Interview: British Standards Institution FD Craig Smith

WITHOUT STANDARDS, ships would sink, planes would fall from the sky, food could poison you, and life as we know it would be chaos. Though you may not be familiar with it, the British Standards Institution, the company behind the Kitemark and CE symbol, is a great British institution involved with virtually every aspect of your day.

It is a business with 70,000 clients in more than 150 countries that publishes 3,000 product specifications every year, and the mind conjures images of a warehouse filled roof to rafter with paper documents not dissimilar to the oft-parodied hangar from Indiana Jones where the Ark of the Covenant is stored – hidden amongst innumerable containers in a seemingly endless procession into the distance.

And while Craig Smith, BSI’s group finance director, admits the 112-year-old company has published somewhere in the region of 30,000 standards, such archaic images could not be further from the truth; not least because the business recently made its largest ever investment in the IT systems that keep it in line with the industry’s move towards digital solutions.

Having spent a lot of money over the last few years investing in its back-office systems, Smith, who joined the company in August 2011, says the most recent focus has been on BSI’s front-office capabilities – most notably in developing its British Standards Online platform, its online shop and BSI Entropy Software, a software system that helps clients manage quality, environmental as well as health and safety standards, and supply chain compliance.

“We have spent a lot of money on those over the past couple of years. They are more customer-focused and put us in Microsoft territory as a business that sells software, which is about as far away from selling paper standards as you can possibly be,” Smith tells Financial Director.

According to Smith, BSI’s customer-facing online platforms, which can host the full range of its online products, mean the business will get “better customer interaction”. Nevertheless, such investments in IT systems are “always quite difficult to justify”.

“You are almost looking at it from an opportunity cost point of view. If we don’t do this, what will happen to our business? The chances are that there is no way these days we will be selling warehouses full of paper copies of standards,” Smith says.

Unique but complicated
Selling compliance software to its clients – which comprise 51% of the combined FTSE 100, Fortune 500 and Nikkei organisations – is only one part of what Smith describes as a “unique but complicated” business model that takes in the writing, sale, implementation and auditing of standards that range from aerospace, agriculture to financial service industries.

Such a diverse mix of products, industries and geographic spread has allowed the business to weather the economic storms that have raged around the world since 2008 and deliver 13 years of unbroken revenue and profit growth, with latest revenue and underlying profit up 4% to £254m and 11% to £32m, respectively.

That growth has not prevented Smith from squeezing BSI’s finance costs and tripling its investment income over the past year by putting in place a policy whereby the company brings all its money back into the UK as quickly as possible.

“When I arrived at BSI, I was surprised by the inefficiency of our investment policy in that we kept an awful lot of cash around the world on current account. That gives you exchange risk – it means you don’t maximise the interest you can get from that,” explains Smith. “I have a target to reach 90% of my cash in the UK.”

The different revenue streams, which have been such a bulwark for the business, also proved a challenge for the finance function to keep control of and understand such a disparate collection of incomes.

That necessitated moving the business to a single, integrated global enterprise. Day to day, the business is now managed through a matrix structure with three global business streams – knowledge, assurance and compliance – being driven through three geographic regions – EMEA, the Americas and Asia Pacific – supported by a central function.

Smith says his main challenge when he joined was to restructure the finance function so that it was able to support a matrix organisation. That required a lot of manipulation of financial reporting systems to pull the P&L off at the business stream level and a change in the way that finance supported the rest of the organisation.

“We had to give good commercial financial support to the business streams as well as to the regions,” Smith says. “Here in the centre, I had to help the business stream managers to get the support they needed, to pull together KPIs, P&Ls, financial analysis for investment, which they hadn’t really had before.

“To go to a matrix structure from a non-matrix structure is quite a big deal. There are an awful lot of different mind-sets involved and we had to support them along the way making sure the systems and the financial processes were able to support them.”

Strong governance
Smith’s role encompasses all the traditional areas you would expect – with additional oversight of the IT function – but he is most animated when talking about BSI’s approach to governance, which is “stronger than any governance I have come up against before”.

As a non-listed business operating under a Royal Charter (the BBC and Bank of England also have one), BSI isn’t required to adhere to the UK’s corporate governance code, which regulates the FTSE 350. Nevertheless, Smith believes one of the reasons he was given the job was because of his listed company experience.

“I manage BSI in exactly the same way,” he explains. “We run BSI as a FTSE 250 business and adhere to the same standards and reporting requirements. We don’t have to produce a FTSE 250-quality annual report, but we do.”

Nor does BSI have to have a Big Four auditor, but it still uses PwC. However, Smith points out that the firm was only recently reappointed following a competitive tender process launched in response to new rules laid down by the UK’s reporting watchdog.

“When the view came around with the new guidelines to tender, we did it straight away,” Smith says, adding that, although PwC was reappointed, the process was robust.

“We had an extremely lengthy process in terms of resource in that all four firms got to meet the chairman, CEO, audit committee chair, another non-executive director, myself and all my direct reports at regional and central level.”

Although it operates like a listed business, BSI isn’t constrained by the demands of shareholders – something Smith believes has supported its strong governance. “The board takes the role of board and owners. We don’t have owners but run the business as if we had,” he says.

“But what’s the difference? The difference is I don’t have a share price. In a way that means my investment horizon can be a little longer.

“If we were to decide one year that we really wanted to invest in the business and that was going to dip our profits, the board has to be convinced that’s the right thing to do but I would have to write a paragraph in the annual report explaining that – and my share price isn’t going to go through the floor if that happens.”

BOX: Setting standards since 1901: The history of the BSI

1901-1914 In the beginning
Sir John Wolfe-Barry – the man who designed London’s Tower Bridge – instigated the Council of the Institution of Civil Engineers to form a committee to consider standardising iron and steel sections on 22 January 1901.

In 1903 the need to indicate to buyers that goods were ‘up to standard’ led to the creation and registration of the British Standard Mark – to become known later as the Kitemark. When applied to tramway rails, the number of gauges was reduced from 75 to five.

1914-1945 Standardisation grows
When World War II broke out, ordinary standards work was stopped and efforts were concentrated on producing ‘war emergency standards’, with the British government officially recognising BSI as the sole organisation for issuing national standards in 1942.

1946-1975 International consolidation and consumer concerns
By the late 1950s and 1960s the market place was flooded with consumer goods, many of dubious quality. As a result, 1953 saw the Kitemark applied to domestic furniture, pressure cookers and motorcycle helmets to help consumers know whether goods were well produced.

1975-1997 Management systems standards
The UK’s first management systems quality standard, BS 5750, was published by BSI in 1979. In 1987, it was superseded by the ISO 9000 series of international standards which BS 5750 inspired.

BSI published the world’s first standard for environmental management systems, BS 7750, in 1992.

Since 1998
BSI goes global in 1998, after changes to the Royal Charter.
In January 2002, KPMG’s ISO registration business in North America was acquired, making BSI Group the largest registration body in North America
In 2008, BSI’s Kitemark was awarded Superbrand status in its own right, joining BSI’s award for the fourth time in successive years.

IN BLACK & WHITE 

2011 – present Group finance director, British Standards Institution
2007 – 2011 Group finance director, Management Consulting Group
2003 – 2007 Group finance director, Huntleigh Technology
2001 – 2003 European finance director, Sun Chemical
1997 – 2001 European finance director, Paxar Corporation
1985 – 1997 Various roles in Australia, Spain, UK, Morocco, Hungary and Finland, Coats Viyella