The stroll in the airport was far from a walk in the park. Back in 1993, Dell Computer Corp. chairman and CEO Michael Dell was ambling through London's Heath-row Airport with his newly minted CFO, Thomas Meredith, and was increasingly puzzled by the optimism in the finance executive's words. Those days, after all, couldn't have been darker for the Round Rock, Texas-based computer maker. The company was growing too fast, burning cash at a breakneck pace; it had posted a $39 million loss the previous fiscal year. Under attack by securities analysts for its hedging practices, its stock price was plummeting from $49 per share to $16 per share.
Dell, a glass-is-half-empty kind of guy, listened gloomily as Meredith went on about how the company would recover, how everybody would learn so much in the process, and how only good things would follow from the experience. Then, as the two approached their gate, he shot his CFO a crooked grin. "Tom," he quipped, "you have a really distorted sense of humor."
But Meredith was deadly serious--and right on target, as Dell notes now. "I give Tom credit for seeing through the stormy times and realizing we'd come out better on the other end," says Dell. And that foresight, among other qualities, prompted Dell to nominate Meredith for the CFO Excellence Awards. The judges concurred, naming Meredith the only two- category winner, with the top prize in both performance measurement and risk management.
Meredith, a former treasurer of Sun Microsystems Inc., brings a fast-paced approach to everything he does. Known for 2 a.m. E-mail memos, he thrives on just three hours of sleep a night. Even in casual conversation, he peppers his rapid-fire comments on Dell's successes with bon mots from such diverse sources as Peter Drucker ("Compression of time is the value") and Alice in Wonderland's Cheshire Cat ("If you don't know where you're going, any road will get you there"). "I'm a big believer that people are interested in challenges, learning, recognition, and fun," he says. "My job is to figure out how to balance those things."
Performance Measurement: DSO + DSI - DPO = CCC
Balance is especially important in performance measurement, says Meredith. "Wall Street rewards companies that balance growth, liquidity, and profitability," he says. "In 1993, however, our balance was out of whack."
And how. That year, Dell was enjoying heady growth as a direct seller of computer systems, but inventories were ballooning, cash reserves were in danger of going dry, and accounts receivables were rising faster than the revenue growth rates. In the first six months of 1993, Dell had a $66 million loss thanks to inventory write-downs.
To bring about a better balance, Meredith identified the cash conversion cycle (CCC) as a key performance measure--one that, not coincidentally, has the concept of speed at its heart. "The balance between profitable growth and liquidity management is all about velocity," he argues.
Using the metrics of days sales outstanding (DSO), days sales in inventory (DSI), and days of payables outstanding (DPO), Dell added DSO and DSI, then subtracted DPO, to determine the cash conversion cycle. During 15 months of what Meredith calls "impassioned evangelizing," he focused Dell employees on how they could influence the CCC equation: accelerating in-ventory turns and collection activities, slowing down supplier payments, and the like. In late 1994, the cycle stood at an acceptable 40 days; today it is a phenomenal negative 8 days.
In 1995, to drive home further the need to optimize the "Golden Triangle" formed by growth, liquidity, and profitability, Dell began using return on invested capital (ROIC) as a broader measure of value creation, and linked the ROIC metric to the variable pay of all executives. Bonus eligibility, as well as receipt of the maximum payout, is now based on a matrix that reflects an appropriate balance between ROIC and revenue growth. In three years, Dell's ROIC has more than quadrupled.
Dell has continued to grow rapidly, almost 60 percent in fiscal 1998 to more than $12 billion, but no longer at the expense of liquidity or profitability. The new performance measurements have helped the company hone its direct-sales, build-to-order strategy, generate some $3.5 billion in cash since 1995, and become Wall Street's top performer for 1, 3, 5, and 10 years.
What makes Meredith positively crow, however, is that Dell's competitors have recently adopted similar metrics. "These companies have had to respond to a landscape shaped by Dell," he says. None, he adds, can touch Dell's numbers.
Risk Management: Opportunity in Turmoil
None can touch Dell's recent response to the Asian crisis, either--a response that has its roots in charges leveled in 1992 that some of the company's hedging activities were speculative in nature. "This was not our finest hour as a company, and the crisis focused attention on the need for change," Meredith observes. "It was clear that we needed a well-defined [foreign exchange] FX policy."
In 1993, Meredith developed new guidelines for Dell's currency risk management program. He established internal benchmarks--a budget rate and an average quarterly exchange rate--to measure FX performance. And he promoted interaction between treasury and Dell's business units. To make that happen, he swayed senior executives to reflect the gains and losses generated by the FX exposure management program in the profit-and-loss statements of the individual business lines.
As with the roll-out of Dell's new performance metrics, Meredith took the lead in communicating the importance of the new FX program. On occasion, he was called on to re- argue for keeping FX linked to the businesses' P&Ls. He was persuasive each time. "Tom is tenacious," observes Michael Dell, "and his instincts are usually right."
Indeed, Meredith was proven right again last fall when Asian currencies were devalued. With about 75 percent of Dell's procurement costs tied in some way to the Far East, the company's U.S. dollars were worth more when compared with local currency. Even though Dell's pricing hadn't changed, component and subcomponent suppliers were reaping gains at Dell's expense. If Dell could drive lower pricing, however, the savings could be immediately passed through to customers.
Meredith formed a task force of treasury risk managers and commodity managers for Dell's largest procured items. The group first carefully evaluated suppliers' underlying costs, then identified where currency depreciation had created opportunity for lower procurement pricing. Analysis in hand, the group negotiated new terms and agreements with major suppliers, ensuring that the full benefits of the currency crisis were reflected in Dell's costs. The savings allowed Dell to lower product prices, which helped boost demand and increase profits.
Without the integration of FX management and business operations, Meredith is convinced that Dell would not have been able to move as quickly. "The devaluation created an opportunity, and we seized it faster than anybody else," he says. And with a better view of currency risk from a supplier perspective, Meredith predicts that Dell will move even more quickly the next time.