AS A NEWLY installed finance director, you know you’ve got a job on your hands when the chief executive tells you you’ve got 54 days to complete a refinancing. When that command is issued on the first day and comes from Ken Lever, a former finance director famed for his turnaround credentials, the task becomes that bit more daunting.
That was the urgent situation facing David Bauernfeind when he was appointed as Xchanging chief financial officer on 7 June 2011. The technology and outsourcing group, synonymous with its work for Lloyd’s of London, was in a parlous state. By all accounts, 2011 was Xchanging’s annus horribilis.
It issued a profits warning in March with first-half pre-tax profits plunging by 95%, and announced it would refine the way it accounted for contracts – a move that spooked investors, halved the group’s market cap in a single day, and dumped it out of the FTSE 250. Worse was to come: Xchanging was accused of “aggressive accounting” – in other words, of overpromising on projected financial performance – taking a £100m goodwill impairment hit on the cost of buying Cambridge Solutions in 2008, a company that turned out to be more trouble than it was worth, which saw the resignation of Xchanging’s founder and chief executive.
Given that backdrop, Bauernfeind knew his job would be one of turnaround and transformation. Item one on the list was to secure that all-important refinancing deal within 54 days.
“Most people thought it wasn’t possible at the time. The business had had challenges and the general environment wasn’t very good so it was a hell of an introduction,” he tells Financial Director. “We did cut it relatively fine – we made it by a few hours.”
Since then, Xchanging has embarked upon a radical overhaul of its portfolio of businesses, hived off underperforming assets and redefined its founding business model from one that was built on a small number of very large clients to one that is built on a large number of very small clients. Essentially, the business’ clients had become more sophisticated, and procurement functions had driven the model to smaller contracts of shorter duration.
“The business model had originally been one of very long-duration, major contracts. The business didn’t move fast enough to make that change,” explains Bauernfeind.
The finance function has been at the heart of this transformation process, which – apart from analysing the performance of each of Xchanging’s business units – also meant moving away from a silo structure to a single business, rationalising the finance function, improving its management information systems, changing the company’s cost culture while at the same time managing the demands and pressures of being a listed company.
Bauernfeind did have the benefit of more than ten years with Xchanging prior to becoming chief financial officer. He joined the company in 2001 to oversee a joint venture with BAE Systems, where he had been a divisional financial controller.
With more than a decade working in almost all of the business areas in senior financial positions, Bauernfeind came into the role “really understanding at quite a detailed level how the business was operating”.
Importantly, Bauernfeind was able to apply the lessons of managing the tight refinancing process to transforming the rest of the business.
“The key thing was not allowing anybody to slip the date. The easiest thing in the world was to look at each of the individual challenges and say, ‘OK, there’s an excuse to slip the date,’” he explains. “We still talk about that internally when we talk about the need for speed and efficiency. We can do it in other areas, and you can create that need to act fast even if it isn’t necessarily something that is public.”
Reshaping the business model required the adoption of an “intrinsic value model” for each of the business units which had underlying assumptions about their performance that was consistent across the business.
“In the finance function, we made sure there was a level playing field for all of the businesses around those assumptions. We weren’t wildly optimistic in one area or ridiculously conservative in another. That helped sort the wheat from the chaff,” Bauernfeind says.
Part of that process involved competitive positioning analysis and value model work, not just at a theoretical level – but at a practical level.
“It’s quite traditional to pull out market analysis that says, ‘This is £50bn market and were we to attract 0.1% of the market, we would have x income.’ What I looked to do in the finance function is say, ‘Ask now which are the five clients in that market we could potentially go and sell our services to’,” Bauernfeind says.
Bauernfeind has continued that intrinsic value model work and updates all of the businesses on a quarterly basis, while using the same approach for investments.
At the same time, part of the turnaround revolved around moving away from a silostructure to a single business, with all the implications that had for rationalisation of central functions including finance. The key, Bauernfeind explains, is separating the business into three distinct roles – a corporate centre, a shared service centre and then the operating units.
“It’s important when you centralise finance or HR that it’s not seen as the corporate centre doing the centralising. It should be a shared service that operates as an internally facing business. The businesses should decide the quality and cost of that service, not the corporate centre,” he says.
Driving change through the finance function in this way has meant improving Xchanging’s management information systems – something that Bauernfeind admits is still “very much a work in progress”.
“The business has been very siloed with many different versions of systems. This time last year we had 12 different HR systems across the group, and we operate two ERP finance systems, so it is very siloed and quite complex at high cost,” he says. “The work we have been doing is to effectively replace each of those systems in each of the functions with SaaS-based models.”
No turnaround story would be complete, or achievable, without some serious cost-cutting. Back in 2011, Xchanging had already begun a programme that included axing some 15% of senior management and relocating from the West End to Leadenhall Street – though the firm has since announced a move to Walbrook. The result: corporate costs for the last financial year totalled £15.3m, down from £19.9m in 2011.
However, Bauernfeind says this was not a case of finance wielding the axe from on high. The strategy, he explains, was to devolve cost consciousness and behaviour down through the organisation. The classic, old-fashioned model of cutting the cost base at boardroom level was not going to work.
“It’s better to try to challenge on cost consciousness team leaders who have ten or 15 people working for them than to try to do it at a level where you have got somebody responsible for 500 people,” he says. “It’s much better, financially, to be able to offer solutions to a team leader – of easier IT to work with and reduced bureaucracy – and then challenge them on cost consciousness than it is to try to have big programmes at a high level.”
During this period Bauernfeind and Xchanging were also commended for their tight control of cash. The business was recognised as top-quartile performer among IT service companies by REL Consulting in its latest working capital survey of the 800 largest listed European groups.
Days working capital – a measure of the average number of days of tied-up working capital in the operating cycle – was among the most efficient in Xchanging’s industry. And like cost consciousness, an understanding of cash needs to be articulated throughout the business.
“One of the big challenges I inherited was simply getting across the organisation the idea of cost consciousness and an understanding of cash,” Bauernfeind says.
“When I look at a business plan and when I look at the investment case, I will always look at the cash first. It’s a psychological thing. If the thing doesn’t make sense on a cash basis, we’re not doing it. That should be the decision-making criteria.”
Bauernfeind also puts a huge emphasis on cash forecasting. “If you looked at the forecasting ability of Xchanging and then went back three years and looked at the ability to forecast cashflows over a 12-week period, which is our normal near-term forecasting period, it was truly terrible,” he says. “If you look at it today, if it’s not best in class, it’s pretty close.”
Throughout this period of upheaval, one constant for Bauernfeind has been managing the demands and pressures of a listed business. The company’s fall from the FTSE 250 undoubtedly damaged investor confidence, while any business going through the turbulence of restructuring its operations and cost base should expect a degree of investor unrest.
Though Bauernfeind concedes the overhaul of the last two years would have been easier in a private environment, there have been positives from being listed.
“It does make you conscious of every decision that you make and how to present it. It’s a lot easier if you can present things in a nice linear progression. The challenging issue is how you message, how close you are to your investors,” he says. “We spent more time with investors and analysts, explaining what we were doing without damaging us from a competitor point of view.”
Xchanging has come through that fixing and can now look to growth and a much more innovative future. Indeed, according to its latest annual report, pre-tax profits increased to £50.4m, while the board was able to reinstate a dividend at 1% per share.
The business still has some way to go before it makes a return to the heady heights of the FTSE 250. But this is not something that keeps Bauernfeind awake at night.
“I think about it as an aspiration as a company because you can put some numbers on it in terms of saying that, if we were to be in the FTSE 250, this is what the company would look like – all things being equal. So it is nice from that perspective, in the same way that you can come up with round numbers of what you would like revenue, or profitability, or earnings per share in the business to be. It’s a little bit more tangible, and it’s nice from that perspective, but I don’t lie awake at night thinking about it or planning a particular date,” he concludes. ?
2011 – present CFO, Xchanging
2009 – 2011 COO and CFO (UK region), Xchanging
2006 – 2009 Finance and commercial director (financial markets), Xchanging
2004 – 2006 Finance director, Xchanging Global Insurance Solutions
2001 – 2004 Finance director HR, Xchanging
1996 – 2001 Financial controller (defence), BAE Systems
1994 – 1996 Internal audit, Johnson Matthey
1989 – 1994 Audit manager, Deloitte