.

"We started to instill a real drive and focus on cash, rather than just looking at profit. We changed some metrics and the assessment of how we would measure capital expenditure. A key part of the task at the time was understanding whether or not we should dispose of certain assets."

Sainsbury’s cashflows are, says Shapland, fairly predictable.

"We know when we pay the wages, the rent, the taxman and so-forth. So we go into fine detail over all those predicable flows and using that predictability we can see over a period of time if we can influence cashflows and do things differently. For instance, we run a number of programmes to make ourselves more efficient with stock, where we have been particularly successful. We have changed our invoice matching system so we can pay more accurately. With fewer mistakes we can forecast cashflow better, so we don’t pay charges."

It was Shapland’s strong retail background that caused Sainsbury’s to want him to be part of their turnaround team. While a specific industry background is invaluable to a CFO who is moving to a job in the same sector, he believes that good finance professionals can move across industries.

"It does mean, however, that you have to acquire sufficient depth in a new sector and quickly get up to the operational understanding of how things work."

There is, he believes, one crucial quality every CFO needs.

"You have to understand the difference between when you can trust people and when you have to go and verify things. You need to get a very good smell test for when something is wrong. As head of finance, you play a critical role in the control environment and you simply have to say: ‘Let’s understand the downside and the risk here, as well as the upside of doing these things’."

It does not, however, mean employing excessive caution, merely insisting on understanding the business, which harks back to his point about the depth of experience a CFO may have in a particular industry.

"You really have to understand what it is that makes the difference between success and failure in the core operational business. Therefore, to operate effectively,

you have to ensure that you have relationships in those parts of the business you are trying to run. So, in simple terms, when you get news either good or bad, it is not necessarily a surprise to you because your antenna is good enough and you know enough about the business to have seen it coming."

To this effect, says Shapland, a good CFO will build up a network of people in the business, who he knows are really going to tell it to him straight.

"When you go through a budget review for example, you get a handle on where people broadly are and where they position their budget; is it on a stretching case or a base case? Are they always over-optimistic? So when you are going through those reviews you can see how they are going to be delivered and where you do not need to spend a lot of time going through to validate them.

"Then there are other maybe more risky areas, where perhaps the manager is new or optimism is their style, where you have to work out if it can be delivered. So you triangulate it with another piece of data. The CFO plays a quite crucial role in joining all that together."

Checks and balances

In investor relations, besides managing the consensus profit number, Shapland sees the job of the CFO as providing balance to what the CEO will be saying. The finance chief needs to be able to draw a clear picture of the numbers and the business’s vision for the sell-side analysts and the press while always keeping in mind the buy-side investors.

Companies start getting investor relations wrong when there is a difference between what they promise and what they deliver. There should, says Shapland, be no attempt to ‘spin’ their way out of problems.

"With analysts and journalists, you have to build up over a period of time a reputation for being straight on things. Then you are in a position to talk about matters that haven’t gone quite as well as expected, as well as those areas that have. Since the new management team came in, the recovery at Sainsbury’s has been very pleasing. But we have made some mistakes on the way and we have been pretty honest about them both internally and externally. We have then got on with fixing them and moving on to the next challenge."

The difference between good and bad businesses, believes Shapland, "is understanding where your performance really is, whether or not things are really working and not being afraid, if something has gone wrong, to turn back and take another path.

"Too often companies go too far down one track, become so wedded to it emotionally and financially, that they cannot turn back. At Sainsbury’s when we make a decision, it not only properly evaluated but we put a control mechanism around it, so if we did get that decision wrong, we make sure we know quickly and can reverse it."