Give Finance a Voice

It pays to give finance a prominent role and allow it to ask the tough questions in the good times because that will help a company remain resilient through the tough times, Judy Romano vice-president of international finance at McKesson Corporation tells Jim Banks.

Some industries demand a long-term focus for decision-making, and successful companies in those industries can teach organisations in any sector about the advantages of prudent management. A good example is the market for healthcare IT systems, which has been relatively resilient in the face of a weaker global economy, in part because the technology helps healthcare providers cut costs, improve efficiency and deliver better care – all of which become more important during a downturn.

That said, however, it still takes careful management to be a supplier of healthcare IT systems in a market where customers may well be feeling the pinch. At one leading company, prudence derives largely from giving the finance team a seat at the table for both operational and strategic decisions.

"Every company feels some impact from the changes in the economy. We could see bad debt hit P&L if a customer goes bankrupt. In the UK, our largest customer is the NHS, which is still paying its bills. We haven’t seen a fall in bookings there because the NHS wants efficiency and spending cuts, and we have the products to help it achieve that," says Judy Romano, VP, international finance in the healthcare IT division of McKesson Corp.

"In Europe, however, the market is softer, although demand should come back as soon as physically possible, because our IT makes healthcare safer, more effective and more cost-efficient. It is a way for hospitals to get to the endgame they want," she adds.

McKesson Corp. is the largest pharmaceuticals distributor in North America, delivering prescription and generic drugs, and health and beauty care products to more than 40,000 retail and institutional pharmacies in the US and Canada. It is also a major medical supplies wholesaler, and offers software and technical services to pharmacies, healthcare providers and insurers to manage supply chain, clinical, administrative and financial operations.

McKesson’s IT business is built around long-running implementation programmes, which naturally pushes the focus for business planning and revenue generation beyond the short-term.

"When we make a sale we call it a booking, which will not go immediately into the P&L. The nature of our business means that it may be months, quarters or years before sales impact the company’s financials. We are very conservative about revenue recognition. The immediate impact of a sale is less visible than in other sectors. Instead, we build in clear milestones," says Romano.

In this business, it is hard to steer a ship suddenly to a new course if the economic weather worsens. The heading needs to be steady regardless of the economic climate, and McKesson shows that giving finance a prominent role in decision making across the whole organisation helps a company maintain its course through any storm.

Objective advisor

The influence of finance is evident through its approach to forecasting.

"We’ve always had good forecasting processes in place and the company’s management is thankful of that. We have very granular analysis, and people may sometimes wonder why we need so much detail, but it helps us to anticipate changes in the market and be more proactive in our approach," explains Romano.

"It is all about having good quality information available to help management make timely decisions. We always project in the short term, which means the current fiscal year, and the long term, which is three-to-five years out. We refresh those forecasts in light of changes in the market. Solid processes on forecasting cashflow and balance sheet are what give us stability," she adds.

Built into the finance team’s forecasts to help management’s decision making are what Romano calls ‘bookends’. These ensure that the key decision makers are aware of the range of possibilities from the ideal to the worst-case scenario. Just as the company maintains a conservative approach to revenue recognition, so does it also ensure that it is not blinded by optimism.

"We guide management on what is likely to happen and also on what the situation will be if everything goes wrong. These bookends are vital to decision-making processes here. They make sure management knows where the company will be if everything were to fall down, such as if something goes wrong with a third party," says Romano

"These processes have not changed because of the downturn. They have been tested by it and they have fared well, although it is true that we spend more time in discussion with management now. In the three and a half years that I have been here our processes have proven to be solid. We know what to expect in terms of cashflow and we constantly monitor it," she adds.

As well as having the ear of management, Romano’s finance team is also embedded in the operational teams across business lines and geographies, where it is allowed to ask the difficult questions that ensure a transparent, careful and rigorous approach to important decisions.

"We have good visibility of things like counterparty risk and we always believe that you should hope for the best but prepare for the worst. Finance has a seat at the table when decisions are made, and that is critical. I know about all the things that impact on the firm’s financial position. I am always asked my opinion," she says.

Importantly, the opinions of finance people about goals, metrics and analysis are expressed in ways that are understood by the rest of the business.

Romano explains: "Analytics is where our team adds value. I pair up my finance people with management team members in every country. They work together on prices, bookings and financial issues, so everyone is empowered. The better the quality of our forecasts, the better our assessment of risks and opportunities. Finance is objective, so it can ask the tough questions. The culture of this company ensures that there is strong financial leadership across the whole organisation."

A steadying hand

Its prominence gives finance a vital role in customer relationships, which has proven successful for McKesson.

"We focus firmly on customer relationships, and in a difficult period we have been able to do something that most people would have thought impossible. We collected aged debt, around £1.5m across Europe, which we previously made provisions for. We succeeded partly because we have to focus on long-term relationships and we have an open dialogue with customers," says Romano.

"We’ve always had a customer focus, so when those relationships have been tested, they have survived. There needs to be some give and take, and there needs to be mutual benefit, but we still need to get paid. We have constant communication with our customers to facilitate their pain points."

Finance helps by ensuring that both sides of the relationship know what is required of them. McKesson must deliver on its milestones, and its customers must pay them for doing so.

"We need to have clear terms and we must be rigid about those terms. We have our Accounts Receivable people looking at the money side but we also have our legal people and our implementation teams working to ensure that customers stick to the terms we have agreed to. We must ensure that we get sign-off on each of the milestones we reach," says Romano.

"Those milestones are built into the long-term implementation plans for the clinical systems we provide, which makes it easier for our customers. They do not need to make one huge payment when the job is finished. Our customers, which are mainly healthcare organisations, have visibility of those milestones, so everyone knows what we are bringing to the table and they can see the trigger events."

In essence, the voice of finance is heeded by management, business lines and customers, so McKesson’s strategy is based on the realities of the market, informed by foresight and detailed analysis.

"We’ve always looked carefully at our own cost structure, so we have avoided knee-jerk reactions to economic change," says Romano. "We look at everything in detail, including operating expenses, which are used to inform any decision. Sometimes those decisions are tough, but the downturn has proved the value of our approach to analytics. It is great to work in a company where finance is involved in the business and is heard by operations and by the management.

"People look up to their leaders, so if they overreact to changes in the market then people start to panic that the ship is going down. A company needs careful, cautious leadership. We are a very transparent and very conservative organisation. We don’t kid ourselves."