Yet, as industries are disrupted and business models evolve, developing a targeted spend management strategy is vital to supporting CFOs’ efforts to achieve the business’s financial goals, including profitability. In our conversations with the CFOs of two major corporations— steel manufacturer Essar Steel and insurance firm Sun Life Financial—two themes emerged that seem to underpin these efforts: the role of digitalisation and open communication with internal and external stakeholders.
The need for a holistic view
Assessing the financial impact of unexpected but significant changes in the business environment drives this need. Recently, finance professionals in Asia have had to work out the cost of reworking their supply chains in response to the tariff wars between the US and China; those in Europe have had to assess the impact of Brexit on workforce management and supply-chain costs; and protests and terrorist attacks around the world have meant that CFOs have had to quickly think through the cost of moving out employees from areas deemed unsafe.
To do so effectively, taking a holistic view of expenditure—including procurement and supply chain, real estate, workforce, and employee-driven expenses—is an important step. It presents technical challenges, such as securing steady information flows from various departments and estimating future expenses. “At present, we have visibility through normal financial reporting, such as different types of financial ratios, and ongoing communication with business unit leaders,” says Gregory Kwan, CFO for Sun Life Financial in Hong Kong. “These provide insights into what each element is costing us but if there were better ways to help me predict [future expenses], that would obviously be useful and ideal.”
Linkages between various spend categories add to the complexity: managing office real estate expenditure not only requires a view of rental trends and facilities management but also insight into workforce dynamics for effective office space usage; and managing tax and compliance expenses requires insight into procurement and supply-chain strategies across countries and regions. The experiences of the CFOs we interviewed bear this out.
Chain reaction
In the global steel industry, profits are under strain as trade war rhetoric ramps up tensions between China and the US, particularly as a result of changes to procurement and supply chain strategies. Manish Singhania, CFO of Essar Steel Precoated Facility, Pune, India, says a collaborative approach has helped manage costs, as his company operates locally and internationally.
Mr Singhania oversees the finances of a steel processing plant that sources raw materials from India and supplies finished products to over 60 countries around the world across South America, Europe and South-east Asia.
“Procurement and supply chain thus play a very critical role [in spend management],” he says. “It has twin objectives: one, you have to ensure an uninterrupted supply of raw materials. If you don’t have the materials even for an hour, it can result in a substantial loss. Second is the price at which these are procured. The art is to balance availability with price.”
These are compounded by a host of other variables at play in today’s highly volatile commodities market and global supply chain. Many have the potential to disrupt operations, including the ongoing tariff wars, changes to tax laws, labour issues and newly created sustainability targets. In fact, social media, traditionally the remit of marketing executives, weighs on this CFO’s mind too. “In the social-media-driven economic climate in which we are working, the perception of your company is of utmost importance. This creates unforeseen ‘black swans’ in supply chain management through greater scrutiny of vendors’ or business partners’ compliance with laws or ethical standards.” In this way, to optimise procurement and supply-chain spend, CFOs are also factoring in brand and reputational risks.
Mr Singhania emphasises the need for visibility across the value chain, to better assess vendor compliance to laws and ethical standards.
To manage this, Mr Singhania emphasises the need for visibility across the value chain, to better assess vendor compliance to laws and ethical standards. For him, priorities were compliance with the recently instituted goods and services tax (GST) in India and labour laws across regions in which they operate.
Essar Steel has focused on adopting technologies to control procurement spend. An online portal has replaced face-to-face meetings in the first step of negotiating with vendors. It allows them to post their requirements to a wider pool of vendors, and vendors in turn have visibility of bids submitted. “So vendors know they have to come in at the correct price,” explains Mr Singhania. This has translated into savings of 7-8% annually for the division.
Effective collaboration between different business functions further enhanced these efforts and allowed Mr Singhania to devise a different approach to optimise procurement spend. In the past, Essar Steel had been procuring raw materials after a sales order had been placed. “We had a ‘made-to-order’ approach as each steel product had different specifications,” he says. But working together with the sales team, they reviewed total sales and procurement orders for the year, identifying large, repeat customers as well as common specifications and raw materials required for these.
Representatives of the sales and finance teams went one step further, meeting customers together to get more visibility on their needs for the year ahead. “It was a non-binding agreement, clients weren’t committing to order with us, but we got the specifications ahead of time.” This not only helped with raw material planning; it improved customer relationships as this foresight allowed them to reduce delivery times.
Central control
Even in a capital-intensive industry, managing employee-driven expenses effectively is a priority, says Mr Singhania. Here too, a collaborative approach with external stakeholders played a central role.
“We had to keep the communications channel open with the unions [to renegotiate employee pay packages]. My experience is that simply cutting employee costs can be counterproductive, so we have to be judicious and fair.” - Manish Singhania, CFO of Essar Steel Precoated Facility, Pune
In recent years, Essar Steel and other industry players around the world have had to renegotiate employee pay and benefit packages. “We had to keep the communications channel open with the unions. My experience is that simply cutting employee costs can be counterproductive, so we have to be judicious and fair,” says Mr Singhania.
Co-operation has also been key in developing technology and processes to control other personnel-related expenses. Mr Singhania turned to digital and mobile technology to simplify expense claims. Previously, employees had to book their own travel, seek their supervisor’s approval and pass receipts through the procurement process. “Even if travel costs were less than US$10, they required a lot of paper documents,” admits Mr Singhania.
Following extensive consultations, a new online portal now allows employees to book travel arrangements directly from their workstations. A dedicated travel desk handles the actual purchase of tickets and accommodation, allowing for better forecasting, control and cost management at a corporate level. “There are tangible benefits for employees as well as financial savings. The dedicated travel desk can find the nearest hotels or transport. It saves a lot of time. Employees have more time to work on their own tasks,” says Mr Singhania.
The next step is to move the process from desktop computers to mobile devices, as part of a broader drive that has already seen payroll and other functions digitalised. “Essar is constantly investing in technology in all its business processes. Technology is treated as an investment, not a cost,” he says.
Productivity planning
Managing workforce expenditure goes beyond just employee-driven expenses. CFOs need to take a broader view of workforce dynamics, projections for headcount and employee productivity to have better control over expenditure related to salaries, benefits and training. This has been among the top priorities for Mr Kwan at Sun Life Financial in Hong Kong, against the backdrop of an evolving insurance industry. Indeed, managing a life insurance business has never been more complex: interest rates have been low and people are living longer, meaning long-term savings need to last longer. “In addition to that, in an environment like Hong Kong and Asia, because we are growing fast as a company and an industry, expenses can grow as fast as revenues and need to be managed,” admits Mr Kwan.
To secure more value from their employees and ultimately manage workforce spend more effectively, Sun Life Financial has deployed emerging technologies to automate work for support staff who rely on multiple systems and applications when setting up a policy or handling a claim. Robotic process automation technology attempts to replicate what employees have to do by automating the steps, Mr Kwan explains. With staff spending less time on form filling and data compiling, they can spend more time on higher value analytical work and more complex cases, reducing the need to increase headcount at the same pace as business growth.
Spatial strategy
Importantly, digitising and automating work processes facilitates remote and agile working practices. This has a direct impact on office space requirements and managing real-estate spend. Comprising a third of their total costs, Mr Kwan describes real estate expenditure as “a large cruise-liner, once you’ve put it on a path, it’s hard to change. But what you can do is improve the utilisation of the space.”
As part of their approach to agile working, sales staff are equipped with digital tablets that allow them to process policies remotely. In this way, Mr Kwan explains, “they don’t necessarily need to come into the office for paperwork, and that reduces the amount of office space required.”
More creative approaches to real-estate spend management are required of CFOs today as they respond to unpredictable events. The typhoon in Hong Kong in September this year is a case in point. “The day the typhoon hit, we realised that one of our buildings was impacted and wouldn’t be recovered for three to four months,” recalls Mr Kwan.
Comprising a third of their total costs, Mr Kwan describes real-estate expenditure as “a large cruise-liner, once you’ve put it on a path, it’s hard to change. But what you can do is improve the utilisation of the space.”
He turned his sights to co-working spaces in another part of the city to tide them over. The short-term leasing decision was informed by their business continuity plan and a review of the most cost-effective solution to ensure their overall financial position was not impacted. In response, they crafted an appropriate strategy for managing their workforce: “We made some people work from home, we made some people give up their desks, we made some people move [to other offices] and the rest we placed in a co-working space. You can’t just maintain extra space for everybody for these kind of contingencies.” A holistic view of the business and various spend components therefore provided the insights required to respond quickly and effectively.
Challenging common perceptions
Rapidly evolving consumer preferences and technological advances are shaking up industries like never before. In this climate, being able to assess the impact on various spend components, from production to logistics, is crucial to making the right decisions. This is even more critical for large, multinational companies. The experiences of CFOs at Sun Life Financial and Essar Steel have demonstrated that it does have a positive impact on operational agility.
Keen to challenge common perceptions of CFOs, Mr Singhania explains that it is not their job to say “no” to costs, but to ensure those costs help the business. “I prefer to say I am a facilitator for the business, not the controller of it.” Importantly, taking a holistic view can help pinpoint relevant spend management opportunities. “I am not a big fan of just cutting 5% off everything. It tends to be a very blunt instrument. You are better off doing things in a targeted fashion,” emphasises Mr Kwan. For this, deeper real-time information is critical, delivered through a combination of emerging technologies and effective collaboration, including open channels of communication between stakeholders and buy-in from colleagues across the business.
Keen to challenge common perceptions of CFOs, Mr Singhania explains that it is not their job to say “no” to costs, but to ensure those costs help the business. “I prefer to say I am a facilitator for the business, not the controller of it.”
