Digital Transformation » Systems & Software » “Harold, we have a problem…”

There is a scene in Apollo 13, the movie based on the disaster-struck moon mission, in which, one week before the launch, astronaut Ken Mattingly is told by commander Jim Lovell that he is being bumped off the team because one of his colleagues’ kids has the measles.

“You sure about this, Jim?” Mattingly pleads with Lovell. “I mean, why don’t I go upstairs and talk to Deke (Slayton, Houston flight director)?

I’m sure we can work this out.” Mattingly had never had measles himself and Houston’s mission controllers feared he wouldn’t be fit enough to last the whole flight. He turns to his commander for help, but then comes the crunch.

“This was my call,” Lovell says.

Exactly the same scene has been played out many times in the world of venture capital. The people with the cheque books – the venture capital houses, the “mission controllers”, if you like – often have to make tough decisions when evaluating management teams. Sometimes, three or four of the prospective owner-managers are fine, but one team member that they simply refuse to carry. Either he gets bumped off the team, or the venture stays on the launchpad. It gets worse: more often than not, it’s the FD who gets grounded.

Ken Robbie, senior research fellow at the Centre for Management Buy-Out Research in Nottingham, says: “Anecdotally, there do seem to be a lot of cases where the finance guy, in the run up to the MBO, gets the chop.” Most industry players agree that if any team member is replaced, it is usually the FD. There are many reasons for this. Finance directors arguably have the most transferable skills and so are more easily replaced. “Backers may like to have someone in the team who is their man,” says Mike Stevens, head of MBO services at KPMG. “They will tend to replace the FD rather than the MD. It’s less threatening in terms of the impact on the team as a whole. It’s pretty easily done and that makes it a pretty threatening situation to be in. You tend to find the FD in an MBO position is pretty jumpy about it because he knows someone else can come in. Most venture capitalists have their own lists of suitable people.”

FDs may also be vulnerable by the nature of their financial qualifications.

“Because the venture capitalists and corporate finance people tend to be accountants themselves, they focus on the finance guy,” says Brett Bull, chairman of Manchester executive search and selection firm Oakleigh Consulting. “If the engineering director wasn’t good enough, do you think they could tell? No, in all probability.”

Martin Gagen, executive director in charge of 3i’s UK business, believes there are two key reasons why an FD doesn’t make the cut – either his professional ability isn’t up to the job, or he doesn’t gel with the rest of the management team. “I have seen both, but it’s usually because the broader skills don’t exist in the candidate,” Gagen says. “It’s the higher level skills, the ability to think as a businessman, that let him down.”

This is the rub. Some FDs, particularly those within subsidiaries whose key responsibilities have revolved around the submitting of results data to head office, often in an agreed standard format, may be considered unskilled in vital areas. They may have no experience in negotiating finance packages, managing the cash flow for complex debt structures, or explaining financial results in a business context to nervous backers.

If an FD’s skills in these areas are a little shaky, he needs to persuade not only the managing director but also the advisors and equity backers that he can handle the challenge. His personal plug can be pulled by a whole range of people.

According to Gordon Power, managing director of Guinness Mahon Development Capital, anyone not up to the job will usually have been “filleted” by the management team’s advisors, the accountants and lawyers, before the project reaches the venture capitalists. It is rare for management personnel to be changed after that point, he says, though this doesn’t mean Power and his colleagues take the management presented to them at face value.

“We do checks,” he confirms. “We look for stability, for someone who understands the job properly and the business back to front, and who has the wherewithal to keep the financial management of the business under control.” Power won’t be drawn on the specifics of the checks. “It’s a trade secret. I can’t say,” he insists. “We use numerous techniques.” Obviously there are face-to-face interviews. But you can bet that the people putting up the cash don’t leave it at that.

The advisors themselves place considerable responsibility for management changes at the backers’ door. Financial Director magazine caught up with Chris Hale, head of private equity at lawyers Travers Smith Braithwaite, the afternoon after he had just completed an MBO deal. “In that transaction the equity provider took the view that the original member of the team in the FD position wasn’t strong enough,” says Hale. “They approached the vendor and said, ‘We can’t proceed if this man is there.’ The deal was delayed for two months while a replacement was found.”

In short, Hale believes it is the equity provider who is most likely to call for a personnel change. If you make it past the lawyers and accountants, the man with the wallet could still say “on your bike”. Hale explains: “The lawyers and accountants are merely looking at the business and checking it out. The equity providers really get to know the team and are the people putting up the money. It’s usually the equity provider who determines whether there need to be any changes to the management team. If the team isn’t performing, it often seeks a change. The person most often changed is the FD.”

If the backers are to hold a majority of the equity then the backers have more power to determine the future of individual team members.

But if the venture capitalists are mere investors in an MBO opportunity that only exists because of that particular management team – for example, a buy-out from a family-owned company – then the backers have less power to change team members. “If the FD goes in these circumstances, it’s usually because the MD wants that to happen,” says Gagen. “The decision rests with the company.”

If it isn’t automatic that an FD will make it to the other side of an MBO deal, what are the qualities that will help get him there? Experience in negotiating banking relations and treasury management skills help, but that’s not enough. “They are not the sort of trendy things young accountants like to be recognised for,” notes KPMG’s Stevens. “It’s not the ability to have vision or form a strategy. It’s an enormous solidity and an understanding of all the financial systems. It’s the ability to provide a stunning level of reassurance to the new owner. You have to have a handle on debt-chasing, pulling in cash.” If you know which debtors haven’t paid for three months, that will impress equity providers. However, don’t expect to be able to bluff your way through. “The sort of quizzing you go through can stretch to a great level of detail,” says Stevens. “If the investigating accountants start to get a feel for the fact that the FD is flannelling, or superficial, they would say something. I would like to talk to the leader of the team first.”

If an FD is pushed from the top slot, that doesn’t necessarily mean severing all ties with the business. Someone else could be slotted in above him in the MBO structure, or the vendor could find him a new role in the group.

But if redundancy is on the cards, neither vendors nor the emerging separated company will want to finish the relationship on bad terms, if only for cost reasons. Surplus team members have employment rights after all. “They have employment contracts,” Hale points out. “They have the right to sue for wrongful or unfair dismissal.”

Unfair dismissal is the less common option, being a statutory remedy, handled through tribunals, with small standard compensation sums. Most senior managers would concentrate on a wrongful dismissal action, which centres on a breach of contract claim, though even these are relatively rare and are generally used as a bargaining tool when negotiating pay-offs. Cases rarely reach court. A breach of contract claim is more likely to occur when someone is kicked out after the MBO has gone through.

Hale estimates that finance directors move on in 10% of MBOs. The situation is a delicate one. “Nobody staying will want him to hang onto his shares,” says Hale. To handle this situation one of the contractual documents signed on completion of the MBO deal contains “good leaver” or “bad leaver” provisions.

“A good leaver can be compelled to sell his shares, but he gets their full value,” Hale explains. “If he is a bad leaver, he gets a low value.”

Not surprisingly, there are often protracted debates about what makes a good leaver. Someone defrauding the company would clearly be a bad leaver.

Someone sacked because his face didn’t fit could be a good leaver. “Most people want to be good leavers,” says Hale. However, it is in the equity provider’s interests for someone to be a bad leaver, since this costs less. “One equity house says leavers only get the lower value for their shares,” warns Hale. “That’s a very tough line.”

By this point many FDs may be about to swear on their Apollo 13 baseball caps that they will never ever get involved in an MBO … But the majority of MBOs don’t end in tears. Zotefoams, the specialist foam maker, went through an MBO from BP Chemicals in September 1992. For Zotefoams the MBO story had a happy outcome. Everyone on the management team became a director, and the company has continued to grow. Turnover has doubled from £12m at the time of the MBO to around #24m now, and Zotefoams floated in February 1995.

The experience wasn’t easy, of course. Zotefoams’ finance director Geoffrey Billson recalls the time as three months of pressure and stress. “None of the team had any experience of what an MBO involved. We could have done with a bit of education as to what our roles would be,” he says.

“I found myself drowning in a sea of people wanting information. I had lawyers after me, I had accountants after me. We had the venture capitalists wanting information – and all from the finance department, and all at the same time.”

Billson says he wasn’t aware of individuals in the MBO team being assessed.

“We knew the team was being scrutinised,” he says, “but no one said, as individuals, you would be looked at. They did ask if we worked as a team, whether we worked well together. That message came across loud and clear as something the institutions would be looking for early on. That seemed the key issue for them, far more than the business plan.”

3i’s Gagen confirms Billson’s impression. “The general stance of venture capitalists will be to look extremely carefully at the dynamics of the management team, their ability to gel together,” he says. “The venture capitalists will try quite hard to keep the management team intact.” He stresses that 3i appreciates the importance of developing a strong relationship with the management team members. “We have learnt that some people who don’t seem quite right do come through and are excellent,” he says. “We have learnt that lesson. If the MD strongly backs the FD, we would listen.”

One last offering of comfort for any FD still concerned that his hopes of surviving an MBO may be similar to his chances of making it to the moon. Astronaut Ken Mattingly didn’t climb aboard Apollo 13. And he didn’t get the measles. But he did reach the stars on Apollo 16. [HH] FLEET MANAGEMENT – Wanna show me what it can do? [SH] Image is everything. It’s also a serious headache for FDs and fleet managers trying to set a well- balanced fleet policy. [BB] Anthony Harrington. [PP] 47 [PL] UK

Of all the issues finance directors confront, there is probably little to match the flinty ground presented by vehicle fleet management for sheer, unrewarding trouble. Almost nothing the enterprise does or is likely to do presents quite the same imbalance between complexity and profitability.

If you do it well (ie, set up the right structures and the right supplier relationships), it simply means you are free to turn your attention to the enterprise’s core business. If you do it badly, the ripple effect could knock the whole organisation off track. How do you put a value, for example, on the effect of losing key staff because your competitors are offering a car with more “sex appeal”? And what about the effect of vital business going astray because vehicle maintenance has not been up to scratch? Add to this the fact that the company car is intimately bound up with the image the company presents of itself, and the scale of the challenge begins to make itself felt.

Peter Cook, at Henley Management College, has conducted a number of studies of fleet management, and the associated cost control issues, for the big fleet providers such as Avis Fleet Services (part of GE Capital Fleet Services) and Swan National. He points out that enterprises have to resolve a number of conflicting demands in setting their fleet strategies and fleet management policies. On the one hand, they are under pressure to spend more money on the cars they provide, to give their employees bigger and better vehicles as part of an ever more competitive rewards package.

On the other hand, they are under pressure to cut back on costs as part of reducing overall business operating expenses. Prudence dictates small and cheap, employee and corporate image building dictates large and expensive.

This is not an easy circle to square.

“Very often the only thing a customer will see that represents the enterprise, apart from a particular staff member, is the car they drive up in,” Cook points out. This makes the car the standard bearer for the enterprise.

There are a number of tools available on the market to assist the FD set sound fleet management policy. Avis Fleet Services, for example, offers a CD-ROM that lists the purchase, running and disposal costs associated with a huge number of leading brands. Swan National offers a lower tech version in the form of a book. The point is to quantify as many as possible of the life-cycle costs associated with each brand and model so that these can be factored in to the overall equation. However, as Cook admits, at bottom it is fashion rather than rationale, that dictates the expectations of employees and thus the purchasing preferences of their organisations.

“Fleet strategy planning is about balancing individual expectations against a comparison with the organisation’s principal competition,” he says.

In other words, you set the parameters of your policy by looking at the opposition, while they set theirs by looking at you. This is inevitable and unavoidable, and while it can result in companies chasing each other up the cost curve, it does produce workable solutions to the problem.

Two additional complicating factors that need to be taken into account at this initial, strategy-setting level are the effects of tax policy and the related issue of the limitations on the organisation’s ability to impose corporate decisions about the company car on individuals. This latter point arises, as Cook puts it, as a consequence of the inevitable “no taxation without representation” debate. Individuals who find themselves paying an increasingly large tax bill as a consequence of their company car naturally want a larger say in what they get for their money (see page 55).

The balancing act involved in drawing up a fleet management strategy is the first step in what Cook calls the “virtuous circle of car cost control”. This consists of nine stages: fleet strategy, allocation policy, car choice, acquisition policy, budgeting, operations management, replacement cycles, disposal and ongoing cost control and monitoring.

No wonder, then, that most large organisations are now looking to the major contract hire companies to solve most or all of these problems for them. This will not absolve the FD from coming to terms with the complexities involved in fleet management, but it does take away much of the grunt work associated in clarifying the key issues.

Geoff Becque, corporate communications director for Avis Fleet Services, points out that there is no such thing as a “one size fits all” contract in this industry. “Our role is to sit down with the client and work out a bespoke contract that meets the full range of their requirements. Avis Fleet Services has a portfolio of some 80,000 cars world-wide, which gives us unmatched experience at controlling vehicle costs – this is the skill that we bring to the table,” he says.

Derek Pridmore, head of marketing for Swan National points out that they, in common with just about all the major fleet providers, like to provide the FD and the fleet manager and anyone else involved in the decision-making process, with detailed background documentation on the contract process and the market.

“Our aim is to provide prospective clients with a useful framework that will enable us to have a sensible dialogue,” he says. This dialogue will normally involve three or four people, but it always involves the FD.

In any organisation with a fleet of 50 vehicles or over, it will usually involve a full-time fleet manager. Increasingly, human resources management now also get involved, since various types of reward/remuneration issues are at stake. And it is not unheard of for the managing director, to take an interest.

“Car fleet decisions involve a level of complexity that goes far beyond that associated with decisions about plant and machinery,” Pridmore points out. Because the car is now seen as an important instrument for attracting quality employees, large companies are increasingly providing business cars to non-essential users. While this might not be seen by everyone as a plus point – it won’t please the anti-car lobby, for example – the intense interest in the company car has caused the contract hire industry to evolve an increasingly sophisticated range of product offerings. This has become possible over the course of the last decade or so because of the general improvement in the build quality of vehicles, which makes the accurate predicting of maintenance costs that much easier.

“Our aim is to take the shocks and surprises out of the system so that FDs know exactly what the costs will be. This means providing fully-costed, budgeted motoring, with full reporting if that is what the client requires,” Pridmore says. While a fully-costed fleet policy is something that will be dear to every FD’s heart, this is only possible, as Pridmore points out, if the relationship between the supplier and the customer is built on honesty and clarity. A key element in this relationship is that large companies have to be able to provide anticipated mileage figures at the outset of the contract that really do bear a real relationship to the numbers on the clock at the end of the contract period.

If a client organisation tells the contract hire company that they expect their cars to do 10,000 miles on average a year, the supplier will cost that car over the lifetime of the contract on that basis. When employees then drive treble that distance the supplier will generally have a clause in the contract that allows them to apply penalties to compensate for significant discrepancies.

Sophisticated costings can be more accurate when the contract hire company knows the client and is not taking a wild flyer on a new customer. This fact is adding an additional degree of stability and inertia to the contract hire market, since companies who have built up a predictable track record with a particular supplier will find their supplier is in a better position to shave a point or two off the overall pricing, since the element of risk is lower.

As this element of inertia suggests, life for the contract hire suppliers is becoming more competitive. The market is dominated by seven major players, including Avis Fleet Services, Swan National, Dial, Lex and BCC. The major players all tend to be subsidiaries of major banks or finance houses, and in some sense, contract hire is simply a way for the parent banking company to add value through a specialised application of its lending capability.

Another group of players, who come into this market from a different, though equally fundamental direction, are the vehicle manufacturers, the Fords, the BMWs and so on. Cook points out that all organisations running a 50-car fleet or above are now regularly contacted by all the major motor manufacturers. It is common practice for the major players now to have their own captive finance houses and they compete directly with the contract hire companies to provide the full range of fleet services. The motor industry has seen some significant alliances recently, such as Ford with Jaguar and Nissan with Saab, to enable manufacturers to offer a balanced portfolio of cars across the full range of their client’s requirements, from director to travelling sales person.

To some degree, the contract-hire fleet market has tended to be a local rather than a pan-European or global affair. However, Avis Fleet Services’ Becque points out that over the last few years, big multi-national companies are showing an increasing tendency to want to consolidate their worldwide fleet management policies under a single supplier umbrella contract.

The significance of these global contracts on the long-term future of the market is hard to overestimate. Whereas a local player might consider a 2,000 vehicle fleet to be a large order, a global contract could involve ten times as many cars, or more. Becque points out that right now, there are probably only two contract hire companies in the world, Avis Fleet Services’ parent GE Capital and Lease Plan, that have the global infrastructure to be able to convince big multi-nationals that they have the capacity to provide a local service in all the major countries. The history of business in other sectors suggests that those companies who achieve this kind of global reach first will be able to achieve even greater dominance of their local markets – usually at the expense of the purely local players.

For a free copy of A Guide to Fleet Cost Control by Peter Cook of the Henley Management College, please phone Avis Fleet Services on 0800 262 147.