Improving global cost and cash management – Heineken27 June 2012
Heineken’s group CFO René Hooft Graafland led a discussion on driving down costs and prudent cash management at FDE’s June breakfast briefing in Amsterdam.
On a sunny June morning in Amsterdam, 40 senior finance executives from multinational corporations such as Shell, Unilever, ING Akzo Nobel and AEGON came together for the latest FDE breakfast briefing in the newly refurbished Hotel de l'Europe. The focus of the session was cash and cost management, and the keynote speaker was René Hooft Graafland, group CFO at Heineken.
Following a welcome address by FDE's Steve Dunkerley and Dick Paul from American Express, the introductory address was delivered by REL senior director, Benelux, Rutger Ford. Ford presented a brief overview of working capital performance among European companies over the past 12 months, drawing from REL's 14th working capital survey. According to Ford, overall performance hadn't changed considerably despite economic challenges and there was a working capital potential opportunity of €886bn for the firms not performing in the upper quartile.
Total cost management
The first part of Hooft Graafland's presentation focused on Heineken's total cost management (TCM) programme, which was launched in tandem with the 'Hunt for cash' programme following the company's £1.7bn acquisition of Scottish & Newcastle in 2008. Heineken was confronted with a £10bn debt level and an aggressive net debt EBITDA of 3.3 times. This was also the year when the financial crisis began and Lehman caused many sleepless nights for CFOs around the world.
The two company-wide programmes were known internally as "must-win battles" and were both driven by finance. Hooft Graafland stressed the precision required in driving the TCM programme and the need to balance strategic investment with cost-cutting.
"Managing a good cost programme is an art in itself. You want to cut the fat, but you don't want to cut into the muscle of the organisation. On the contrary, you need to continue to strengthen the muscles of the organisation, while on the other side you need to take out cost," he said.
The solution for Heineken was to manage the TCM programme on gross savings rather than net savings because, according to Graafland, managing on net savings increased the risk of the business being starved of investment.
"The easiest thing is to manage the cost programme on net savings as it is easy to measure, but the result of this is that people will stop doing things that increase their cost and are for the benefit of the business," he explained. "We therefore decided to split the two. We have cost savings on the one hand and cost increases and investments on the other. You need to manage these separately, which causes complexity and means you need very clear definitions as to what cost savings are; you must define how you calculate it."
As a result of the TCM programme, Heineken saved €600m in a three-year timeframe. Immediately after this, TCM 2 commenced as, according to Hooft Graafland, cost-saving activity should never stop.
"Just like the Olympics, people run in a certain time and you think that they can't run any faster. Four years later, you will see people running faster. It is the same with costs. Investors often ask 'Is that all?' No it is never all," he stated. "You can always drive the costs down further. Now, for example we are busy setting up shared-service centres and getting 30% savings on the cost of transactional finance."
Hunt for cash
The 'Hunt for cash' programme was launched throughout an organisation that had traditionally focused on EBIT and required a new mindset to be adopted; Hooft Graafland compared it to learning a new language.
"As finance people, we always talk about the need to increase your profit and sell more," he said. "Now we were talking about what we should do less, which was a change in mindset. We developed web-based training modules and set up workshops in operating companies, just to make our people aware of what cash and cash management is. If you are only EBIT focused and incentivise people on the EBIT, you will find that production runs are much longer, and you standardise in the sense that, since there are long production runs, there will be high inventories as a result. You give more credit to your customers because you can get a higher price. You pay your suppliers earlier because you get a discount. That is all good when you look just at EBIT, but not good for cashflow."
The way in which the concept was communicated to employees was important to Hooft Graafland, as well as driving cross-collaboration within the organisation.
"We didn't call our programme 'survive' or something like that. No, we named it 'Hunt for cash' - something fun," he continued. "You should absolutely not give the impression that you are in financial difficulty. What is also important is that people don't see it as a finance exercise. SKU rationalization, for example, cannot be done by finance, and requires supply and commerce coming together, and credit management requires a strong partnership within your commercial organisation."
As well as focusing on payables, receivables and inventory to improve cashflow, another aspect Hooft Graafland touched upon was divesting non-core assets
"If you look deep into operating companies, the amount of things you can find to divest is staggering. When people move on and management changes, assets, however, can remain in the company, so you need to make an inventory of the real estate and question why it is on the books, whether it is necessary or if it could be used for different things," he said. "Above every pub owned, for example, you have a whole building on top of it; how do you exploit this? Do you want to keep it? Do you want to sell it? In addition to divesting real estate, old brands, equipment and spare parts can also be sold off, which ultimately make the management of the company more proper and focused."
The move toward a cash-centric approach meant changing Heineken's financial systems and processes.
"Our cashflow on balance sheets was underdeveloped and, before you get into forecasting, you need to first know month by month where you stand. So we changed our systems and got into monthly reporting on balance sheets and cashflows. We also introduced into our measurements the notion of 'cash conversion' [free operating cashflow as a percentage of net profit before minorities]."
Hooft Graafland reflected on how the cash created by the programme was put to use.
"The important thing for us was that two years later, in 2010, we could do the FEMSA acquisition. After a very strong first year in the 'Hunt for cash' programme, we said we could do it and joined the race that other players were in, and ultimately we bought the company. Telling your employees 'Thanks to what you have done across the organisation, we have been able to buy this company' creates an enormous positive energy, while at the same time there is also the feeling of 'Oh, now we have to go again', but ultimately it is good."
Granular insight gleaned from sub-processes
Following the keynote address, NV 'Tiger' Tyagarajan, CEO and president of Genpact, provided a supporting address that focused on the importance of companies understanding and improving each step of an end-to-end process. A couple of examples were presented that illustrated how process step changes can release cash in the source-to-pay cycle. The first example related to indirect purchases being paid for by companies immediately due to ERP systems not being configured correctly.
"Unnecessary immediate payments can occur when there are no contract terms, resulting in ERP systems defaulting to immediate payment. Now that's a granular step and, if you fix that step, then you could have a substantial impact on your payment cycle for payables," he declared.
The second example looked at a situation when companies don't properly capture and follow up on benefits associated with a purchase. Tyagarajan argued that these benefits are often twice as valuable as the purchase price.
"We have seen examples where multinational companies have contracts with technology providers such as laptop companies," he said. "You have a wonderful contract that includes a 5% discount when the 1,000th laptop is purchased, both on future and past purchases. Do you think that companies track the 1,000th purchase? The answer is no.
"It's nuggets like these that help unlock working capital outcomes by granular benchmarks and granular execution on individual sub-processes," argued Tyagarajan, prior to the closing Q&A session hosted by Dick Paul of American Express.
Click here to read the interview with René Hooft Graafland published in the spring 2012 issue of FDE magazine.
Click here to listen to the keynote address by René Hooft Graafland of Heineken.
Click here to listen to the supporting address by Genpact’s Tiger Tyagarajan.
An exclusive FDE whitepaper that features both Tiger and Rene talking about emerging markets strategy from a business and operations development perspective can be found here.