Consulting » THE FINANCIAL DIRECTOR INTERVIEW – True grid: the financial director

The ‘objects clause’ in the memorandum of association for Williams Grand Prix Engineering Ltd makes interesting reading. The scores of business activities that the most successful Formula 1 racing team of the 1980s and 1990s is allowed to undertake includes: “coach and body builders”, “self-drive car hire and taxi-cab service proprietors”, “manufacturers of and dealers in caravans and trailers”, “operators … (of) camping sites (and) lock-up garages”, “tobacconists and newsagents” and “panel beaters”. Sure, the Williams team – more precisely, the Winfield Williams team – hasn’t been having a great season in 1998. As this issue went to press just before the Silverstone Grand Prix on 12 July, last year’s championship team was languishing in fourth place, being beaten by an almost unstoppable McLaren Mercedes, a reinvigorated Schumacher-driven Ferrari team and a solid performance from Benetton. Williams’s lead driver Jacques Villeneuve, the reigning world champion, was ranked 7th, 39 points behind leader Mika Hakkinen. It’s all a bit of a come-down for the team that has won more Formula 1 championships than any other, but we are unlikely to see Villeneuve and fellow driver Heinz-Harald Frentzen hitching a caravan to the back of their Williams FW20 car and setting up as tobacconists and minicab drivers on the outskirts of a Northamptonshire campsite. Still, while the objects clause says that Williams Grand Prix is a company of “motor racing engineers”, it doesn’t say that the business of the company is to stuff young men into small carbon-fibre advertising billboards and make them drive them at over 200 miles an hour in front of a television audience of 350 million people. Herein lies the great irony of modern-day Formula 1: as Williams Grand Prix Engineering finance director Duncan Mayall says, “What we build, we don’t sell. We build cars, we don’t sell cars.” Our meeting with Mayall took place two days after the Montreal Grand Prix, the race that saw Williams unveil major new modifications to its car. It was also the race that saw Jacques Villeneuve finish last after a pit-stop of more than seven minutes. So no one was punching the air with delight at the Grove, Oxfordshire headquarters on the day that we met. The atmosphere was relaxed, but businesslike. This could easily have been the head office of a pharmaceuticals company – which, ironically, it was until the Grand Prix team moved here from its Didcot site in 1996. All pretty calm given the fact that the race had a hugely disappointing ending – Williams driver Heinz-Harald Frenzen was shunted off the track by Michael Schumacher – and some spectacular crashes. “That’s one of those rare Grands Prix that occurs every couple of years where, from beginning to end, it’s a mess,” Mayall says, “and you suddenly find there’s a milk float in first place. (In this case, a Ferrari milk float driven by Schumacher.) You just write them off in your own mind. They’re not representative of anything.” But how do the sponsors deal with Williams’s deflating track record? “That’s racing,” Mayall says, laconically. “It’s not predictable. They’re in it for the association (with F1) and reaching their audience.” Certainly it is far too early for the company to start worrying about the financial impact of being stuck in the rankings between Benetton and last year’s novices, Stewart Ford. “If you’re in the top three or four teams, the sponsors are still getting what they’re paying for,” Mayall says. “They are not paying for you to win all the time, they are paying for you to be on the podium as often as possible – and also for TV coverage. There have been cases where, if you run alone in races, the TV coverage drops away dramatically because they look for a tussle further down the field. We’ve had that in the past where the Williams cars have just trotted off and the TV is on another battle down there for third and fourth place.” One suspects that that is a problem everyone at Williams would quite gladly have, rather than the one they have now. But at least FOA, Formula One Administration, monitors the exact number of minutes and seconds of media coverage each sponsor gets. 1998 is the first year in a decade that Williams cars have been running without a Renault-badged engine. The French car manufacturer decided to pull out of Formula 1 a couple of years ago after a string of successes with both Williams and Benetton. For this year and next, Williams’s engine supplier is Mecachrome. The irony is that Mecachrome is an independent manufacturer, sub-contracted to build engines developed by Renault. As such, it has, in fact, been supplying Williams with its engines for several years. Renault itself used to provide the Williams team with Mecachrome-built engines for free – in exchange for all the marketing and advertising value derived from being associated with what was known as the “Rothmans Williams Renault” team. Hence, the engines supplied by the former team partner by-passed the profit & loss account. Now that the direct link between the car manufacturer and the racing team has been severed, Mecachrome is supplying the team with engines “at cost”, Mayall says, and the Mecachrome name does not form part of the Winfield Williams race team name, as Renault’s did. From 2000 onwards, however, BMW will be the engine supplier and, as a full partner with Williams, is expected to be providing them on a no-cost basis. (BMW now also partners Williams in Le Mans motorsport.) All of which means that Williams Grand Prix Engineering Ltd is not only taking a bit of a beating on the track this year, it’s also taking a hit on the costs line. (Of course, it’s two-year engine expenses will be nothing like the £50m or so that Mayall believes Ferrari spends every year on its own in-house engine development programme – “And of course, they can’t just change the engine if they decide that that’s the weak link,” Mayall adds.) While sponsors such as Rothmans (which, in 1998, is promoting its red packaged Winfield brand) bring money to the team – and lots of it – others, like the engine suppliers, bring particular skills or products. “If somebody is supplying us with Airequip hoses for brake fluids, for the brake line system, they obviously would like to be able to say, ‘Successful with Williams in Formula 1 in the 1997 season’,” Mayall explains. “Therefore they will give you, perhaps, more discount, a free supply of new products that are coming to the market, or preferential delivery times: part of the problem in this industry is that, as soon as you design something, like that torsion bar (Mayall points to some odd-looking piece of engineering sitting on his desk), you want it tomorrow. Speed is essential; price is secondary.” Andersen Consulting, which gets its name on the chin of the drivers’ helmets, has worked with Williams for several years. Their most remarkable contribution was to project manage the team’s 1996 relocation from its Didcot site to a much larger facility about 10 miles away. From our point of view, one of the interesting questions about a F1 team is how you manage the cash flow, given that there would appear to be only about eight cheques arriving in the post every year, and thousands going out. “It’s a bit more than eight, obviously,” Mayall says. “The biggest single outlay in payments tends to be the drivers, which we typically pay four times a year. That is how we structure most of our payments from sponsors to us – over three or four payments beginning on the first day of the season, so that our cashflow tends to balance out. It’s fair to the sponsors and it’s fair to us. We take the money as we spend it and, hopefully, if we do our job correctly, then we should end up with a profit at the end of the year.” The task of pricing all the advertising space available on a car is “not a fixed science,” he says, though the media coverage data supplied by FOA helps the negotiations. “Positioning (on the car) isn’t really a major issue. If you’re the major sponsor you’re taking all the plum areas. That will be measured out in square centimetres, exactly the areas you have and where your prime positions are. The car shape will change slightly from year to year so you have to be flexible. But they obviously want so much impact from the car. Once you’ve got your major sponsor (Winfeld), the rest tend to fall into position.” Part of the juggling act, however, is to ensure that the sponsorship deals don’t all run out at the same time. “You would hope that you would keep an engine supplier for 10 years if it was giving you the engine you wanted, but you’d sign typically for three to five years in the initial contract, and then start expanding it and rolling it forward three years at a time as the engine developed. You don’t want to be left with an engine that’s not performing. “Similarly, with a major sponsor you’d typically be starting off with a three-year contract and rolling it over every couple of years for another couple of years. That’s just asking for trouble if your engine suppliers and your main sponsors all co-terminated on 31 December one year.” But with tobacco sponsorship of sport in general, and Formula 1 in particular, being such a controversial issue, Williams is one of a number of teams that will almost certainly have to seek a new sponsorship partner at some point early in the new millennium. While that creates a problem for Williams, Mayall doesn’t see it as being a bleak prospect. As it is, there are sponsors out there that don’t want to be associated with tobacco-sponsored F1 teams. “If there wasn’t tobacco in this industry then we know that there would be other people coming forward – people such as Coca-Cola would be an obvious type of target.” The world’s biggest brand sponsors an IndyCar team in the US. But whatever company gets associated with F1, they not only have to be big enough to handle the cost and make full use of the global media coverage, they also have to be able to stand being part of a dangerous sport. “They have to say to themselves, ‘What if a 1994 happens (when Williams driver Ayrton Senna was killed)?’ How will that affect them?” For Williams Grand Prix Engineering, costs must be about as unpredictable as race results – or crashes. But Mayall says that they can actually budget their costs to within 3%: “After a few years of being involved in it, it’s easier than it might at first seem: you’ve got 16 races, you build up to ten cars. There is design and innovation happening all the time. After each Grand Prix the car is broken down into its bare essentials from the monocoque, side pods, radiators, etc, upwards. The engines go back for stripping down at Mecachrome, and everything is completely rebuilt. “The act of actually wrecking a car on the track is really doing the mechanics’ job for them, in some ways. It breaks the car down! It’s not going to cost any more because we’ve got enough spares to do it.” Even normal (normal?) wear and tear isn’t a big issue: “We wear out a lot of parts such as undertrays, that are there to be worn out. Other parts get damaged but we build so many in the year that it’s pretty immaterial. It’s actually very rare to completely wreck a car. Once in two or three years.” The way parts get used up, broken and developed over the course of a racing season affects the way Mayall does his management accounts for team owners Frank Williams and technical director Patrick Head. “They understand that they’ve spent, say, £40,000 on titanium and £40,000 on radiators and £40,000 on some outside machining or some metal processing. (You could) turn around and say, ‘That anti-roll bar: we produced 100 of these and they are £1,000 each. I’ll put down anti-roll bars: £100,000.’ But if you redesign that tomorrow, you throw it in the skip.” After nine seasons with Williams, Mayall finds that the budgeting process gets easier, although “Storms erupt all the time, and this (he holds up an unrecognisable car part) is a good example of something that can cost £2,000 one year and £10,000 the next year. So we cannot cramp the flair of the design department. They are not introduced to the cost element at all. They have no concept of what things cost, how much materials cost.” At the Montreal Grand Prix, a minor accident resulted in Jacques Villeneuve taking his newly-refined car into the pits for a pitstop that was so long there was virtually no way he could have come anything but last. Was it a commercial decision to get him back on track just to get the sponsors’ logos in front of the world TV audience? “No commercial decisions at all reach the race track,” he insists. That decision was purely an engineering one – coupled with just a glimmer of a possibility that, if four more cars crashed or failed before the end of the race, then Villeneuve would at least snatch one more point for himself and the team. For a business that costs tens of millions of pounds a year to run and yet doesn’t really sell anything that it makes, Williams Grand Prix Engineering isn’t doing too badly. In 1996, the year that Damon Hill became world champion while the team won its ninth constructors’ championship, the company had turnover of £44.3m, making a pre-tax profit of £9.4m. There is no debt. Shareholders Frank Williams and technical director Patrick Head split a modest £1m between them in dividends (70:30); all the rest – after tax – goes back into racing. This is one reason why, though Bernie Ecclestone may be trying to float Formula One Holdings (the company that owns the broadcast rights to all Grands Prix), it’s not an opportunity that would be workable for Williams: “The average investor is looking for profits and that’s not what the company is about. It’s about race success being won by racers who enjoy racing and who want success at it. “Profit helps the racing, not the other way around.” CURRICULUM VITAE Name: Duncan Mayall Age: 52 Qualifications: FCCA – 1974; FCIM – 1977 Career: 1963-67 Management trainee, finance. Wayne Dresser Inc 1967-68 Assistant to chief accountant (computer division). Honeywell Controls 1968-70 Chief accountant Dysona Microwave Division. David Brown Corp 1970-71 Financial accountant. Memorex Belgium 1971-81 Director of finance for operations in UK, France, Belgium and USA. Cherwell Valley Group 1982-85 Director/consultant. Prime Management Group 1986-87 Finance director for Motor Products Grp. Claradeen Ltd (Australia) 1988-89 Group finance director. Altrack Ltd (Australia) 1989- Finance director. Williams Grand Prix Engineering Limited and associated companies

 Mayall on post-     "People feel a little bit - not down, race morale         but slightly quiet on the Monday. these days          But by the Tuesday or even by the Monday afternoon,                     everybody is back thinking, 'We've got the next race                     which is only two weeks round the corner.' It affects                     you a bit more at the early part of the season." Mayall on not       "It's not necessary for me to be there. going to many       I'm not going to make the cars go Grands Prix         any faster. Two or three (races) are enough for me to                     get around the sponsors and the people that you know                     in the industry and talk to them. Every fortnight is                     too often."                               1996        1995                              (£m)        (£m) Turnover                     44.3        36.3 Operating profit              9.5         6.6 Pre-tax profit                9.4         6.5 Dividends                     1.0         1.3 Constructors' championship position         1st         2nd