When Cisco Systems Inc. reported financial results for its fiscal year, some on Wall Street chided it for "managing earnings." One analyst complained in the Wall Street Journal that, for the eighth straight quarter, the San Jose, California, company had topped Wall Street's expectations by precisely one cent per share--and suggested that accounting games were being played. So what does CFO Larry R. Carter think about such an accusation?
"I take it as a compliment," he says. After three years spent trimming the finance department's month-end closing process from 10 days to 3--with the goal now in sight of a "virtual close" that permits error-free numbers accessible on demand--there's not much guesswork going on when he talks with analysts. "The close is no longer viewed as a single monthly event," explains Carter, who is also senior vice president, finance and administration, and secretary. "Instead, it is now considered a continuous process that builds over the course of a month."
Cisco's astounding record in shortening closing times, though, is just one of many successes in the program Carter began in 1996 to tighten corporate processes. In an array of areas, from bill payment to tax planning, Carter has led the effort to improve productivity, reduce cycle times, increase the flow of accurate information, and boost profits. And the effort ultimately won him the 1999 CFO Excellence Award for Developing an Efficient Finance Organization.
In Carter's view, the long road to finance efficiency has been paved with three big advantages: a dearth of "legacy issues" at the fast-expanding networking concern; employees wise in the ways of the Internet; and the same frenetic acquisition drive that some might consider an obstacle to process improvements. In reality, he says, "it forces you to be more efficient."
In the end, the results speak for themselves. Net income surged 55 percent in the fiscal year ended July 31, to $2.1 billion, on a 43 percent jump in revenue to $12.2 billion. And much of the credit goes to Carter's team, says Cisco's senior vice president, manufacturing, worldwide operations, Carl Redfield. Finance, he explains, "plays an important role in improving the cost structure and affecting the productivity, asset utilization, and gross margins for the entire company."
If the absence of corporate legacies spares Cisco from tired old traditions, Carter's own legacy gives him a personal boost. Now 56 years old, Carter spent 19 years at Motorola Inc. before moving on to Advanced Micro Devices Inc. as controller, and eventually to VLSI Technology Inc. as CFO. "The combination of working for a large company like Motorola and smaller companies like VLSI provided an excellent training ground," he says. Motorola made formal instruction paramount, "but in a smaller company, there's such an entrepreneurial environment"--the kind of environment he tries to emulate, even as Cisco expands at its rapid clip.
It was precisely that clip that hurt Cisco's efficiency in the first place, however. When Carter joined in 1996, Cisco was acquiring midsized companies and integrating them well, but barely keeping up with the management of its own internal finance processes. "Maintaining the status quo was simply unacceptable," says Carter, who initiated a hiring program to add finance managers with experience in large-scale process-improvement projects.
Speed was of the essence, of course, both in making the corporate changes and in setting the framework for finance planning. "We don't make a lot of three-year and five-year plans," he says. "It's an exercise in futility" for a company growing like Cisco. And not surprisingly, the Internet and other technologies became cornerstones of Carter's improvements. "Everyone here is very Web- adaptive and PC-adaptive," says Carter, adding, "It's all very natural" for a company built on making networks run smoother.
Take the improvements in purchasing and accounts payable. To increase their efficiency, Carter put those two departments under a single manager in 1996--one who was encouraged to introduce his own vision for reengineering the procurement cycle into a single process. Soon, networked commerce with suppliers had become the standard. Cisco eliminated many of its paper-based transactions as it reviewed document flow and assessed supplier relationships. And it created three separate procurement strategies to fit the different needs of its high-dollar, high-volume inventory and service suppliers; its low-dollar, high-volume repetitive purchases; and its low-dollar, low-volume transactions.
In the wake of these improvements, Cisco's A/P headcount per $100 million of disbursement has fallen sharply over three years, for a 55 percent productivity gain in the area. And the shrinking corporate-purchasing headcount per $100 million of purchasing has led to a 33 percent productivity boost.
The impetus for much of the change: Each unit's finance department "developed a balanced scorecard that focuses simultaneously on productivity improvement, cost savings, timeliness, quality, and client satisfaction," says Carter. "In addition, a business-process- improvement department was created in the corporate controller's office to provide centralized leadership and resources."
Over in payroll, automated transfers of commissions, benefits, and stock- administration data--along with another Web- based tool that managers use to capture actual and accrued paid- time-off information--have helped Cisco slash the headcount 33 percent, from 1.8 per 1,000 employees to 1.2, while payroll costs per employee have been reduced by the same percent.
Meanwhile, advances in the tax-planning and - execution arena--mainly in the area of integrating tax with other Cisco operations-- have helped reduce the company's effective tax rate from 37.5 percent to 33 percent.
Toward a Virtual Close
The efficiency that pleases Carter most, though, is the approach toward a virtual close. George Kelly, a managing director with Morgan Stanley Dean Witter, credits Carter's microelectronics background with making "the idea of lightning closes" the rule of law at Cisco. And Carter agrees. "I saw at Motorola that it could be done," he says, noting that his former employer had managed to achieve a one-day close.
In watching Motorola's progress, he realized how monumental immediate access to internal information could be to a company. "I knew it would help improve quality and productivity, and give us a more analytical approach," he says.
The first step was to get the finance department to view the close as a continuous process. Progress was achieved through the gradual movement toward automation of important reconciliations and the establishment of automated feeds between key systems. With the drive toward shortening the cycle in mind, meetings held both before and after each close highlighted areas of potential improvement.
That original 10-day closing has now become ancient history. Today, even though Cisco officially lists the close at 3 days, revenue and expenses can be quickly sized up at any point during the month. Tools such as rapid revenue reporting, the executive information system, and expense tracking give daily updates on sales, bookings, and costs. And that nearly instantaneous information has been a boon to corporate insiders and investors alike. Nearly every CFO presentation includes a slide that says "No Surprises."
One thing Carter didn't bring from his prior employers, however, was their reverence for multiple metric measurements. "If you try to focus on too many things, people get confused," Carter says. "The focus at Cisco nowadays is on market share, gross margins, aftertax profit--as simple as it gets." Cisco, he explains, "doesn't need to break things down into 40 subsegments and do all the allocations." Motorola's monthly profit-and- loss statement "was probably an inch thick" for the group Carter represented during his last years there. At Cisco, "ours is one page."
Now that's efficiency.