CFO Leaders: On Cost Culture, Rising Input Prices, Leadership Challenges
Train tracks run through a section of of a tunnel. (Photographer: Andrew Harrer/Bloomberg)

CFO Leaders: On Cost Culture, Rising Input Prices, Leadership Challenges

“We see the light at the end of the tunnel and hopefully it’s not that of an incoming train,” said one chief financial officer as we chatted about prospects for the economy in 2021. All five of them expressed optimism regarding India’s economic recovery, with a Covid-19 recurrence caveat.

This CFO Leaders conversation took place at the start of the year, since then some of the economic indicators have weakened and input prices have risen further. Yet, armed with new cost cultures and the belief that nothing can be worse than the year that was, leading chief financial officers of India Inc. are ready for 2021.

Pandemic Learnings

Arnab Roy, CFO, Schneider Electric India Pvt.

I’ll give you a very topical example not from a finance function but from a business side of it. So, 50% of what we sell is to the government and since we sell large equipment, most of our products are physically inspected by a government inspector. Now when everything came to a shutdown in April 2020, obviously they couldn’t come to the factory to inspect, but power is an essential commodity. So, the supplies had to be made and there we started a visual factory inspection test. So, a government inspector sitting in Bihar was inspecting the product from his office through a (video conference) call like this. We put some high-resolution cameras to enable the inspection from him. So, that kind of technology started, and today when we speak, at least in the last nine months, of whatever we have shipped maybe about 30-35% of that has been virtually inspected. Now translate this when we come to a new situation—how this kind of productivity will translate in real life. Certainly, wait times in the factory are gone, you’re able to move the supply chain much faster. So that’s a practical example of how this crisis is turning into opportunities in real life.

I think what will happen is—how do we translate it to a commercial model? Possibly, we can propose a kind of a differential pricing if you do this, so which brings in efficiency to the customer as well as to us. So, there can be some sort of a thing which can be translated into a structural thing. Many of us went through a lot of tactical actions on the costs front in this year but now the challenge is how do we translate some of those tactical actions into structural savings.

Pratyush Mittal, Finance Director, Mondelez India Foods Pvt.

I think on the finance function what this crisis has taught us is to be a lot more opportunistic on how do you really simplify the business model. Because as businesses grow we do end up adding a lot of complexity—a lot of products that are there but possibly the consumers don't need it, we end up pushing them. I think what this has kind of taught us is, take a step back and always look at the business and see what pieces of businesses are making sense or what are not making sense and what to discontinue and how to simplify your business, which brands do you not need etc.

Going forward, something that we should possibly be doing at regular intervals—let’s step back and say, these five SKUs (stock-keeping units) don’t make sense, or this process is just a complexity that we have added. Because, to be honest, in this crisis what happened was, we in many of the processes were not possibly doing 100% of what we were supposed to do, because they were just unnecessary bureaucracy added over the years by different departments. So, I think this has really taught us to say, how do you keep simplifying your business.

Aneel Gambhir, CFO, Blue Dart Express Ltd.

One is the digital journey, which has transformed everything in every space of working. In our case look at it, we were doing manual billing and then also payments were generally manual. However, a small portion of the collection used to be in the digital mode. Now, during pandemic period cash was truly king. For us cash become oxygen. To survive, obviously we had to work to make sure that enough cash is available to run the operation and also with handling fixed costs—as all these are fixed costs when you fly aircraft. To do that, obviously we also took hard calls not only in ensuring that we collect from our customers during the pandemic who are working from home but we also put cross functional teams to follow up and ensured that we have enough cash and cash surplus by the end of the quarter, that is June 2020.

We also implemented a first-time model which is cash and carry. So, anybody requiring essential things to be moved during that period had to pay cash at that point of time so that we have enough cash to operate our business.

Dinkar Venkatasubramanian, National Leader, Restructuring & Turnaround Services, EY India

Initially there was a lot of focus on working capital and opex (operational expenses), but as we went along and things became more normal we’re still going forward on the aspects around future proofing of capex as well as capital structure—these are two aspects which were initially ignored but now is in focus for a lot of the CFO community in terms of making sure that they have the right resources available.

Koushik Chatterjee, Group CFO, Tata Steel Ltd.

Just to extend the conversation we’re having now, one of the things that is important is, once you come out of it then you reset the business again and reset in a manner where the new ways of working come into place.

One of the areas is to look at capital structure. Capital structure is actually the muscles on which you will grow in the future. So reset that capital structure very quickly and carefully, which means that you have to start again back into—how do you generate more internal capital? The starting point is looking at spend reviews, questioning each and every spend that you have, classifying into the ‘must-have spends’ to ‘good to have spends’ to ‘discretionary spends’ and you get back to the basics and try to actually do cost-takeouts of a very different nature. So, that's one starting point.

And then there is the capital allocation towards growth. When do you actually restart your existing projects, etc. and how do you do it more smartly than before? What do you need to do yourself and what do you need to put onto say, a rental model? So, what are those assets that you can play arbitrage with?

Then the third thing is, all of this will lead to the kind of capital structure that is to be designed that—where do you want to go and how do you need to achieve that goal? So, I think these are the things that we’ve been working on.

Rising Input Costs

Pratyush Mittal, Finance Director, Mondelez India Foods

There are certain commodities which are showing inflationary trends but not to the extent that we are worried about how to manage, at least this year. I think we should be able to handle it. We all make our annual plans and we have factored in some sort of reasonable assumption as to where we think it’s going to head. But, there are certain commodities which are showing a bit of inflationary trend as consumption is coming back and there is there is demand increasing for those commodities.

There is always a direct correlation in the consumer goods industry where if you take a price increase that shows on the demand to some extent, because it's a price elastic product at the end of the day. We have to take those calculated risks to say where to put it in.

Commodity costs in our businesses, it's a cycle it comes, you have to handle it and you have to kind of factor it into your business plans and maintain your margins with it. So, it’s an every-year reality. I don't think this year is significantly different from any previous year that we've seen from a commodity inflation point of view. So it's not an out-of-whack worry is what I'm trying to say.

Aneel Gambhir, CFO, Blue Dart Express

Apart from commodity, I think the bigger portion of input costs is manpower. In our kind of an industry manpower cost has also gone up more, especially during the pandemic when people migrated to their hometowns. I think that’s the time when labour shortages happened and as a result of that the prices had gone up. To top it all, now the government is talking about a new labour code, which will also have significant costs increases with the minimum floor level being prescribed. So that could also increase input costs or production costs for all the industries. So, it will not be peculiar to us, it will be common for all.

What we are doing—wherever possible we are looking at automating our hubs and our distribution system so the dependency on labour reduces and as a result cost reduces, but whatever portion we aren’t able to contain or bring efficiency, obviously that we plan to pass on to the customers.

Challenges Facing CFOs

Koushik Chatterjee, Group CFO, Tata Steel

I think fundamentally, two things. One is the impact of climate change and how do you actually reshape the agenda of the corporate aligned to climate change. It will be an important one for any industry, going forward. Certainly for our industry but for any (other) industry too—because it will have various implications on corporate strategy and how decisions will be undertaken.

The second one, is how do you balance between talent (people) and the digital world and how do you really look at enabling talent to be capable of handling a digital acceleration. Because, while we will be in robotics and in machine learning and AI etc., it will be the people who will actually have to drive it differently. So, skill management and the talent management of people will to me be one of the biggest challenges and opportunities. How do you deal with the incumbent of today and reshape this into a very different skill sets for the future?

I think these two are going to be the main drivers for companies and CFOs because sustainable finance is getting to become a very big aspect. Providers of capital are now getting very choosy about investment options and portfolios. So, whether it is on the debt side or whether it is mezzanine capital or whether it's equity. To address them and their portfolio, it is going to be very important to look at climate change and impact of that on companies.

Aneel Gambhir, CFO, Blue Dart Express

I think going forward the way we have seen, in the VUCA (volatility, uncertainty, complexity and ambiguity) world, that things are changing and in a pandemic how situation can overnight change. So, taking that change into account and ensuring what plan you prepare—earlier we’d talk of a long-term plan. Now a long-term plan may continue but at the same time it always has to adjust to the new reality and the new reality could change every minute and every hour. So, agility in planning would also become key apart from the environment and retaining talent. Of course, the digital space is going to be becoming very exciting because new things would keep adding to the profile.

Dinkar Venkatasubramanian, National Leader, Restructuring & Turnaround Services, EY India

This has nothing to do with Covid. This is a trend which would have impacted businesses anyway over the next 5 to 10 years—the digital transformation trend. How to become more efficient, more productive and more innovative and make sure that you’re using data and analytics to give the best to your stakeholders or consumers or whoever. I think that will continue to be the overarching trend for all businesses to deal with. I don't think that has anything to do with Covid—maybe it’s reinforced by what we’re going through over the last one year but my view would be this is the overarching challenge to get through for businesses.

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