The CFO`s great balancing act

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In an economic landscape characterised by stagnant development, the ability to balance cost transformation with growth is pivotal for any leading business. This situation is particularly true in fast moving sectors, where companies need to integrate long term planning strategies with reactive initiatives. Speaking at The Economist’s CFO Summit 2013, Timotheus Höttges, CFO at Deutsche Telekom, discussed how these challenges were affecting the telecommunications industry.

The Complexity of the Telecommunication Industry

Every industry is confronted with its own dilemmas. Höttges explained that in the telecoms sector, there are currently four main issues. The first is the capital intensive nature of the industry. Deutsche Telekom (DT) invests approximately €8.5bn CAPEX per annum into infrastructure. This heavy investment, coupled with low capital turn over and long investment cycles, adds to the complexity of the industry.

The telecoms sector also has to keep up with the latest market innovations. The iPad was given as example of the most recent game changing product. It took only 1.8 years for Apple’s tablet to reach 50m consumers.

“In the telecoms industry, maybe flat is the new up […] we are in a very, very tough environment and facing different challenges from multiple angles.”

Another issue is DT’s shrinking, core business. Regulation, price competition and voice applications will continue to dramatically impact the telecom sector’s traditional revenue streams. This decline needs to be managed whilst the company searches for new business opportunities.

Höttges listed asymmetric regulations as the fourth, main challenge for DT. Sector specific regulations, enforced both locally and at European level, are forcing operators to reduce service prices. To illustrate this point, Höttges stated that recent regulations led DT to lose 90 per cent of the value stream of its fixed line services.

Juggling Stakeholders

Looking at the role of the CFO from a more general perspective, Höttges examined a dilemma which affects the finance leaders of all large organisations: serving the interests of a variety of stakeholders. For DT this means balancing the requests of the entrepreneurs, the capital markets and, most importantly, the end consumer.

“How can a CFO manage this balancing act [in the current economic climate]? […] I will give you three impulses: the first is Avoid Surprises, the second is Be Focused on what you are doing and the third is Be Reliable.”

Tracking Threats and Modelling Risks

In relation to avoiding surprises and managing risks, Höttges expressed his disapproval of those who base their strategy on media reports and the measurement of single KIPs. DT has introduced a number of early warning indicators into their “risk cockpit”, for each market the company has a presence in. This entails analysing and determining leading indicators such as the CLI, coincident indicators and lagging indicators.

By monitoring these early warning indicators, DT is able to determine the impact of seemingly unrelated events on their markets. This process enables DT to form a clear picture of whether a given situation is improving or worsening. Another important element of this strategy is modelling the potential impact of certain risks. For example, how would business be affected by a decline in the dollar or the failure of a supplier to deliver.

“We are measuring 50 KPIs for each of our markets and are getting a better picture of how [events] are developing.”

Strengthen Your Position

For Höttges, “Be Focused”, refers to effectively allocating capital. The key element of this approach is not spreading resources too thinly. Although this may seem logical a number of companies operating within the telecoms industry, unwisely invested in outside markets. DT on the other hand, stayed focused and worked to consolidate their current footprint. In competitive industries, such as telecoms, the market leader will be entitled to the majority of the benefits.

“I will not [separately discuss] cost management, because in this environment, when you are always managing a decline in your revenue streams, cost management and productivity gains are always a must do.”

Balancing Returns

Höttges’ final point, “Be Reliable”, focuses on balancing the interests of a wide variety of company stakeholders. DT has a cash flow of approximately €6bn a year, which could be used for various purposes. Options include increasing dividends, investing in infrastructure or raising employee wages to build loyalty. Balancing these interest groups is essential in any large company.

DT has structured spending in such a way as to increase the stability and reliability of the business. The company has put together a three year program, which effectively balances the demands of each set of stakeholders. As a result, DT is the only telecom company in Europe which has been able to continue paying its dividends. This reliability, asserts Höttges, has enabled the company to keep long term investors on board.

Concluding Thoughts

Höttges’ presentation lays out a clear plan for CFOs looking to drive growth in a difficult environment. By consolidating market share and implementing an efficient risk management solution, DT has been able to keep stakeholders happy whilst ensuring the long term sustainability of the company. In the words of Höttges;”This is not just theory, I would say it is proof of concept. If you compare Deutsche Telekom with its peers […] you will see that we were able to be quite successful in managing this balancing act.”

All charts and illustrations are taken from Timotheus Höttges’s “The CFO’s Great Balancing Act” presentation, given at The Economist’s CFO Summit 2013.

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