Consulting » THE FINANCIAL DIRECTOR INTERVIEW – Making a merger work both

“ABB is one of those companies that people either know a hell of a lot about or nothing at all.” Steve Gardner, finance director of ABB’s UK regional head office, certainly knows the group, having joined it in 1989 when the US-owned automation business that he was then working at was acquired by the Swedish-Swiss industrial giant. Perhaps Gardner overstates the case a little. Certainly, ABB isn’t a household name, though the $30bn-turnover business has some $1.6bn of revenue emanating from the UK. But most people in business circles probably know two or three things about ABB: that it was formed out of the 1988 merger between Sweden’s ASEA and Switzerland’s Brown Boveri; that it has been voted one of Europe’s most admired companies on numerous occasions; that its devolved structure leaves it with hundreds of profit centres; that it is a sort of “continental GEC” – but without the frightening reputation that followed Arnold Weinstock. Gardner and his colleagues knew little about ABB back in 1989 when he was financial controller of a business owned by US group Combustion Engineering. “One journalist described ABB as ‘a bold experiment’,” Gardner says, “because it was one of the very early major cross-border joint ventures. Of course, a lot of people said joint ventures don’t work.” At the time, Gardner had been FC for barely four months in a company he clearly hated – “my predecessor got so fed up he left” – and he had been wondering how long he had to stick around to avoid damaging his cv. So when ABB came in, he says, “it was just a breath of fresh air.” What happened next is a clue to how ABB works. The group had acquired a number of automation businesses in the UK, some in less healthy financial shape than others. Gardner was appointed FC of the business and given a Norwegian boss. “The objective was to bring us all together into one company. On the face of it, it was one hell of a job,” says Gardner of the rationalisation effort that was needed. “All ABB did was to bring in one MD – they didn’t bring in any other people, just one MD – and in six months we closed the Luton operation, shipped two-thirds of the people across to Stevenage, shipped the instrumentation business 30 miles up the road, opened a new satellite up in Warrington, and introduced a whole new accounting system. “Looking back, we always wonder how we did it. But what had happened was, ABB came in and said, ‘Here’s your business, here’s what we want to do, here’s your objectives, here’s your balance sheet – get on and do it.’ With very little interference, that was a very stimulating position to be in.” Gardner tells of how he learned the importance of having “a representative top team” when going through a merger process like that. But it clearly helped that so many people in the merging businesses had baggage they were more than happy to leave behind. “Everyone from day one looked forward and thought, ‘ABB’ – for different reasons, no one was really looking back at the past. People still tend to look back and say, in some ways, they were some golden years because it was crisis time and everyone pulled together.” Note how the pressure to perform seems to have been self-generated – there was no heavy hand emanating from group head office. “There was no one on the phone saying, ‘Why are your results so bad?’ They said, ‘Have you thought about visiting So-and-so and seeing how they do it?'” says Gardner, who rose to the UK FD seat in 1994. “Maybe it’s the Swedish style. It’s a motivating way rather than threatening people and hoping you frighten them into doing things.” Legend has it that such was the level of trust in the business, the ASEA/Brown Boveri merger was agreed in an 11-page, hand-written document, with no lawyers present. Under the leadership of Swede Percy Barnevik, the group radically decentralised, slashing head office overheads and bureaucracy. The Zurich office is said to employ no more than 135 people, the UK office just 16. The so-called “confederate” structure leaves a great number of highly-motivated, empowered profit centre managers. One legacy of ABB’s acquisition programme over the past decade is that it has countless incompatible financial systems. “Until recently we had about 15 systems in the UK,” Gardner says. “Imagine trying to come up with a common ledger. You can’t!” So how do you maintain control in a business like that? ABB uses a PC-based system called Abacus, which basically sits alongside whatever system is used at any particular business. The trick is, only the important bits of data are keyed in every month. That yields two benefits: speed and relevance. “People input the order data and the revenue data in a summary form (into Abacus),” Gardner explains. “You can’t measure how many toilet rolls are used. If they want to do that, that’s on the local system. It’s very much for the information which corporate management and segment management use. What the guys use on the ground in terms of detailed cost-centre reporting, what they need for product analysis, time measurement – until recently, it’s almost been up to them.” Gardner says that ABB is now trying to pull these systems together: “The company’s changed: we’re focussing a lot more on standard IT, trying to get better control, because the disadvantage of decentralisation is that you don’t end up with an optimum IT policy.” The trick, of course, will be to not lose the main advantage of such a decentralised structure – “very motivated management who want to get things done” – but there are hints that perhaps a sort of recentralisation process may take place through greater use of shared service concepts. But the main philosophy of the Abacus system seems certain to continue. As it is, ABB goes from year end to audit sign-off in a remarkable 36 days (including new year and weekends). That’s almost a week faster than all but one FTSE-100 company in Financial Director’s Annual Reports and Accounts Survey (October 1998). “We have to report any quarter within about four or five working days,” Gardner says. “That goes up to the group in Zurich and then they have some further work to do on the consolidation. But I always think it’s not a big issue about getting numbers prepared. It’s all about how you prepare in between. In any organisation I’ve been in, if you give people a week to finalise the numbers, they’ll find the time. The issue is, how do you look at the process, find the bottlenecks?” Gardner has found some real howlers in his crusade to trim reporting times, he says. One business unit manager was taking about three days to fuss over how to allocate costings worth £100,000. “Only £100,000 and it goes into WIP? It goes into the balance sheet?” Gardner was incredulous. “A lot of accounting people focus on the minutiae. I’ve always believed that finance accounting is an art, it’s not a science. Trying to get that through to people is very difficult. I’ve known people who, if a late invoice has come through for £300, want to open up the books again. Getting timely information which is probably 95% accurate is better than having 100% accuracy over an extra week.” But of course, it’s not just a question of speed – and certainly not speed for its own sake: “Management is trying to see which way the business is going: what are the early warning signs? Trying to get the exact financial picture spot-on on a particular day isn’t the big issue. If anything drives me scatty it’s seeing a report with pennies on it. Our philosophy in this office has always been, if something needs fixing let’s do it quickly. Let’s not analyse it for three months. Because invariably what you get first cut is probably 80% there, and if you spend any further time on it, it’s just detail – and it doesn’t really add much to the value.” All of which serves to underline the fact that the finance function – not least, Gardner’s finance function – is there for a purpose. In fact, ABB managers refer to financial controllers as “business controllers”. “We expect them to be knowledgeable about business, not just about financial things. It’s probably psychological, but there is a difference between a good business controller and a good financial controller/accountant. One can be technically blessed and not able to get the message across. A good business controller has to be able to read the numbers, but also get the message across, interact with the management of the business,” Gardner says, adding that the job isn’t concerned with “churning out tonnes and tonnes of paper. My vision of a good business controller is someone who is close to what’s going on, knows when an issued should be highlighted, sees that their boss is encouraged to make decisions and follows through on actions.” Don’t be lulled into any false sense of security, however: “ABB is known as being quite rigorous with its financial controls, and we make no bones about it,” Gardner says. “If companies are underperforming they expect to be asked questions. But I still hope that it is done in a supportive way. I hope there aren’t too many people out there who say, ‘They always phone up to ask stupid questions.'” Another aspect of ABB that appears to work well – despite siren cries that it wouldn’t – is the matrix structure. Imagine a matrix where countries are listed across the top, with industry sectors running down the side. In many businesses, the vertical, country-based linkages work reasonably well, but the horizontal industry linkages don’t: the widget division of the UK group works against – or, more often, oblivious to – the widget division in Germany or America. Not so at ABB, Gardner insists: the business units talk to each other and work together, wherever they may be. “The company invests a hell of a lot of time in networking,” he says. “My personal feeling is that the Swedish side encourages networking. Their style of management is one where they’re interested in people’s views, then they’re quite decisive in action, whereas the British way tends to be more authoritarian – it’s not so easy to work in a matrix.” He enthuses over the value of Lotus Notes in making the various parts of the business work together. “I think we’re the second-largest user of Lotus Notes in the world.” It’s proved its worth, for example, in exchanging databases and data on pilot plants. He found it particularly useful when he was put in charge of ABB UK’s Y2K programme – “I don’t know how organisations without it can mobilise quickly enough” – and it serves as the central nervous system for the drive to create a knowledge-driven organisation. That other end-of-millennium bugbear, the euro, causes fewer problems for Gardner than did Y2K – helped by the fact that both Sweden and Switzerland are outside the eurozone. “The big issue we try to alert (our) companies to is looking strategically at what will happen to pricing and transparency – which is why it’s really critical for this global organisation to be on top of country pricing issues. Secondly, with the Internet, it’s all so transparent. There’s no way you can sell something at one price here and another price in abroad if it’s on the Internet.” The Internet is, if anything, a bigger issue for Gardner than the euro. Parts of ABB’s business – he mentions AC drives (whatever they are!) as an example – are highly commoditised and prime for a Web-based “fast route to market”. There are procurement and supplier management opportunities, too – the problem is, Gardner won’t talk about these initiatives yet. A biography of GEC’s Lord Weinstock, written by Guardian journalists Alex Brummer and Roger Cowe, draws a distinction between the way business units work with each other at ABB: “Weinstock has deliberately avoided, and in some cases actively prevented, cross-fertilisation between business units, a factor which ABB believes has been crucial to its success.” * Predictably, perhaps, Gardner’s operation employs a number of ex-GEC managers – “most people talk of him (Weinstock) in only respectful tones – but when you hear about a Weinstock budget review!” – but the most interesting thing is the impact of the Weinstock style on his managers’ behaviour: “I’d like to think a good ABB manager respects the fact that there will be people working for him who are better (than they are) in many fields. I sense that at GEC, an MD has to feel he’s top dog.” Looking through ABB’s annual reports, it’s easy to get the sense that this is one of those continental European companies that has a world-class reputation, but which proceeds year in and year out to destroy shareholder value. It isn’t obvious what it is that drives the company. But Gardner insists that the group is more focussed now on shareholder value creation than ever : “In the early years, the focus was on restructuring and developing product ranges. I think we were financially focussed but perhaps not in the terms people think of today. But that has changed over the past 18 months to two years. Our financial reporting systems are being geared to making sure that each business does understand its weighted average cost of capital. One of our briefs is to ensure our managers understand the concept of value creation as against value destruction.” Ironically, the last question we asked Gardner in our interview was, “So what’s next for you?” “Some international experience wouldn’t go amiss,” he told us. Barely two weeks later, and with just days to go before this page was sent to press, Gardner’s secretary advised us that he was off at the end of August to become FD of a large gas turbine power plant business at joint venture company ABB Alstom Power – in Brussels. He added at the time that an MD role might prove an attractive proposition – continuing a long-established trend of FDs moving into general management. “I think one of the advantages of being in this position is that I’ve observed a lot of MDs at work – and therefore I’ve come to judgements about whether I could step into their shoes,” he says. He’s clearly fortunate to have spent the ten years at a company whose managers are so highly regarded – even if that’s the only thing future employers know about ABB. * Weinstock: The life and times of Britain’s premier industrialist, HarperCollins Business. CURRICULUM VITAE Name: Stephen Gardner Age: 40 Qualification: CIMA (1983) Education: Hatfield Polytechnic Hons degree in business studies (1981) Career: Sept 1999- FD, Gas Turbine Power Plant business of ABB Alstom Power, Brussels 1994-99 Chief financial officer, ASEA Brown Boveri Ltd (UK holding company) 1993-94 Financial controller ABB Industrial Systems Ltd 1990-93 Financial controller, ABB Process Automation Ltd 1989-90 Financial controller, PAB (division of Combustion Engineering (UK) Ltd) 1988-89 Chief accountant, PAB (division of Combustion Engineering (UK) Ltd) 1985-88 Systems manager, Schlegel (UK) Ltd 1983-85 Financial accountant, Schlegel (UK) Ltd 1981-83 Cost accountant, Eaton Cutler Hammer Gardner on the last few months before Y2K: The area that is most difficult to assess is the supply chain, especially when you’ve got just-in-time manufacturing. What happens if a widget doesn’t turn up – it’s caught up in customs? How will that affect your business? Gardner on choosing to go to a polytechnic: I’m surrounded by colleagues with Oxbridge backgrounds, and you think, crikey, this is esteemed company. The poly offered sandwich courses so you graduate with a year’s experience. I found it a very good background. Gardner on visiting ABB plants: It helps your credibility when talking to certain people if, for example, you know what a transformer is. When visiting a plant I like to see how things are put together – observing manufacturing processes is interesting in its own right.