Consulting » THE FINANCIAL DIRECTOR INTERVIEW – A penchant for the euro (and no

The white porcelain frog is a clue. The Larousse dictionary is an unsubtle hint. And if the packet of Gitanes isn’t a dead give-away then the accent soon is. Patrick Ponchon is that rare beast, a foreign – indeed, French – finance director of a British-based business. Ponchon – pronounced the French way, though that came as a surprise to his receptionist – is the numbers man at Xerox Ltd, the $5.6bn-turnover European business formerly known as Rank Xerox, and now a wholly owned subsidiary of the Connecticut-based $18bn “Document Company”. We had been advised that he had some strong views about the single European currency. So it was natural to expect to be on the receiving end of a tirade of French chauvinisme in support of Emu, against the euro-scepticism of the country that prints newspaper headlines like “Up yours, Delors”. Far from it. Of course, Ponchon is not exactly opposed to the euro, either. But, over the course of a wide-ranging interview, he presents an extremely rational, carefully thought-out business strategy for dealing with the single European currency. And it is clear that many others ought to cut out and keep his words of wisdom. “Since the beginning we took the view that the euro was unavoidable, that it would happen,” Ponchon says. “So in front of that we took a positive and proactive position rather than a defensive position.” Ponchon and his Xerox colleagues soon dismantled the popular notion that the euro was to be treated like just another currency and rapidly discounted the obvious benefit that the resultant zero forex volatility would offer. “People tend to talk about the currency itself and the currency implications. This is not the biggest part of it,” he says. “We (at Xerox) are already working a totally centralised currency management system. Currency management will become much more simple, obviously, but there will still be a lot of countries not joining the euro.” Much more important to Ponchon are the issues of product pricing and the difficulties price transparency will bring once Xerox products are sold in euros all across Europe. The problem is, local prices for the same machine can easily vary by 20-25% from one country to the next. “When you launch a new product across Europe, you put it at basically the same price at the beginning. After five years of currency movements, it can be all over the place – so that makes the pricing management very complex,” he explains. The most attractive option – raising the laggard prices rather than cutting the fattest margins – often isn’t possible even now. “We had those big devaluations in Italy some years ago: you never really recover the loss. As these countries will be in the euro, the visibility of the price difference will be much higher.” Ponchon is aiming for price “harmonisation” across Europe but recognises the difficulties in getting there. “If you don’t unify or harmonise, your customers will push you to do it. They have access through the Internet and other information to the best price in Europe. You have to go for that,” he admits, recognising the threat to Xerox’s bottom line. “The pitfall we need to avoid is that it will drive a general price decrease. Our challenge is to manage that, to avoid that. There will be some cases more difficult than others but, you know, our strategy is not to fluctuate prices more than our productivity allows for – as a sort of internal rule. But we don’t expect to lose all the effect, to lose all the profit. It has to be managed. Our competitors have got the same issues so we are in the same boat, from that standpoint. “But, you know, the whole purpose of the Common Market is really to drive for better productivity and for price decline. This is the purpose so we shouldn’t be surprised.” Service contracts are a different matter and price harmonisation is simply not feasible at this stage, not while labour costs vary by a factor of 1.5 from Ireland to Germany, nor with such non-uniform productivity rates. “You cannot solve this problem overnight and the euro will not solve it overnight – so you have to recognise some differences,” Ponchon says. By the way, forget about the “no compulsion, no prohibition” rule that’s supposed to exist during the dual currency phase between 1 January 1999 and 30 June 2002 – the date by which first-wave national currencies will cease to be legal tender. “We want to be able to offer from 1 January 1999 the ability to deal in euros with all our customers if they want to. Some of our customers have already requested the same thing. Mercedes is the best-known example: they have written to all their suppliers saying, ‘First of January, if you want to continue to deal with us, it’s all in euros’.” Xerox itself is taking much the same line with its suppliers. Indeed, because “we are obviously trying to get some advantage”, the company is going even further. It is seizing the opportunity presented by pan-European pricing to drastically streamline its entire purchasing operation. Eventually, Xerox will reduce the number of European suppliers on its books by a factor of ten. Just to be clear about this, though Ponchon did not have the figures to hand, he is talking about an order of magnitude that would reduce Xerox’s supply base from perhaps 10,000 separate companies to just 1,000. This statistic should send a shudder down the spines of most business people throughout Europe, though a few, those that make it onto the approved list, will have much to celebrate. “This obviously makes a much bigger critical mass for each of them,” Ponchon says. “It also simplifies all the administrative process: we have created a pan-European purchasing and facilities organisation which will handle all these deals at a European level. For instance, if we buy parts or components for our products that will be part of it. When we buy facilities, when we buy utilities, such as telecommunications, we will be driving for pan-European deals and we should get some advantage from it. It’s a significant drift from where we were before when we tended to have local and national purchasing.” This initiative wasn’t born out of the single European currency but the euro is certainly “accelerating the process”, Ponchon admits. Basically, as the euro obliterates centuries-old concepts of “imports” and “exports”, new approaches to sales and purchasing are multiplying the geographical opportunities for selling and sourcing products – without running any risk of mismatching currency exposure for revenues and costs. Is the Xerox supplier base ready for all this revolutionary thinking? Er, no – and, believe it or not, the same is true of the millennium problem, Ponchon insists. “We are asking all our suppliers, ‘Are your products year 2000 compliant?’. And the responses we have on this are not any better than the ones we have on the euro. But it’s not surprising, you know. Some of them are positive but this is still a minority. The level of consciousness and awareness of these two things – year 2000 and the euro – is still pretty low.” In companies the size of Xerox the problem isn’t so bad, Ponchon believes. “But I think still a lot of companies are very late on these things – very late. In the UK they may feel we are not in the same boat for the euro so it doesn’t matter. In fact, I think that’s wrong because if they want to deal with western Europe then they will have to follow the pattern or else they will have more difficulties.” Xerox’s foreign currency exposure is handled in the US but Ponchon has a small three-person treasury team at his Marlow, Buckinghamshire, headquarters dealing with the group’s interest rate exposure and refinancing its leasing arm’s huge debt pile. “We are swapping systematically our short-term rates to rates to fit with the (leasing) contracts,” he explains. “Most of our contracts are five years, so we try to match that and ensure we take no risk on the interest. “The policy of the company is to take no risk, to hedge everything. We are totally banned from doing any derivative activity or anything like that.” But the question that must keep any FD who is responsible for a dealing desk awake at night is, from one day to the next, how do you know that you’re not taking any risks? “We have internal control systems which give us close to daily control over transactions. Within one particular day …” Ponchon shrugs in a Gallic kind of way to concede that there is always some risk. “There are things they, the dealers, cannot do. Their level of authorisation is fairly limited, and the banks are very much aware of that, so I don’t think they could do big things. We couldn’t have a major disaster because their authority is fairly limited. So it doesn’t mean nothing can happen, but you will never have things like we have seen in the press in recent years. That is not possible. That is not possible. So I don’t bother with that.” He claims, in fact, to be more concerned about fraud: he recently circulated to a number of his managers the January Financial Director cover story on how “performance-related stress” can lead to pressure on employees to engage in “serious accounting irregularities” merely to keep their jobs and earn their bonuses. “You cannot just ignore this sort of problem,” he says. “We know that all companies are pushed to produce. To put it this way, there is a trend to push too much onto people. I think the article you published was quite good because, as long as you reward people on the results, the danger is that those people will play a short-term game and then leave the company. And many companies are developing more and more systems of bonuses or stock options or things like that. Obviously you need to have a very strict system of controls. That’s for sure. So I think the point you make is very valid.” But he is quite certain that Xerox, at least, is relatively immune. The internal controls system has been sharpened over the last few years and, while hardly invulnerable, the amount of damage that might be inflicted on the group is far from life-threatening. “Our auditors are going in all the territories. It’s not a central audit so they have a very strict control over all the accruals and this sort of thing – and they can compare year after year or quarter after quarter. So it’s almost impossible in a local country to make a big thing. You can have a small difference, but I think it’s quite difficult to overstate the results by more than $20m or $50m – I don’t think that can happen. But we never really found it to be a real issue.” Ponchon describes the system of internal controls at Xerox – first it is necessary to understand how the European business is structured. In recent years it has been reorganised into some 40 customer business units (CBUs), each with about 300-500 people, full p&l responsibility, full accountability, their own finance organisation and a lot – but varying degrees – of empowerment and autonomy. (“Surprisingly, the most liberal one is in Germany,” Ponchon says, as he laughs. “Yes, that’s very surprising.”) There is an annual review of the internal controls involving a checklist with about 40 questions. The probe looks at such areas as accounts reconciliation, expense controls, inventory management, ageing of receivables and bad debts. The trick is, it isn’t just the CBU finance heads that are involved in this process. “It’s really a general management process. And the improvement came from that. When it was just the accountants doing it nobody cared. But when the general manager is measured on that you can bet that gives you a big improvement,” Ponchon says. It’s also a self-assessment process, though the central audit group does do a follow-up investigation. Predictably, perhaps, when the system was first introduced, there was a wide discrepancy between what the managers thought of their internal controls and what the central auditors thought of them “After some years, we come to a self-assessment which is roughly right: we tend to agree. At the beginning there was a big gap because the people thought they were perfect and in fact they were shit. Now it’s much more mature.” Each of the CBUs gets a score out of 400 and a league table is published. There’s no financial reward for doing well, it’s just for the “glory”, Ponchon says. “People see that as a competition so they are very keen to improve” – though a finance manager would be unlikely to have much of a career at Xerox if his department never scored well. But while most of the checks are financial, the message is rammed home to CBU general managers, ‘This is primarily your responsibility’ – and that works. And to some extent it’s a good guarantee against fraud as well because the finance guy is not on his own.” Ponchon is hot on the idea of finance managers having a general management background. In fact, while he was running the CBU in Paris, he was once faced with such a stifling shortage of financial talent that he was forced to cast his net further afield. “We wanted to recruit internally,” he explains, “so I took some of the sales and marketing people and I brought them to finance. These guys had a very good knowledge of the business. After some years they had become the best finance people I’d ever seen. That was amazing because a number of these people tend to behave like sales people – they are more relaxed, their sense of discipline is not so good and so on. But we managed to get some very good finance people and, with their knowledge of the business, their understanding, they can bring a lot of ideas. They are very creative. “Their capacity to communicate – even to impose – difficult things, I think, is higher than the average of the traditional finance people. I’m very much in favour of cross-fertilisation for finance people.” But Ponchon has had less luck with the same idea in the UK. “When you tell your accounting people, ‘Would you take this salesman in your group?’ they say, ‘No way’. They are very proud of their financial education and they think that if somebody doesn’t have it he cannot be good.” Such pride in the Anglo-Saxon accounting tradition is well deserved, he believes, even though there is still room for more “cross-fertilisation” of skills in the back office, to have finance people “who can act well beyond pure accounting”. “I was amazed to see the very good quality of accountants in England compared to what I’ve seen in France or Germany,” says the French-qualified expert comptable. “I was surprised to see that. They have a technical knowledge which is above the average and their education is quite broad. It’s not just accounting – debit, credit. They are very knowledgeable on currency, on tax, on treasury, investment analysis and things like that. They are excellent, absolutely excellent. In France you will have difficulty finding people with this kind of broad knowledge; I had the French equivalent of the chartered accountant education, but, honestly, I learned a lot of things here.” As we leave, at the far end of the large open-plan office, we notice Ponchon in the distance lighting up his first Gitanes in at least an hour and a half. An hour and a half, that is, without a single mention of the word “photocopier”. Curriculum vitae Name: Patrick Ponchon Age: 51 Education: University of Economics, Lyons Advanced Management Programme, Insead Qualification: French ACA equivalent, 1969 Career: 1969-70: Assistant to chief accountant, Schneider 1970-73: Financial analyst, Rhone-Poulenc 1973-96: Commercial operations director, financial controller, information systems manager, assistant general manager, Rank Xerox France Chief financial officer of non-European operations, Rank Xerox (UK) Director of finance, Rank Xerox France (from 1992) Deputy general manager, Rank Xerox France (from 1995) 1996 – Finance director, Xerox Ltd (formerly Rank Xerox), Marlow, Buckinghamshire “We in Xerox don’t say that we give a privilege to those countries which are within the euro. We are assuming that in two or three years everybody will join the party. If any country were to say, ‘We will never join,’ then that could be a different story.” “I think that the day the UK joins will make a big difference (to the euro). Vis-a-vis the dollar region and the yen region, that will make a big difference over time.” “People can cross the borders, go anywhere for work. That’s the theory. But in practice, the mobility of people across Europe is not that big. Even in this country, when we ask somebody to move from Marlow (Buckinghamshire) to Birmingham or to Manchester, this is a nightmare.” “To be honest with you, I don’t have a clue. It’s complex because I am an assignee, so I am probably around here (indicates £200,000-£205,000 band), but I don’t know. Honestly, I don’t know.”