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[Top tips & case study] Understanding economics

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In part three of a series of PM Forum articles on ‘the seven habits of a commercial adviser’, Ben Kent and Adrian Furner discuss how advisers need to demonstrate an understanding of economics. [Habit 3]

What does ‘economics’ mean to you? Traditionally it is a difficult term to grapple with. A formal definition would be ‘the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods’. For many, the definition of economics goes much wider than this which is why it can be hard for advisers to grasp what it really means to their clients.

Understanding financial documents such as the balance sheet and the profit and loss account is only part of it.
‘Understanding the economics’ means not only understanding how your client makes money, but how the advice that you are providing will impact on this.

Three main steps to economic understanding:

  1. Organisational economics – understanding how your client’s company is structured, how and when it reports its financials, the internal reward structure.
  2. Macro and market level economics – understanding how your client fits into the wider world/their market, now and in the future.
  3. Transaction economics – understanding the economic drivers and implications of the specific opportunity.

A commercial adviser not only has a good grasp of these areas, but is able to articulate them clearly to the client. They are able to identify and articulate the value that they have brought, as well as any potential risks to the client, in financial terms.

To achieve this, numeracy is a key competency. Numbers are the language of business, but many professionals are tongue tied. A lack of financial fluency can put professionals at a grave disadvantage. It excludes them from the serious c-suite conversations and makes it difficult to justify the value of their recommendations. “If you can’t quantify what impact this project will have, why should we pay you £100k?”

In my 25 years of doing this I have met two lawyers who can add up which means it’s difficult for them to be commercial. They delineate between that which is a commercial point and that which is a legal point and shouldn’t. I’m not paying £1000/hr to make all the difficult decisions, I’m paying for someone else to not just advise, but to make a decision. Dr. Robert Easton – Managing Director, Carlyle Europe

A useful way to understand this is by looking at a typical M&A transaction. Ben Kent shares his experience and tips.

M&A economics

I started out my career in the corporate department at a Magic Circle firm. I worked on a series of acquisitions, but  my understanding of finance was limited. I now realise that a better understanding of M&A economics would have really helped
me deliver better quality, more focussed advice.
At its heart M&A economics is quite straightforward. Financiers generally value a business by analysing three factors:

  • The value of its assets
  • Its ability to generate future profits. Many will use a Discounted Cash Flow model (DCF) to do this
  • The value of comparable companies.

This will give you a base price, ie. the price of the business if it was sold as a standalone business.

Financiers then look at potential synergies to calculate the benefits of two businesses merging (on the principle that one plus one should equal three). This will push the price up:

  • Cost synergies include savings from sharing head office costs, rationalising property or shedding staff.
  • Revenues synergies are the additional revenues you achieve by crossselling additional services to each firms’ customers.

It is critical that lawyers understand the valuation model and which synergies are driving the price. It enables the lawyer to
focus due diligence and negotiation of the sale and purchase agreement on the issues that really matter. For example, if
the deal is driven by revenue synergies it is critical to review contracts with customers and make sure that the sales teams are locked in. If the sales teams leave then the revenue synergies will be nearly impossible to deliver.

Unfortunately many lawyers are not given enough financial training to understand these points and as a result focus on points that are commercially irrelevant.

[This article originally appeared in professional marketing magazine. For further details go to www.pmforumglobal.com. In the next issue: Habit 4 – Understand the people]

[Top tips & case study] Commercial understanding

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In the second of a series of articles, Ben Kent and Adrian Furner discuss how advisers can better understand the context of their clients’ businesses [Habit 2].

How much do you really know about your clients? In our recent study, Effective Client-Adviser Relationships, 52% of clients cite a lack of understanding of their business by external advisers as the factor which is most likely to derail the client-adviser relationship.

As we discussed in the Summer 2014 edition of pm, understanding the business context in which a client operates is one of seven core habits that commercially-savvy advisers exhibit. Commercial understanding is now a major factor clients consider when they commission work. When looking to instruct advisers for complex work, 40% of clients place an understanding of their business as among their top three selection criteria. The professional firms that have been most successful in this area have managed to turn their more commercial approach into a brand differentiator: “You must constantly educate yourself otherwise
you can’t deliver successful advice.” Mike Strong, Executive Chairman EMEA, CBRE.

So what exactly do clients expect from their advisers? Reading financial statements and annual reports is useful, but no longer sufficient. Clients are demanding much more: 75% say they expect their advisers to know about their organisation’s strategy and business plan, and 67% expect knowledge of industry sectors and trends. As clients raise the bar, professional firms are expected to jump higher and higher to demonstrate commercial understanding.

Three steps to demonstrating better commercial understanding:

1. Research the style and culture of your clients

Each client has their own language, jargon and way of doing business. Communication styles and risk appetite vary between organisations and individuals. Understanding the personal and emotional factors involved in any piece of work will inform how to best position advice to ensure it gains traction. Top tips:

  • Map out the key stakeholders for any engagement, and meet with them to discuss their personal views and objectives.
  • Keep in touch throughout the duration of an engagement and afterwards. Informal meet ups work well, particularly at the client’s premises.
  • Be inquisitive about a client’s strategy. Don’t be afraid to ask for strategy documents that would help contextualise your advice.

2. Share best practice and case studies

Clients want to know from their advisers how other organisations, especially those in the same sector, have undertaken
similar engagements. Sharing insight on what does and doesn’t work, and how pitfalls can be avoided, is a key attribute
of trusted advisers. Top tips:

  • Capture the knowledge that you build up from different clients. Write down the key learnings and actively share with junior colleagues.
  • Develop a checklist of questions to ask when attending initial meetings with a new clients.
  • Prepare relevant case studies to show clients ahead of meetings, and talk to colleagues to gather more examples.

3. Keep one eye firmly rooted on the future

Clients also highly value foresight on trends likely to reshape their sector in the future. CFOs and GCs are time poor and so look to external advisers to offer a view on the issues that might impact their business over the short and long-term. Top tips:

  • Read blogs and thought leadership, and attend industry events and networking sessions to keep abreast of sector developments and issues.
  • Attend seminars and workshops delivered at client organisations to understand the in-house dynamic.
  • Send short, personalised emails to clients drawing their attention to issues you think are relevant to them.

Case studies: fostering business understanding
The talent management strategies of professional firms are at a turning point. Firms now recognise that business understanding
is as important as technical understanding. Sector groups, key account plans, and knowledge managers are a good starting point. However, more innovative firms have taken further steps to build business understanding into their culture:

Simmons & Simmons has created a highly successful mini-MBA for trainees joining the firm that teaches young lawyers essential business skills.

Thomas Eggar, a law firm based in the south of England, sends its lawyers to do a day of work experience at their client’s retail outlets.

The Big Four accountancy firms and large consultancies have high developed knowledge management systems that allow fee-earners to share insight and collaborate across practice areas.

[This article originally appeared in professional marketing magazine. For further details go to www.pmforumglobal.com. In the next issue: Habit 3 – Understand the economics]

[Interview] How can the finance function better meet the needs and expectations of the wider business?

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As guardian of the corporate purse-strings, the finance function has long enjoyed a privileged influence on strategic and operational decision-making. But that influence is now being threatened by other executives keen to gain the confidence of the CEO. To investigate this changing dynamic we spoke to Jamie Lyon, Head of Corporate Sector at global accountancy body ACCA. Jamie leads ACCA’s global thought leadership, research and insight programme on the CFO agenda and the future of the finance organisation.

 The real skill is about being commercial while making sure the business ticks over day-to-day. 

The role of the finance function in changing across the corporate world. The drivers of this change are largely external. “The state of play of the global economy dictates what corporates expect from their finance people,” says Jamie. For example, during the economic downturn, and for a considerable time afterwards, the watchword was survival. This meant the finance function focused on its core responsibilities to control costs, encourage efficiency and maintain cash flow.

Now market sentiment is more buoyant and many mature economies have returned to sustained growth. This different market environment brings with it different expectations on how the finance function can best serve its partners in the rest of the business.

As other corporate functions become more involved in strategic decision-making, the finance team also needs to take on a wider, more commercial role. There is an opportunity for finance professionals to collaborate with departments such as Sales and Marketing to work out which channels to market are most profitable.

So how can the finance department adjust to this new role and remain a trusted business partner to the rest of the executive team? For Jamie Lyon the answer lies in balancing the competing demands of the role: “The real skill is about being commercial while making sure the business ticks over day-to-day.” He shares three important tips:

1. Align the finance function to the KPIs that really drive value

As the corporate agenda switches from efficiency to growth, so too should the priorities of the finance function. “One of the big challenges that corporate finance functions face is aligning their finance work and commercial support to the things that drive real value in the business,” says Jamie Lyon.

This requires a sophisticated understanding not just of the core business activities, but also an appreciation of how value is assessed by the rest of the business. What is it that colleagues in other functions genuinely value? How should this be appropriately measured, tracked and reported? This insight will help the financial team put in place the right KPIs and prioritise efforts on activities that will maximise value-creation.

 2. Be open to risk

Taking risks is not a natural element of the typical CFO’s psyche. The training that finance professionals receive is often compliance-focused; it priorities financial controls and rigid assessment of the payback on investment. This leaves little room for taking risks.

However, Jamie’s advice is clear: “Finance teams must be prepared to take calculated risks to seize growth opportunities. They are used to taking a rational and measured approach. With the current business environment still shrouded in uncertainty, this is the right time for many businesses to reassess their risk appetite.”

 3. Make the most out of available data

“The balance between financial and non-financial data is becoming more important. Finance professionals have to step up to the mark and accept that there’s a lot of change happening,” says Jamie Lyon. Senior executives want to be able to assess the health of their organisation in the round, and are looking beyond the balance sheet. With increasing frequency, information about other organisational priorities – risk, talent, technology, innovation and customer – are being given equal attention alongside financial data when boards take business decisions.

To be an effective finance leader and business partner means showing willingness to work with and synthesise this range of data, and investing in the systems and processes to do so efficiently. “Finance teams need access to good tools which will allow them to conduct the data synthesis, extrapolation, forecasting, modelling and progression that they require,” says Jamie.

 

To be an effective finance professional means learning to adapt to the changing expectations of colleagues, and having the right skills, mind-set and confidence to work collaboratively across the business. The rewards for those willing to embrace this new model can be significant: the most commercial finance teams are viewed by their colleagues as facilitators of growth, not policemen of cost. This means they are able to secure a privileged influence over strategic decision-making for years to come.

[Top tips & case study] How can advisers better achieve their clients’ desired outcomes

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In the first of a series of articles, Ben Kent and Adrian Furner explore how advisers can better achieve their client’s desired outcomes. [Habit 1]

Success needs to be defined by achieving the client’s outcomes rather than excellent inputs or outputs.

Too often advisers confuse deliverables, with outcomes. This mismatch arises because professional services firms tend to adopt pricing models that reward their advisers for providing deliverables, whereas clients’ businesses are usually only rewarded when they achieve certain outcomes. In the context of the 7 Habits of Commerciality, being truly commercial means being able to bridge this gap. Advisers need to focus more diligently on how their advice is used in the boardroom during the decision-making process.

Focus on the client’s objectives, understand what success means for them

Take an M&A transaction as an example. An adviser is accustomed to providing advice and support for the negotiation of the opportunity, focusing on the execution of the sale and purchase agreement. However, for the client having this document drafted and signed is merely a milestone en-route to success. Success often does not occur until many months or years further on where the final objectives – achieving cost synergies, expanding the company’s geographic footprint, and bringing together IP to launch a new product – are fully realised.

Realise that the desired outcome is often personal and rarely contained in the brief!

It is often not taken into account that the reasons for a desired outcome may also be personal. A commercial adviser
acknowledges this and tailors advice to help the client get to their individual outcome.

Ask the right questions

With modern account management tools it is easy for advisers to assume that they know their clients well. However, the real skill is to truly understand clients in the context of the advice being given. Why is a given matter or engagement important to them? How does it link to the corporate strategy? What are their plans for the future? It is these types of questions that can give true insight into what matters to the client.

Be closer to clients, before, during and after – collaborate

Much of this understanding will only come from being closer to clients, before, during and after they need an adviser’s technical services. Professional advisers are often only brought in when there is a transactional need for their skills, by which time the client is often a significant way along in their decision-making process. Being closer to clients earlier in the cycle can really help advisers to better understand desired strategic outcomes. How many advisers really know the timing of their clients’ strategic planning cycles?

Help the client implement their advice by offering implementation services or handing over well to the implementation team. The Big Four accountancy firms have now developed post-merger integration capabilities.

Don’t rush in, build in space and time so that things are not overlooked

When trying to understand their clients’ desired outcomes, advisers often rush towards the solution almost immediately, often feeling that that they are offering the client value for money by converging on the solution from day one.

In the drive towards the solution, opportunities may be missed and the need to understand and test the solution against the client’s desired outcomes may be overlooked. Increasingly in complex and interconnected transactions, space and time needs to be built in to allow for more divergent thinking.

Case Study: What can strategy consultants teach the professions?

The top strategy consultants have a reputation for being extremely results focussed. What can they teach lawyers and accountants about commerciality?

We recently interviewed an ex-partner from one of the top three strategy consultancy firms. He believes that the rigorous professional training that young lawyers and accountants undergo can be a hindrance. “It is very easy if you are a lawyer or an accountant to believe that the only thing you provide is technical advice, and you probably feel nervous outside that space. They rock up and show off their technical expertise. Strategy consultants don’t have the crutch of a professional qualification so this forces them into a different space”.

Three techniques are particularly powerful:

1. Problem statement – At the outset of the project define very clearly what is the ‘problem statement’, i.e.. what is the problem you are trying to solve for the client, and how can the benefits be quantified in terms of ROI? Make sure that the consultant’s activities are focussed on achieving the outcome and cut the fluff.

2. Value proof letters – At the end of the year this partner’s team would write a value proof letter that said “over the last year we have worked on these three projects, this is the value of the work we have delivered to your organisation relative to the fees we charged. We were looking for multiples of twenty times our fee rate.” This forces consultants to focus on implementing change rather than just delivering a report. Without change there is no value delivered to the organisation. It also creates a mind-set shift: “It takes people away from focusing on the technical and towards the business outcome,” he says.

In his experience clients absolutely love this approach, and it overcomes the complaints that advisers get about deliver a presentation, going back to their office and leaving the client with a turkey. “It becomes the basis for a meeting with very senior people to say this is what we do, and this is how you felt. It completely opens up real honesty in the relationship.”

3. At-risk fees – “We often put part of our fee at-risk. We are paid the full fee if the results were delivered and the client was delighted. There is a discount if the client is only satisfied.” In the right circumstances, it is a terrific way of ensuring that the client’s and consultant’s interests are aligned. At-risk fees work best when success can be measured.

[Excerpt from an article that originally appeared in professional marketing magazine. For further details go to www.pmforumglobal.com. In the next issue: Habit 2 – Understand the business]