I have never been the CFO of a telco, but I have met quite a few. Louis Khor, who works for Papa Rob in the preposterous role of “GRAPA Research Director”, has never been the CFO of a telco. My guess is that Louis Khor has met rather fewer CFOs then me. If you forced me to give a number, I would estimate he has met approximately zero CFOs. Why do I say this? Because I read an old post of his where he uses the term “CFO” a grand total of 32 times. Anybody who tries to tell you they know what CFOs want, over and over and over, is doing so because they think you must know nothing about what CFOs want. That gives them free reign to make up the most incredible fantasy version of real life, which I would now like to eviscerate. And why should I do this? Well, let me just say that I find it offensive that somebody with a website called I LOVE Revenue Assurance tries to give lessons in the subject of RA without first checking his facts. You might say I am critiquing his research skills. Or you might say I think he is an out-and-out charlatan. Either will do.
But before I rip into Louis’ fantasia in C(FO) minor, you may be wondering why I visited Louis’ site. Well, I have a theory that goes like this. Papa Rob is always launching new campaign initiatives, new channels of communication, new programs etc. But he rarely mentions all the old ones. So when GRAPA does something relatively high profile, where they profess themselves to be the heroes of RA, and not the arch-villains that they really are, I like to wait a while and come back later, to see how long their heroism lasted. True to form, I visited I LOVE Revenue Assurance and found… that it is dead. Perhaps Louis has fallen out of love with revenue assurance, because he managed 22 posts in June 2010, one post in October 2010, and none since. Here is a memo to Louis from somebody who really really loves revenue assurance: 442 posts since October 2006, and still going strong. Now that is love. A tough love, but love all the same. All Louis had was a brief and tawdry affair.
So what did Louis, the man who whispers sweet nothings about RA, say in his very last post, which was dedicated to what CFOs supposedly want? Read on, and I will give you my take on what CFOs really want, as we go through it…
CFOs Want to Predict The Future – Here’s How With Revenue Assurance!
Well that is a bad start. CFOs need lots of forecasts, but RA has got to be one of the last places they would turn to for forecasting. After all, they employ a whole lot of other people in Finance to do forecasting. 10/10 for ambition but 0/10 for getting along with your colleagues in Finance who actually get paid to forecast on a full-time basis.
When it comes down to it, CFOs are primarily concerned with “do I have enough money to run the business.”
That is their primary concern? In other words, their primary concern is ‘will we be bankrupt tomorrow’? You have to hope that the average CFO is working on a level slightly above speculating if the company will disappear overnight. Maybe not Scott Sullivan, former Worldcom CFO, who spent 4 years in prison for his part in their accounting fraud, but then he was too busy inventing ingenious frauds. But your average CFO is doing quite a bit better than turning up to work on a morning without knowing if he will be in a job come the evening.
They may delegate that responsibility to the controller, or to various Line of Business managers, but the fundamental need to ensure that the business has enough money to function effectively does not go away.
So are we all clear on this point? If the business collapses, that is a bad thing. Glad we got that resolved, in case there was any doubt about it. Let us hope the other CxOs also take a passing interest in the subject.
Because of this, CFOs are constantly looking to any indication of how the business is doing, and ways to forecast a telco’s performance in the coming months.
Err… not really. CFOs are not constantly looking for any method of forecasting performance. They prefer to use good methods.
Hard as it is to believe, CFOs are not opposed in principle to losses or leakage (though no CFO will admit to actually being happy about them). They are more concerned when these losses are not detected early and only become evident months after they actually occur. This leaves CFOs no time to plan for how to address them – through adjusting the budget in line with such real-world conditions.
And this is where Louis goes horribly wrong, and never really recovers. This is what they teach you on the first day of CFO school: cash is king. It means no matter what Louis Khor or anyone else says about revenues or profits or whatever, you can only spend cash if you have cash. The thing about cash is that it is not mysterious. You tend to know if you have cash. A decent CFO would know, anyway. The thing with cash is that you do not need to know anything at all about revenue leaks to work out how much cash the business has. That is because cash is cash. Did you have some money, did you get some money, did you spend some money? That kind of thing. So if the telco expects to earn a million dollars in revenue from selling its services, and the amount of cash they collect is zero, then the amount of extra cash the CFO has to spend is zero, and the CFO should be able to work this last bit out, without needing to be able to tell the difference between a situation where a million dollars worth of services were sold and a situation where nothing was sold. In short, you can know what your cash position is without knowing anything about revenue loss.
A CFO’s Worst Nightmare
When your revenue figures are suddenly far less than projected based on your forecast and your sales figures, you end up with large cash flow problems that severely affect how the business can be run.
See above. Yes, if you sell a lot less than you expected, or collect a lot less cash than expected, then you do have less money. That is a problem, especially if you need to spend money. But where does this ‘suddenly’ come from? To a CFO, nothing happens that ‘suddenly’. They do not go into work and find the firm has ‘suddenly’ gone bankrupt. CFOs get paid a lot to know what is going on, and if that was not enough incentive, they deal with hundreds of annoying auditors who are dying to point out every silly glitch and slip-up. And because CFOs need to know what is going on, poor old accountants get lumbered working long hours to tight deadlines, to ensure the CFO knows what is going on, all of the time. A lot of people provide vital information to the CFO. RA and Fraud Management is a piece in the jigsaw, not the whole puzzle.
Huge sudden unexpected shortfalls in revenue due to revenue loss or fraud that were also undetected and not represented in the sales figures, are often a CFO’s worst nightmare.
Everything is very sudden in Louis’ world. Imagine him crossing the street… “I walked out into the middle of the road without looking, and then a car suddenly hit me.” Well, it might not seem so sudden if you bothered to look first. So only the daftest CFO in the world would look at sales numbers and ignore their cash position. Imagine that CFO… “I can see we have great great sales figures! I won’t bother to look to see how much cash we collected, as it is inevitable we will get it all… WHAT? We didn’t get all the cash? That was a sudden surprise!” You do not need a revenue loss or fraud for the sales figures to not match the cash position. In fact, factors like timing differences and bad debt make it inevitable that the two will be different. Hence Finance functions forecast their cashflows too. Yeah, it is bad if the firm gets less cash than expected, but it would be a pretty useless CFO that ran the business so close to the precipice of collapse that he has a panic attack about every new fraud that comes along.
These shortfalls can lead to severe cost cutting, or borrowing large sums/re-capitalize at extremely short notice.
Oh boy. Where do you start pulling apart nonsense like this? First off, cost cutting usually increases cash costs in the short term. Make somebody redundant and you have to pay them off, cancel a contract and pay a penalty… that sort of thing. So this panic cost cutting scenario is pretty silly. If the business was that desperate, it would probably just file for bankruptcy and try to negotiate with its creditors. Second, telcos always borrow large sums. They are running a big business, not a mom and pop store. Of course they borrow large sums. At any point in time every telco everywhere owes large sums. These loans all need to be serviced, so the question of how to respond to disappointing operating cash inflows is only one of degree. After all, telcos borrow loads to make huge investments which take years and years to pay off. That is what telecoms companies are all about. And as for re-capitalizing at short notice… pull the other one. If the company is not borrowing money, it must be getting extra cash from shareholders. Imagine that – an exec team has to turn around and demand the shareholders pump in extra money because they ran the business so badly they could not cover operating fluctuations using their credit facilities. Yup, that would be a nightmare. First off, the shareholders would demand the sacking of all the execs responsible for this ‘sudden’ turn of events. Luckily, that rarely seems to happen in practice, and never because of a ‘sudden’ revenue leakage.
If a CFO knows that losses are occurring, or are going to happen, they can plan and adjust the budget accordingly. CFOs deal with losses all the time, what they don’t like are SURPRISES. This is why they use whatever tools available to forecast how the business will perform in the coming months, in the hope that those forecasts turn out to be accurate and meaningful by the time revenue is finally accounted for.
Groan. ‘By the time revenue is finally accounted for’ – that would be the time that cash is reconciled to revenue. Maybe they should just keep an eye on the cash position…
Planning, Forecasting, Wishing, Hoping
One of the key planning tools a CFO has is the budget, which is effectively based on a forecast of sales activity for the coming year. A forecast of sales activity is borne out/proven by the actual sales numbers that occur. This in turn is an indication of how much revenue will be received (once service is delivered), and the amount of profit that will be made after direct costs are taken out.
So whilst the average telco spends zillions in capex, Louis has simplified them to sales in vs. direct operating costs out. It is a good job the average CFO has a more detailed understanding than Louis. Perhaps it never occurred to Louis that profit can be affected by capital write-down and indirect costs too. And anyway, all of this is not relevant to the ‘sudden nightmare’ scenario discussed above, because ‘sudden nightmares’ would revolve around having inadequate cash. After all, lots of telcos go on for years and years without being profitable.
But even though forecasts are regarded as an educated guess based on past performance, they are incredibly important, because that is what the CFO uses to plan until interim numbers (like sales figures) come along. These interim numbers allow the CFO to make adjustments and re-assess the budget. Of course in the end, revenue and profit will be accounted for – but by that time it’s often too late. The earlier a CFO can make decisions, the greater effect those decisions will have.
I have no idea what the CFO is meant to be deciding here. How much to spend on paper clips? Or how much to spend on rolling out LTE? Guess what, if you are going to spend zillions on capex, you sort out the financing needed for it. You do not rely on operating cashflows and then panic when they fall below target.
But Marketing and Sales Say We’re Going to Do Better Than We’ve Ever!
Realistically, the only way CFOs can have confidence in the forecast of sales is by implementing marketing assurance, so they know what the marketing people tell him will be the “lift” from their activities will have some actual relationship to reality when the sales figures come in.
So now we have ‘marketing assurance’? People have been working in forecasting since the dawn of accounting, but now we have ‘marketing assurance’. Some people really do seem to believe the world only comes into existence when they open their eyes. The truth is that there were people who did jobs looking over a company’s finances before Louis Khor was appointed Research Director for GRAPA, and even before anyone had ever got a job in RA. They just did not call their jobs ‘marketing assurance’.
But in the end, what CFOs are most concerned about is not forecasts, or even sales figures. They are concerned with the revenue that comes from rendering service. More importantly, they are concerned about the profit this revenue represents.
WRONG!!!!! Cash is king. A business can be profitable and go bankrupt. So CFOs think about plenty more than revenues and profits.
In particular, this manifests as the margin a telco earns once direct costs (such as payments to interconnect/roaming partners) are paid out.
Louis must be the only person in the world who thinks CFOs take no interest in capex or indirect costs.
In effect, forecasts and sales figures are simply ways that CFOs can help themselves judge/predict how well the company is going to do once the accounting is done – for instance at the time of a periodic trial balance. These management accounting balances help a CFO get a sense of whether the sales numbers were really a good indicator of how things were going.
Well, at last there is something I cannot argue with. But all Louis is saying here is that CFOs compare their forecasts to the actual results… hardly a stunning revelation.
The Beauty of the Truth – or Reality
The way a CFO can ensure that the sales numbers are a good indication of reality is through revenue stream assurance (leakage control) and margin controls.
If they were super stupid they would do it like that. How about they compare their sales numbers to the amount of cash they get? That would work too. There is a reason why people take an interest in ratios like DSO. It tells you something useful, even if you had no controls whatsoever.
That way when the final margin/profit is calculated and accounted for, there are no big surprises that can reasonably occur. This is because, to a large extent, whatever was sold was billed and realized, and done so in a way that is in line with the margin assumptions that were made.
Or you could just look to see how much cash you were getting.
This is the key value that Revenue Assurance can provide as a finance function that reports to the CFO. Revenue Assurance can give the CFO confidence that the numbers being used to forecast, adjust budgets and make business decisions are actually useful and accurate and not random numbers that have no relationship with reality.
Yet, peculiarly, the absolutely most basic control in finance is to reconcile your cash position. Hence another saying from day 1 of CFO school: ‘revenue is vanity, profit is sanity, cash is reality’. But RA teams do not tend to be the ones reconciling cash. Why? Because somebody was doing it long before RA showed up. Give those professionals some credit, and do not pretend the RA team is the last line of defence. The RA team may add lots of value, but other people working in finance serve a useful purpose too.
Big Money, Big Decisions, Big Problems
When a CFOs get funds, decisions need to be made such as:
* Do I ring fence those funds because I know there will be substantial losses coming, or bad debt that will never be collected?
Double groan. ‘When CFOs get funds’…? Louis makes them sound like they stare out of the window all day, and occasionally somebody surprises them by throwing a sack of money on to their desk. CFOs always have funds, are raising funds, planning what to spend with funds, and checking that their plans and forecasts match reality.
As for bad debt… now Louis really is showing his ignorance. Even the most junior auditor knows that the firm needs to estimate its provision for bad debt. The question is not ‘if?’ but ‘how much?’
* Do I invest the money in new equipment, more marketing, hiring more staff etc. because the forecast/sales figures indicate a potential huge rise in revenue and a need for increased capacity to capitalize on it?”
Telco reality: plans and strategies that take years to execute. Louis’ imagination: “what should we do next week?”
If CFOs are not sure of the forecasts and whether the sales figures will be borne out by the revenue figures, they have to play it safe.
Triple groan. Nobody knows for sure whether a forecast will be met or not, for hundreds of reasons. RA maybe deals with a few dozen possible causes of planning variance. But that does not mean CFOs are forced to ‘play it safe’… whatever that is supposed to mean.
They may then miss market opportunities, because they never know what surprises are in store, hidden in the overoptimistic forecasts and inflated sales figures that ultimately manifest as lower than expected revenue due to leakage/fraud.
See above. Whilst most of the telco world buys spectrum, raises loans, negotiates contracts over a timespan of years, Louis talks like one bad sales day will spell imminent disaster. Think of this way – what if people just made fewer calls one month? What then? Would lots of telcos go under? The difference made by RA, whilst significant, is not hugely greater than the difference between a month where people made a lot more calls than average and a month where people made fewer calls than average. And nobody has devised a way to force customers to spend money just because the telco needs the cash.
And even when bad things do not happen, and no surprises pop-up, that is still bad, because the CFO is left with money he could have spent but didn’t, which represents dozens, even hundreds of missed investment opportunities.
Quadruple groan. So whilst telcos are pitching billions into network rollout and spectrum auctions, Louis thinks the business is going to underperform because it… erm… well, I do not know what Louis thinks the business is or is not doing with that extra cash. Most CFOs would put it in the bank. Earn a bit of interest, or pay down some debt. Louis must think they stuff it under the mattress. But even that would be better than spending every last available penny on every possible ‘investment opportunity’ that they can think of. Telcos are a business, not a ‘get rich quick’ scheme.
That ultimately manifests as lower future/expected revenue over time.
You see, the problem with Louis is that he has no sense of scale, at least as appropriate to a CFO. When you make multi-million dollar decisions that commit your business to a strategic path that you hope will give you a competitive advantage over rivals, you are not going to break a sweat because Louis Khor thinks you missed an opportunity because operating cashflows were slightly better than expected.
At the other extreme,
When Louis uses the word ‘extreme’, he really means it.
a CFO can overspend and not have enough money to run the business by the end of the year
Actually, you need money all the time, not just at the end of the year. Paying suppliers, servicing loans, paying your staff… it happens all during the year.
because he trusted the forecast and sales figures that ended up not being borne out by the final revenue numbers. This cash flow problem will mean reduced budgets, staff cuts, and an inability to invest in potential future revenue streams.
Is it too much to say I feel a quintuple groan coming on? How about ‘not paying a dividend’ as one of the options? Shareholders like dividends. CFOs really care about shareholders. After all, shareholders own the business. But if there is no money to pay them, the telco does not pay them. Funnily enough, I have yet to hear of the telco that did not pay a dividend because of ‘sudden unexpected revenue leakage’. On the other hand, as mentioned above, staff cuts would be a really stupid way to deal with a cash crisis. You need to spend lots of cash in a short period when you make staff cuts, because you still have to pay off the people who got cut. Unless they have no employment laws or trade unions in the country which the firm operates. Even so, I doubt that any CFO would risk destroying the business to save himself the bother of raising some short-term finance to handle liquidity problems. On the other hand, an average CFO would cut wasteful discretionary spend. A good example would be eliminating the budget for GRAPA training.
And all this because revenue assurance wasn’t involved in ensuring the figures were accurate,
There we have it. Everybody working in telcos, the CFO included, is an idiot… except for the people in RA. I like RA. I love RA. But not so much that I think anybody who has a job outside of RA must be an idiot.
had integrity and not subject to large amounts of fraud or leakage that lead to surprises and abrupt needs to borrow money or drastically reduce costs.
Worldcom went bust. Global Crossing went bust. NTL went bust. Other telcos have gone bust. But none went bust just because they suffered fraud or revenue leakage. They all had more fundamental issues. If you believe the old saying ‘count the pennies, and the pounds will look after themselves’, then you are wrong. Spend all your time counting the pennies, and you miss the big picture. That is why CFOs, thankfully, spend most time looking at the big picture, and delegate the small stuff. Louis is one of those guys who will never understand the phrase ‘penny wise, pound foolish’. He may be ideal with the small stuff, but should not pretend that lots of small stuff = some big stuff.
How Does a CFO Determine Their Appetite for Risk?
The question is not whether a CFO needs this assurance, its how much assurance does one need.
Let me remark that, all along, I felt Louis must have been cutting and pasting ideas from what he has read elsewhere. He certainly never heard any of this nonsense from a real CFO. For me, when Louis casually chucks in the phrase ‘appetite for risk’, it confirms he is copying things he has read without understanding what they mean. Investors set the risk-reward curve, by the way. Just check out telecoms betas. And if you do not know what I am talking about, then do not feel bad, as Louis does not know either. But the CFO would know – and Louis’ post is supposed to be about the CFO.
Depending on the revenue of the company, and the potential upside gains of focusing attention and capital on new investments/opportunities, a CFO may say that a variance between forecast and sales, and between sales and revenue of $10 million USD for a quarter, is acceptable. Most of us would say that’s high.
Most of “us”? Most of who? Now, you know that I love you. And, better still, you love you. Louis also loves you. But the shareholders own the company. They do not need to have love in their hearts. All that really matters is the returns they want, not what you or I want. And that is what the CFO cares most about – delivering the returns that shareholders expect.
But if a telco can realistically expect an upside potential of $50 million USD profit each quarter by continuing with investments at their current/optimistic levels rather than being conservative with expenditure, a CFO may say that amount of variance (and potential loss) is more than acceptable.
I would make fun of this if I knew what it meant.
But as CFOs want more accuracy in terms of the numbers they use to plan, the more they will want to invest in a function that helps them have more confidence in those numbers. The more accurate those numbers, the more faith they can have in them. The more risks that can be safely taken and managed, the more investments can be made to generate potential future returns. And that’s what CFOs really want – they want to be able to invest in things that grow the business, and to be able to do so without unreasonable fear that it’s the wrong decision.
In summary, the reason why all Louis’ arguments are stupid is this: CFOs cannot control customers. If customers chose to buy, or not, that creates a variance in forecasts. People are free to chose how they spend their money, and no forecasting technique known to man can precisely determine how people will spend their money. There is an irreducible uncertainty, that means there will always be variances in forecasting. A CFO would know this. And a CFO knows that the job of RA is not to improve forecasting accuracy, but to reduce inefficiencies and flaws that depress actual operating performance.
That’s why I (and CFOs!) Love Revenue Assurance!
And those were some of the reasons I dislike GRAPA.