Every so often, a company steps back to examine what can be done more effectively and then establishes a strategy with a timetable. Having implemented a new strategy two years ago, ABB, one of the world’s biggest engineering companies, aims to drive productivity, efficiency and working capital improvements across the group. Finance Director Europe speaks to Eric Elzvik, CFO, about how the company is accelerating changes and meeting its goals.
A global leader in power and automation technologies, ABB was born in 1988 from a pioneering cross-border merger between Sweden's ASEA and Switzerland's Brown Boveri. Nearly 30 years later, ABB continues to build its presence as a global company that provides solutions to improve efficiency, productivity and the quality of its customers' operations. Innovation through the company's evolving technology and its approach to growing the business remain its top priorities.
In 2014, ABB announced its 'Next Level' strategy, which set key financial growth targets for 2020, focusing on profitable growth, relentless execution and business-led collaboration. Eric Elzvik, ABB's CFO, is currently driving stage two of the strategy in the finance function. The company is going through a group-wide transformation, which includes increasing shared services and establishing a $2-billion working-capital-improvement programme.
"We have performed well, but there is still a gap for us to step up in performance," Elzvik says. "There is a strong focus on cash flow, return on investment and value creation. We made some progress but, in stage two, we are accelerating our approach on the cost and efficiency side."
Elzvik joined the company in 1984 and has been CFO since 2013. He has overseen the finance function during the first and second stages of the strategy. The current phase of implementation includes a divisional realignment - reducing five divisions to four - that aims to drive organic growth by focusing the efforts of its combined power and automation to deliver more customer value. The strategy also targets $1 billion in cost savings, through its white-collar productivity programme, and the release of
$2 billion in cash from working capital by the end of 2017.
"We have streamlined the internal organisation to be closer to our customer segments. We accelerated the strategy at the start of 2015, and we had already seen a significant reduction in costs because of the white-collar side. There has been a clear reduction in working capital already, and we are targeting $2 billion in total. We have a lot of inventory - around $8 billion - and our benchmarked performance shows we have the opportunity to improve," says Elzvik.
"We are going into the detail of the entire global value chain - including factories, logistics and sales - to drive efficiency and customer service. We have set ourselves a big target, but that is the right level of reduction to aim at. Inventory is what we are targeting first; for instance, in our motors business, we have already made good reductions. Cash generation has also been very strong.
We have to understand how the different elements in the value chain fit together. These are profound changes in how we operate the business, and we have to make sure it is sustainable beyond 2017."
A central projects team is handling the implementation of the 'Next level' strategy through the various line organisations. An enhanced performance-management system has also been in place since last year to ensure the right targets are set and the responsibilities for management teams are clearly defined. The finance function, however, is also in a state of transformation.
"The operations department understands that we can make improvements. There are always some change management challenges, but it is very important to anchor everything properly within the organisation. The white-collar productivity programme will help us become leaner, faster and more agile to reduce costs. We expect it to generate $400 million in gross savings in 2016 out of a total goal of a $1-billion reduction in the run rate of structural costs by the end of 2017. Everything is driven through the operational side and we are seeing the benefits already," says Elzvik.
Centre of excellence
"The finance function is also changing and is part of that white-collar programme. Firstly, we are clearly defining and allocating responsibilities. We are moving transactional processes to service centres, and we have centres of excellence for functions such as treasury. Business finance can then be about business and driving the direction of the business. We are also implementing the principle of continuous improvement. We already use lean principles in the manufacturing part of our business, and we are now moving that into the administrative finance part."
The lean methodology has become common in many manufacturing industries, but its application in the administration setting is relatively rare. Implementing scoreboards, driving engagement and harvesting the innovative ideas of the workforce are all central to this way of thinking. These activities fit well with the core values of the 'Next level' strategy.
"Cultural and organisational change are part of the same thing, but cultural change takes longer," Elzvik says. "It is about the minds of people. To drive our culture of cash generation and balance sheet management, the values of the company really have to be understood and be at the front of mind for our colleagues. Culture evolves over the long term, while organisational change is much faster. At ABB, we have become used to change over the last few years. We need to have the agility to change fast because that is what yields progress."
Technology plays a big role in shaping ABB's business, including the solutions it designs for its customers and its internal management systems. The company drives digitisation in the power and automation parts of its business, and that appetite for innovation will see it look closely at disruptive technology that could shape the finance function and back office, where robotics could play a part in the automation of its service centres.
In such a fast-moving business, the CFO must stay in charge of the change in the finance function while the rest of the organisation undergoes transformation, and external factors bring new challenges and opportunities. Elzvik says that as CFO, he needs to step outside the finance function to embrace the mindset of innovation, continuous improvement and business partnering.
"In any industry, there is always change. My advice to people in the finance function is to make sure they have a rounded view of their company and its market. I have been CFO for three years after being in many different parts of the organisation, including regional roles where I had to get my hands dirty," he says.
"I was head of M&A, I had a role in strategy and I have travelled a lot around the world in this job - it is important to be out in the countries to understand the business. If someone else does not throw you into the deep water, then throw yourself in. Be proactive. It is important to be impatient, but whatever job you are in, it is also important to make a real contribution before you move on. If you achieve results and work hard then it will be seen. Don't get nervous if you do not seem to be moving fast enough."