Group finance director of Computacenter, Tony Conophy

Tony Conophy has worked for plenty of different businesses
in the past 20 years. He’s been FD of a small, fast-growing, entrepreneurial
privately-owned company with barely 200 employees. He’s worked for a company
that IPO’d into the FTSE-250 worth £1.3bn and then doubled. And he’s worked with
investors to take private a business worth a fraction of that. He’s now the FD
of a £325m market cap company that’s reinventing itself, having taken a huge and
permanent knock two years ago when a structural shift in the industry killed
half its profits, reducing margins to a razor-thin 1% to 2%.

What’s amazing is that all of those companies were called Computacenter.

In the two decades since Conophy joined the computer reseller and services
business, he’s ridden the company roller coaster from not long after the launch
(he joined six years after founders Philip Hulme and Peter Ogden started the
business, when the group was about 1% of its current size), and he’s seen it
through the good times and bad.

Right now it’s not so good ­ but there’s nothing in Conophy’s demeanour that
suggests any abject despondency. Truth be told, it’s barely 12 months since the
company was able to return £74m of excess cash to shareholders. But the fact
that Computacenter is now a £2.27bn-revenue business that made just £33m pretax
in 2006 ­ a margin of barely 1.4% ­ doesn’t faze him much. “Yeah, it presents
challenges,” Conophy says, earning himself a nomination for the ‘understatement
of the month’ award. “But that’s the market we’re in. You have to run your
business,” he explains. “You have to understand the cost structure attached to
it. You have to focus the resources to reduce the cost and it’s about managing
those resources.”

It would help to explain a little about Computacenter and why it’s margins
are so anorexic. In very broad terms, there are two bits to Computacenter:
products and services. The product side involves acting as a reseller of perhaps
thousands of PCs at a time to major clients, but at margins that get “negotiated
to dust”. This thin-margin part of the business makes up three-quarters of the
revenue, though within that there are chunks of business that command higher
margins, such as high-end servers, complex networks and the like.

Fierce competition

With rivals such as Dell selling direct to the market, competition for such big
contracts is fierce. And two years ago key suppliers, including Hewlett Packard,
changed the basis on which they do business with resellers such as
Computacenter, slashing the rebates they traditionally paid to them.
Computacenter’s 2005 results got whacked as £27m of profits went out the window
purely because of the loss of vendor rebates, leaving group pretax profits
exactly halved at £34m.

On the services side ­ still just a quarter of the business as of the latest
2006 figures ­ margins are a little less scrawny. Outsourcing, support desk and
datacentre services feature here, but the margins, though better, aren’t exactly
juicy: it’s no licence to squander money, so technology plays a key role in
keeping down costs, such as databases that enable engineers to provide quick
fixes for recurring problems, rather than, say, always sending out an engineer
for what often turns out to be a trivial matter.

But it’s in this area that Computacenter has had a few notable wins: after a
negotiating marathon that ran on for well over a year, the company managed to
not only renew a flagship contract with BT, but to extend it to include managing
­ in fact, owning ­ all of the telco’s desktop and laptop IT assets ­ about
114,000 of them, not just in the UK but around the world, too. Spread over five
years, the company says that this is a £200m-plus contract, a not unwelcome
uplift on the £25m-a-year that the UK-only contract was worth, with the added
value of being such a high-profile client.

Of course, the problem with high-profile clients is that everyone notices
when you lose them, as happened when Computacenter lost HM Revenue and Customs
in 2005. Conophy admits that the media attention on such deals creates a certain
extra risk. “It just ensures that we give a very high level of focus on [the
contract] to ensure that it works well,” he says.

Part of the problem, as Conophy explains, is that you can’t simply wind down
the low-profitability product side and expect automatically to be able to ramp
up the value-adding services business. Moreover, investors would lose out if
they scaled back on the product division, Conophy says. “Often, analysts ask the
question, ‘what’s your target margin percentage?’ And we say, ‘Well, we can’t
really focus on a single metric: it doesn’t really describe the business
because, if we sell a lot less product, we might have a higher EBIT [margin]
percentage, but actually we make less profit overall; which would you prefer?’
It’s just a weighting factor.”

We ask Conophy what his priorities are as FD of a company experiencing such
knife-edge margins. He’s almost blasé ­ “It’s always been the case!” ­ but his
focus seems rarely to stray beyond that sliver of profitability. “If I look at
it from a business perspective, which is clearly the ultimate objective, [my
priority is] to delight our customers and to be able to deliver value through
quality ­ but also through cost saving. My role primarily is to try and help the
business in terms of understanding our cost structure, being able to help look
at investments that help to drive down the cost of providing service.”

In outsourcing contracts, for example, Computacenter will often own the IT
kit as well as manage it ­ which, Conophy says, gives the company an extra
incentive to cut costs, reduce datacentre power consumption, reduce the number
of servers employed, use technology enabling ‘virtual servers’ ­ so perhaps that
keen-eyed focus on costs is part of the service offering in itself, and not just
a necessity born of the state of the market.

Cost conscious

Conophy’s finance department has a big role to play in all of this ­ though
it, too, has to be cost-conscious. “All of the transactional engine processes
are very clearly defined,” as he puts it.

While commercial managers will run the negotiations and contract process,
finance people work with them ­ literally alongside them, and not from the ivory
tower of the finance department. These decision-support finance staff have a
solid reporting line to Conophy, but a dotted line to the divisional managers
with whom they work on a day-to-day basis. It’s a not uncommon structure but one
that has sometimes been said to run the risk of finance staff ‘going native’,
working so closely with non-financial managers they neglect their accounting
discipline and ethics.

“That’s why it’s a hard line to me,” Conophy says. “You’re right. They can go
native. The business’s financial controls need to be strong enough to be able to
overcome that, and you need to develop interaction with those individuals to
make sure that they understand what’s allowable and what’s not allowable. That’s
sometimes a challenge. But we haven’t had any major issues.”

Spending two decades in the same company, as Conophy has ­ and sitting
alongside a chief executive and two founder directors who have all been with the
company even longer ­ could be a formula for stagnation, a management hierarchy
screaming out for fresh blood, despite all the thrills and spills along the way.
“If you look at the prospectus when we floated [in 1998], it listed about 15 or
16 senior people that effectively ran the business,” Conophy explains.
“Actually, there’s only three of them left. We’ve had quite a lot of change at
the level immediately below us. We’ve brought in people from the outside and
that’s allowed us to get some benefits in terms of how other companies operate,
what the competitors are doing, how they do it, what they do better than us, and
learning from those aspects.”

Best of times

Of his 20 years at Computacenter, the last couple can hardly have been the
most fun-filled. He admits that the best times were when the company was growing
almost exponentially. “In one year, I think between 1995 and 1996, we grew by
about 60% and that is a major challenge,” he says. “Lots of things changed. Just
driving your infrastructure to cope with that is a major challenge.”

But while the job now is about running a more mature business, it’s had its
moments. Last year, the company restructured its share capital, issuing one ‘B
share’ worth 39 pence for every 5p ordinary shares held by investors and then
almost immediately redeeming them for cash (and, for those who like this sort of
detail, consolidating every six 5p shares into five 6p shares so that the net
effect on the share price was negligible).

This mechanism returned almost £75m in a way that treated all shareholders
equally ­ rather than simply standing in the market and buying in stock ­ and
was more tax efficient than paying out a special cash dividend. These sorts of
considerations acquire special importance when the two founders still have such
a large slug of the equity in the group: just over 40%. In any event, Conophy
adds, the legal costs of structuring the return of excess cash in this way were
less than the stamp duty that would have had to have been paid by buying its own
shares in the market. “So it was cost efficient,” he explains, “which clearly
you’d expect I’ve always got an eye to. It did mean reading a lot of long
documents late at4 night but there you go. It comes with the job.”

Some months earlier, Conophy was part of the team that tried to buy
Computacenter off the stock exchange, taking it private at a time when its
shares were thoroughly depressed after the vendor rebates bombshell. But Conophy
insists that that is to overstate his involvement in the would-be deal. What
happened was that the founders, Hulme and Ogden, thought that it would be a good
idea to take the company private again after the bashing the City gave them ­ a
common solution to a common problem, these days. Conophy and his chief
executive, Mike Norris, would have remained part of the team.

But the founders didn’t want to turn to private equity to finance the deal:
they wanted to own the whole thing. “As you’ll see from the progress of the
business so far, our founder shareholders have a long-term view in the
organisation,” Conophy says. “A private equity investor would look for an
external capital raising or go to the market again in a few years’ time.” Faced
with a choice between taking on a crippling debt burden or joining forces with
an external investor who would just want to get the business refloated in a few
years anyway, the founders decided to scrap the idea and keep Computacenter as a
public company.

No regrets

Conophy has no regrets (or so he says). “Actually, it didn’t make that much
difference to me. My role is still very much the same now as it would have been.
And I think you’ve got to bear in mind that, maybe if Mike and myself had led
this transaction and gone to private equity it would be very different. This
wasn’t: we were coming along as the management team as opposed to the lead
people in the buyout, which was very much driven by the founders who already
owned a big portion of the company anyway. So it’s not quite the same
situation.”

It was a case of sticking with the day job, then. The share price is a bit of
a nuisance, though. Now standing at barely a sixth of its value compared with
the dotcom era. “I’m not sure the market fully recognises the potential of the
business and also the strength of the balance sheet ­ which is a discussion we
have from time to time,” Conophy says.

Most FDs we meet have the same sort of gripe, though Conophy is at pains to
emphasise the cost-reduction work that the company has gone through,
particularly since the loss of vendor rebates in mid-2005. “The longer-term
investors [who] have been with us quite a long time understand the message,” he
says. “They understand how we’re taking the business forward, how we’re trying
to add to our high-end product sales, reduce the cost of going to market with
commodity products, understand the services message. They understand that
message and are willing to stick with that message to ensure that it’s
delivered. Obviously we’ve got to keep delivering and make sure we don’t let
them down. That’s the key.”

But like many companies, not least in the technology sector, Computacenter
has a reasonably broad spread of employee shareholders (apart from the founders,
of course, who still own around 41%). Isn’t it a bit demoralising for everyone
to work so hard and yet not see the benefit in the share price? “The fact that
the share price lags behind both the performance of the business and its asset
backing is clearly disappointing,” he concedes. But he’s straight away on the
forward foot: “We do believe it will increase and improve over time and that you
have to take a long-term view of these things rather than just a view today,
tomorrow, three, or six months’ time.”