Your Controller: IT Wannabe or Wise Man?

The need for improving financial reporting IT systems may first be recognized by your business' controller or chief financial officer.

A Tibetan proverb says, “The wise understand by themselves; fools follow the reports of others.” Does it seem like your controller – or chief financial officer or whatever they're called in your business -- is constantly meeting with the IT people? Perhaps it is because he or she sees danger in “the reports of others.” The interaction with IT probably means you have a good controller, but it may also mean your reporting systems are inadequate.

In today’s business world “the reports of others” are a critical part of day-to-day business for both the wise and the foolish. Most corporate job descriptions include reporting of some form, but for many small-to-medium sized businesses, the controller and IT manager are at the frontlines of the reporting that supports your company’s most important decisions.

A good controller has tremendous insight into financial reporting needs, and he or she often leads the charge for improving systems. The controller understands that both timeliness and accuracy are at risk when reporting depends on manual data entry and an ever-growing spider web of linked spreadsheets.

As reporting needs increase, the controller’s job becomes awfully scary if systems don’t help. Many top executives would shudder if they understood the degree to which the “information” that drives major decisions is dependent on the data entry accuracy or the Excel skills of their most junior accounting employee.

Having visibility into key budget and profitability drivers is essential for decision making throughout the company. Controllers often help define technology needs, collaborating with the IT manager to understand and deploy appropriate business systems. Good controllers often become far more systems-savvy than the average employee, or even the average executive.

Take, for instance, the case of a Chicago insurance company. An unexpected resignation left the IT organization with a void in their financial reporting function during a difficult time in their business cycle. The company recognized the need for good information and acted decisively, hiring an interim controller to work with IT to determine what steps needed to be taken as the company approached their next phase.

The controller, working within the IT team, immediately began visiting face-to-face with department leaders involved in financial reports and analyses. Those discussions opened a dialogue that had been absent and helped to break down longstanding barriers.

The controller’s communication skills and in-depth financial knowledge helped the company discover profitability issues that would have otherwise not been uncovered. For example, the company had a tendency to fill job vacancies with contractors, rather than full-time employees, because it was assumed to be a preferable, cost-effective way to manage short term staffing. Deeper analysis challenged some of those assumptions, and enhanced reporting was created to allow managers to see the relationships between day-to-day hiring decisions and broader financial results. The controller also improved visibility into other profitability drivers, such as costs associated with myriad vendor contracts and the IT department’s employee and consultant budgets.

This company understood the need for timely information to enable them to make good decisions that would drive results. Their story illustrates the unique role an experienced financial executive can play when working at a detailed level with systems people. Neither group can independently create timely and accurate reporting, but acting as the link between IT and management, a controller has the “hands-on” insight to ensure that systems meet rapidly changing business needs.

So if it seems like your controller is joined at the hip with IT, it may be time to look at your financial reporting systems to see if they meet your business needs. Today’s wise business leader recognizes that quality decisions depend on quality information and therefore reporting isn’t a technology project, it is a business project.

Lisa Metcalfe is a Regional Practice Leader in the Technology Leadership Practice of Tatum LLC. Tatum is the nation’s largest executive services firm, providing financial and technology leadership nationwide.

The Value of Enterprise Project Management

Cut a piece of wood hastily, and will likely be ruined. That’s why “measuring twice and cutting once” is a carpenter’s golden rule. That same rule applies to implementing and managing business projects or programs: double check your work to understand every project aspect before you launch.

Talk to nearly any corporate executive today, and you're likely to hear stories of frustration regarding projects gone awry. With the challenging nature of managing multiple projects, measuring their success and aligning their costs with objectives, it's no surprise that solid success stories are few and far between. Many companies improve their odds by implementing an Enterprise Project Management Office (EPMO).

Whether it's a merger, integration, spin out or some other large project, C-suite executives employ EPMOs to help handle major programs. Such projects generally run horizontally across the enterprise, impacting many areas. The EPM office is all about taking each project and measuring it twice -- understanding its requirements and risks while managing expectations and ensuring consensus of success. Use it effectively, and your projects will come in on time and on budget.

Controlling project chaos

Imagine yourself a retailer considering a project like a major store refurbishment. Perhaps you're introducing a new logo, theme, or look. This might include changing the physical appearance along with the product mix or displays -- all of which impact multiple departments -- from the office of CFO through marketing, pricing, sales, construction, and operations. Once you see the wide impact such an initiative can have, you see why every function must be well coordinated.

Corporate programs that are not managed by an EPM function are often poorly executed, missing deadlines, or budgetary requirements. But with a program management function in place, the success rate is much higher. Because redundancies and missteps are avoided, costs are also contained -- even 10-20 percent less than a project done on an ad hoc basis.

So, how do you measure success? With EPM, you create a set of criteria to define and measure success. Program plans include clearly defined steps and responsibilities. To ensure accountability, there are also people dedicated to the program management function who report directly to a C-level executive.

Establishing a governance committee

Just as corporate governance is now a critical part of doing business, so is making sure IT decisions and projects align with objectives. This is where a governance committee plays a vital role -- ensuring that the program management function is well structured and gets buy-in from the officers and department heads. It also establishes the criteria for managing programs, which could include project size and scope or factors like resource allocation, cost, or impact on strategic initiatives. Unless a program only impacts a single function or doesn't hit the thresholds of cost or impact, it should be managed by the EPMO.

For example, consider resource conflict, which includes things like operating capital or people. A governance committee may uncover a conflict like an employee assigned to five different programs plus his daytime job. Stretching people this way yields fragmented results, which can hinder the project's success through poor work quality, missed milestones, or cost overruns.
If you're executing a large scale program, it's important to organize it properly from the outset, which is why appointing an EPM executive is a critical first step. That executive assigns a team of project managers and lays out the details in a formalized project management tool which can perform a variety of tasks, from tracking phases, tasks, hours, and costs to determining how long it will take and what the interdependencies are.

There are a variety of toolkits available for this purpose and for activities like collaboration, portfolio analysis and ERP. You may even custom develop a solution for yourself which leverages those tools. As for cost, some tools are available for free, while others can cost several hundred thousand dollars, depending on the scale of your program and the number of users. The key is finding a toolkit that works from a cultural as well as a technological perspective within your organization.
Managing interdependencies

In virtually any project, managing interdependencies is critical. That means ensuring that step "A" is completed before step "B." If you missed the timelines or costs associated with any step, it impacts the cost of the overall program and prevents you from proceeding to the next, which is why all interdependencies must be well coordinated and managed. You can even ensure that steps are not interdependent by structuring activities to run in parallel or independently.

With portfolios in particular, you may find items that cause interdependencies across a set of programs or projects. Each is part of the portfolio, and if you don't complete them, they may impact something down the road. Your whole portfolio of programs or projects may also exceed your operating or capital budgets, which forces you to go back and reprioritize, which is another vital function of the enterprise project management function and governance.

Enterprise program management goes far beyond technology. It applies to all aspects of major programs your company might be initiating. Measuring twice and cutting isn't just a catchy proverb -- it should serve as a reminder for you to take those steps necessary to complete your picture of each project and build a detailed plan, namely through a robust Enterprise Project Management function. When you do, you can improve your overall focus and avoid the disappointments that a failed project can bring.

Mike Gorsage is a Partner and Technology Practice Leader for Tatum LLC. Tatum is the nation's largest executive services firm, providing financial and technology leadership nationwide.

Scaling Your Business with Technology

In today’s economy, companies are looking at every opportunity, every tool available to help them prepare for growth. The answer for many is technology. But before you invest, make sure you understand just how it will impact your organization.

By this point in the financial crisis, you've made countless cutbacks, and wrung as much productivity as you can from your organization. But how can you grow without adding large numbers of people? Scaling your business from here requires a significant change, and for many organizations, that means employing new technologies.

Technology can empower your organization, helping you improve efficiencies and even expand operations. But to use that technology well, you must balance your needs with the realities of how you do business. That means understanding not only which technology to invest in, but also how it will affect your operations and how to maximize your returns on that investment.

Ask the right questions

What does it really mean to scale your business? Today, it means much more than simply throughput. When considering a new technology, many organizations focus on the wrong questions. They want to know, "What can I do with this technology?" rather than "What can this technology really do for me?"

Today, businesses and consumers alike expect everything from new technology, namely speed, collaboration, consolidation, accuracy, and greater connections. But it's risky to think that simply plugging in a new box will do the trick. Using new technology to scale your business involves much more, primarily exploring how well it will integrate with your network, your IT components and your users.

Think automation

Whether the solution you are looking for relates to manufacturing or improving payroll efficiency, a new technology can scale your business through automation.

Consider the example of an auto manufacturing plant utilizing robots. Thanks to that technology, it no longer takes 17 people to build a car -- it may now take three. While people do monitor the technology, there is no one actually driving the screws. In this case, the technology platform improves efficiency and helps the organization meet new "green" business standards. Reducing the number of people makes for a smaller carbon footprint, with fewer resources required.

From a general business perspective, technologies can have a similar impact. Tools like enterprise resource management systems, financial systems, and customer service technologies all have a tendency to improve effectiveness and efficiency without always having to "brute force it" with more people.

Consider scaling your customer interactions, for instance. The Web has made it possible to sell without human interaction. Today, even a multi-million dollar at- home business requires no bricks and mortar. Everything can be automated, from the sales floor and collection of money, even through distribution.

You can even scale your human resource function by converting to a self-service model. Here's an example: A staffing company goes through a large HR payroll implementation, which needed to accommodate the 380 thousand people on payroll. Over a year, they undergo a major conversion that allows them to handle 800 thousand people without adding more than 1-2 percent to headcount.

Clearly, automating functions like employee background searches, enrollment in benefit plans, and payroll can allow you to scale dramatically without adding to your carbon footprint or adding headcount.

Get the most from your investment

A common mistake many organizations make is allowing the technology to choose them, rather than choosing technology to grow their business. Many select technology before they really build out their business case and consider the process re-engineering required to make the company better. Very often they buy software and then convert their processes to support the software, which can actually make things worse.

That is why before you invest in technology, build a thorough business case that looks at the total cost of ownership (including costs of hardware, software, and implementation and maintenance over time). When determining costs, remember that once you invest in a technology, it's fairly well set. Major changes or upgrades are usually not required for some time. But technology does require continual care and feeding.

After implementing the technology, you must then go back and verify that the business case met your company's internal rate of return. For example, if you projected a million dollars in savings, go back and review the business case, compare it to actual performance and show that you did as well as promised or worse. If you did worse, conduct a 360 degree review that explains what lessons were learned, and how you could do better. Such an exercise renders you more thorough, diligent and focused in terms of vetting the business case before proceeding with any kind of project.

When looking to scale your business, remember that scaling through technology means something different to every business and every network. But if you ask the right questions, budget and plan properly, your investment can pay for itself many times over. When you know your business, you'll know how it will respond to change. You'll also be better equipped to meet today's challenges and prepare for growth.

Mike Gorsage is a Partner and Technology Practice Leader for Tatum LLC. Tatum is the nation's largest executive services firm, providing financial and technology leadership nationwide.

Business Insights: Learning From The Future

Ever driven a car with your eyes fixed on the rear-view mirror? You won’t get far, and neither will companies that base their strategies solely on past performance. That is why many turn to business insights -- a holistic approach to capturing and analyzing data that helps them predict the impact of their decisions on future success.

Today's organizations must constantly reinvent themselves to adapt to changing conditions. But one element remains constant: success stems from solid decision-making based on solid data. In the last few years, companies have invested heavily in technologies such as SAS software, Business Objects and Hyperion, all of which are designed to help capture higher quality data.

But look beyond the tools for a moment. How smart is your organization's approach to business intelligence? If you rely too heavily on dashboards, your view of the company may be too high level, missing key details on specific performance issues. The data you capture may only offer a snapshot view of your business, making your intelligence unfortunately short-sighted. In the end, an approach that focuses primarily on tools while overlooking data and strategy will not add significant value.

Today, business intelligence must rise to the level of business insights -- a more sophisticated approach that gives your executives the information they need to drill into each area covered by a dashboard and play "what if" scenarios, based not just on a historic perspective, but also a prospective one. When your approach includes both reflective and predictive perspectives, you can get much more out of the tools you're using to balance risks and rewards and set strategy more effectively.

A prospective view

As you shift your focus to business insights, keep in mind that it's not just about the tools -- it's about building a robust enterprise capability that enables you to take operational characteristics and turn them from analytical data into useful, predictive data to manage your business either on a current, real-time basis or on a future predictability basis.

In the past, business insights have been used primarily for sales forecasting and reviewing knowledge around areas like supply chain or customer and product profitability -- all of which line operations people need to make strategic decisions. This use of business insights is a vertical application that looks at departmental functions. An expanded approach is a horizontal application - extracting data that crosses the organization, connecting all relative pieces together to give you a common look and feel for predicting the future.

This application helps you see the consequences of moving the levers of your business. For example, let's say you wish to change your inventory management processes. Business insights allows you to look ahead to see its potential effects on areas like cash flow, staffing, delivery times or liquidity. This type of insight helps you predict how your decisions will impact your business, customers and profitability.

Building a robust insight capability

• A solid data structure. The first element you will need is a strong data structure, which comes out of all the applications you rely on to operate your business. Those include your ERP systems, financial accounting, HR, supply chain systems, manufacturing, logistics, customer files and other areas to give you a departmental or vertical view of the company. When you look at all of these pieces, an overall story emerges about what is going on inside your company at any given point in time. At that point, it's time to start connecting the dots by creating a common, horizontal set of data elements. When you do, you produce the kind of insights your leaders need to move the levers that fine tune and optimize your business. This is where ETL or data extraction tools come into play, placing the right information into a common platform: your data warehouse.
• Looking outward. The next step is to sub-divide your data warehouse into individual data marts, which are a horizontal or vertical perspective of the company. As you conduct business insights activity, be sure you look outward, or prospectively first, not necessarily inward. Think of it as looking out the windshield as you drive, rather than focusing on the rear-view mirror, which can only cause you to miss vital turns or make serious mistakes.
• Painting your picture. The final element is the right set of reporting tools, including Hyperion, Business Objects, Cognos, and SAS software, or Crystal Reports. By plugging your data into these tools, you can now begin painting the overriding picture of your business insights. From there you can generate dashboards or predictable modeling scenarios that allow you to change one dial or lever at a time and measure the impact on your business.

As you tweak the dials and levers of your business, it is absolutely critical to have the information you need to keep from flying blind in today's tough economic climate. By raising your business intelligence to the level of business insights, you can obtain new barometers of knowledge about your business and how it's performing. But creating value requires more than an investment in technology – it requires a comprehensive data model and strategy. When you understand the true worth of business insights, you support smarter, more agile decision-making within your organization and build strategic advantage.

Mike Gorsage is a Partner and Leader of the Business Operations and Technology Practice for Tatum LLC. Tatum is the nation's largest executive services firm, providing financial and technology leadership nationwide.

IT Cost Reset

As businesses cut their IT budgets, it's important to find creative ways to cut costs without compromising quality.

In today’s economy, no entity is exempt from cost cutting initiatives, particularly corporate IT departments. This comes as no surprise to CIOs, who are aware of the costly nature of IT. But before your organization begins slashing budgets, remember: your IT department supports virtually every aspect of your business. Reactive, misguided cost-cutting decisions can harm your ability to emerge stronger following tough economic times, rendering you ill-prepared when the upturn comes. With careful planning, you can successfully optimize IT expenses while preserving liquidity and performance today.

What’s the solution? Creative and carefully executed plans for an IT Cost Reset. Keep in mind that IT operating expenses and capital expenses go hand in hand, making them two of the most critical components of protecting business liquidity. In a world of tighter money, that means planning projects effectively and looking for ways to optimize and reduce IT costs. It also means never losing sight of the future -- creating an environment that fosters growth and innovation.

The following steps can help you protect liquidity and identify areas to optimize and reduce costs and capital consumption.

Step 1 -- Know where you’re going

An important part of developing a plan is having an idea of what the outcome should be. One way to accomplish this is to produce an outline of the deliverable before starting the project, so the end goal is always in sight. This outline should include a detailed analysis of the various cost cutting measures along with the ramifications of each.

Step 2 -- Conduct an honest assessment

Can a company be truly honest in assessing its own spending habits? It’s a difficult task for anyone -- personal biases inevitably enter the equation, along with defense of colleagues and particular applications and pet projects. This is where an independent assessment can be invaluable.

While an internal group, such as an internal audit function or a performance team, could be used to conduct such an assessment, they must have no vested interest in the technology base or the people base. There would also have to be a declaration that there would be no resizing of the workforce. An independent assessment could eliminate these hurdles. Because they are uninvolved, a third party could clearly and quickly determine where you are and where you are spending money.

Step 3 -- Virtualize, consolidate and rationalize

As you begin assessing your IT costs, first review your portfolio of technology, including hardware and software. Look at how they could be rationalized and simplified into a more cohesive set of applications to facilitate integration and support of new processes.

On the hardware side, it’s likely you have servers dedicated to particular applications. Review how many servers you have, what their capacities are, and how they are being used. Many servers today can support multiple applications, so if you find yours are underutilized, consider consolidating servers and eliminating excess hardware that is not necessary to support business needs or protect against disasters. This not only reduces your hardware footprint but also reduces costly energy consumption.

The same approach applies to your network and your software. By consolidating and reducing your total number of network servers and routers, you reduce the size of your network without sacrificing efficiency or performance. In terms of software, which extends into every functional area of your business, rationalize your applications portfolio by reviewing variables such as the number of users and the number and type of reports they generate.

Very often, people forget the costs of maintaining applications. For example, let’s say you identify an application used only to generate reports several times per year. Compare that usage with the cost of renewing the software license, which can be steep, and the cost of maintenance, including updating IT skills to keep the application running and integrated to others. With careful rationalization, you can identify other applications in your current portfolio that could perform the same role.

Once you have reviewed these technological areas, the next logical area to analyze is your staff. If your rationalization process results in scaled down servers and applications, you may not require as many staff to maintain IT operations.

Step 4 -- Keep cleaning house

While tough economic conditions or impending crises are often the impetus for companies to launch cost cutting initiatives, they really shouldn’t be. An IT cost reset should be conducted on a regular basis as a part of your regular IT strategy refresh. Think of it like cleaning out your closets -- if you haven’t worn it in years, you can probably throw it away.

With detailed planning and thoughtful analysis of every major area of IT, your organization can protect its liquidity, reduce operating expenses and minimize your capital consumption. It’s a reliable formula that can help you through the downturn and position you to seize the opportunities that are sure to come.

Mike Gorsage is the National Technology Practice Leader for Tatum LLC. Tatum is the nation’s largest executive services firm, providing financial and technology leadership to businesses of any size.

Why IT Projects Fail

Information Technology (IT) project success rates continue to be depressingly low. Experts estimate there is an overwhelming 66 percent failure rate across all IT projects. Insufficient deliverables, budget overruns and missed deadlines all make small and mid-size business owners or managers skeptical of undertaking any new IT project. But if you stand back and look at the root causes, you will see that the real issue often isn’t only the CIO (if the business even has one), the IT staff or even the technology being implemented. It’s the lack of a solid Enterprise Program Management Office (EPMO) approach to managing complex initiatives.

The current failure rate is easy to predict – with no “traffic cop” in place, an IT staff can quickly end up with too many projects (most not contributing to business goals) that overstretch the often limited IT resources. This results in missed budgets, late delivery and even implementations that don’t quite meet user specifications.

What is an EPMO?
The reality for a small business is that it is even more critical to avoid “spinning wheels” by working on the wrong projects or failing to achieve the projects goals. The EPMO oversees the flow of all projects across your business, setting priorities and allocating staff to ensure the
right projects are implemented with the resources necessary to succeed in order to solve the right business problems. In most cases, it also manages the implementation to ensure
quality and on-target/within-budget completion. The unfortunate reality is that very few companies, big or small, currently have an EPMO in place, and even fewer have adopted one successfully. For many small organizations, the challenge is a resource issue. But the
overarching principle of ensuring IT projects support and advance business strategy can be applied to any size business.

Creating an Effective EPMO
One way to create an EPMO is from internal resources. Look at your team to see if you have a strong leader who will be able to make the transition from his or her current role into managing a robust new function. The right person will have political maturity, experience acting in an EPMO role and no other duties. In a small business that lacks the resources to hire new
staff or dedicate existing staff to an EPMO, there is often only one large, strategic project at a time. In this situation, responsibility can be assigned on a rotating basis, so long as the people in rotation have the stature within the organization to be effective. At the end of the day, there
must be one person accountable for actually driving results for each project.

However, if your business is growing rapidly and the IT projects are essential to the business goals, it may be viable to hire experienced consultants to get the office underway and to provide an objective perspective that considers both functional and strategic issues. A consultant in this
role must help the wary top management team understand the value the organization will gain from the move to an EPMO.

In either case, the EPMO must clearly understand and mesh with organizational culture and business strategies to minimize risk and disruption to the operating structure.

Responsibilities of an EPMO
Most EPMOs are responsible for at least the three following areas:

1. IT Alignment and Project Prioritization
The EPMO acts as a counselor to the CIO, or IT manager, ensuring that all IT projects map to business strategy. At the same time, the EPMO must prioritize projects and resources to safeguard against an overstretched staff and unrealistic deadline expectations. The required
time commitment for each project must be weighed against the business value that will be delivered. A project involving massive person-hours needs special treatment and scheduling because of the potential to distract and detract from an organization’s mission.

2. Project Support
The EPMO should provide project management guidance, support and recommendations to managers and staff teams implementing IT projects. This includes methodologies that standardize the implementation process and provide true project management discipline. Even the brightest IT staffers will often fall short in this area because of lack of experience, which is what the EPMO brings to the table.

3. Training and Mentoring
The EPMO must work to develop expertise within the IT staff to continually improve project quality. This includes both professional development training and individual mentoring. A properly-built EPMO function can do a lot to reduce IT costs by streamlining project lifecycles and prioritizing critical projects to align IT with business strategies.

As noted previously, almost 66 percent of IT projects fail. An EPMO is not a magic wand that will make every IT project a success, but it will make sure your best and brightest IT resources are focused on the projects that really are the “must haves.”

Is a CIO a Luxury or a Necessity?

In a world where technology is king, can your organization do without a CIO? It’s a tough question that deserves careful consideration of the strategic value of technology in your business.

How many things can you name in your business or personal life that are not driven in some way by technology? These days, not many. Everything from your car, your healthcare, entertainment and communication -- they’re all technology-based.

In virtually every sector today, dependence on technology is growing. Just look at the recent flurry of national technology positions created by the Obama administration: a Cyber Czar, a National CIO, a Chief Innovation Officer, to name a few. All signs point to an elevation of the strategic value of IT and the need to clearly define the roles of your technology leaders.

CIO's as strategic partners

Does this trend mean you must have a CIO? It all depends on the value your company places on IT. Consider your website, for example. Very likely, it’s the front door to your business, and it’s a tool that didn’t exist only a few years ago. What value does it represent for your organization today? Chances are, it has changed the way you do business. Technology like this eliminates the boundaries of time and distance in interacting with clients and customers -- a significant contribution, to say the least.

For many businesses, technology is a strategic part of the delivery mechanism for client service, the development and delivery of products or meeting other requirements such as regulatory and compliance issues. When this is the case, having a CIO is not a luxury -- it is a necessity.

Today’s CIO's manage much more than systems and data. They must be as business-focused as they are technology-focused. In fact, the most effective CIOs bridge the gap between the two disciplines. Businesses of all sizes can benefit from their leadership, particularly when going through a growth phase or a transition, such as a move from legacy to enterprise systems. Even relatively small firms regularly need to address strategic issues and make sure current initiatives properly align technology to support the business. A CIO can help streamline your systems, avoid costly mistakes and integrate new technology into your business.

Technology: cost or asset?

If your IT leaders do not view technology as a business asset, then you lose sight of the value proposition that technology provides. Technology for technology’s sake does very little for your organization. You start getting highly fragmented from your technology, and your operations become more complex. By refocusing on strategic planning and integrating it into your business, you are better positioned for future growth and opportunities.

A common mistake firms often make is entrusting high-level technology decisions to a “default” CIO, possibly a lower level IT manager or director, who lacks the experience needed to effectively manage IT resources. These individuals tend to focus on interfaces, hardware and networks, rather than how these systems integrate with your overall strategy. This lack of a truly cohesive strategy can prevent an organization from recognizing the benefits, and in some cases new revenue streams, that a solid technology strategy can bring.

The outsourcing alternative

If you have determined that IT is not a strategic part of your business, you probably don’t need a CIO. You could consider outsourcing the majority of technology -- both your infrastructure and applications. But even in doing so, you cannot ignore the value of strategic thinking. You must still assign a senior level business executive to think about the technology implications of business initiatives that your company takes on, particularly as your company grows or needs to consolidate, re-tool, or reset costs.

Outsourcing may help you become more stable. A large commercial real estate firm recently hired an outside firm to investigate IT practices, revealing that a recent investment in server upgrades wasn’t being put to full use, weakening the flawed, outdated infrastructure. Simple help desk requests took weeks or months to rectify, causing technology deficiencies that harmed sales and prevented managers from growing the firm’s business units. The outsourced firm objectively recommended a new IT staff and a fully operational infrastructure. Within a month, the firm lowered technology costs and cut help desk responses from weeks to just hours or minutes. Once technology was aligned with the overall business strategy of the firm, the business stabilized, frustrations faded, and focus returned to clients.

When handled properly, outsourcing can help you achieve greater economies of scale within your budgets. In fact, if your budget cannot handle a full-time executive, you might even consider buying a portion of time from a consultant with multiple clients, giving you the high-level guidance you need without the heavy price tag.

There is also a downside to outsourcing. It may be difficult to decipher whether a company is advising you on what’s best for your business or what will give them the highest margins, causing a natural conflict of interest. Conducting thorough research on reputation in your industry and prior achievements, along with a healthy dose of skepticism, can help you identify a possible conflict.

Whether or not you outsource or bring on a CIO, consider how your IT efforts are positioning you for the future. Some businesses thrive without a fully functional CIO, while others seek outside guidance to develop systems that support business strategy. Whatever your choice may be, don’t relegate your infrastructure to another line item on the balance sheet. Take a look at your technology platform and make sure you have the resources in place to gain competitive advantage and prepare for what’s to come.

Five Mistakes CFOs Need to Avoid in a Volatile Economy

MISTAKE #1: THINKING THIS IS JUST A NORMAL DOWNTURN IN THE BUSINESS CYCLE.
It is not. With the credit markets virtually frozen, with no commercial paper market, and with the value of bank assets unknown we are in one of the most serious credit crises of our lifetime. Resolution of the credit shut-down certainly will not come from our elected leaders! This cycle
is going to take the collective brain power of the country’s financial and business leaders to solve. The Fed will be part of the solution, but it is going to take a long time for the consumer to get back into the market and begin spending again.

MISTAKE #2: NOT SEEKING OBJECTIVE ADVICE
Remember the first point: this is not a normal cycle; now is the time to get objective advice rather than assume past techniques will work when the rules of engagement have shifted. How long can you continue your current course with no external funding? If the time line is short – you need to take action now! The ability of businesses to borrow for needs as simple as working capital is severely restricted. If you are planning to fi nance your inventory for the Christmas season – you will need to consider an alternate plan immediately. Proactively brainstorm with
other business leaders and advisors with proven experience in tight situations, and be prepared to negotiate.

MISTAKE #3: OVERREACTING… OR UNDER-REACTING
Don’t rush into major changes without projecting the implication on your business model. Conversely, this is not a time to think that because business cycles always turn around, that you can sit back and wait for the rebound. Challenge assumptions, create scenarios and think through the consequences.

MISTAKE #4: POSTPONING “COLLECTING CASH”
With no cash moving in the credit market, the ability of customers to pay bills is decreasing. If it hasn’t already, at some point this problem will reach your customers. The most important commodity is cash, and now is the time when you should be making sure that all accounts receivable are collected in a timely manner. Once a customer gets behind, he will not be able to borrow money to catch up and you will effectively be providing goods and services for free.

MISTAKE #5: THINKING THAT YOUR STAFF IS NOT WATCHING YOUR EVERY MOVE
Your staff is looking for guidance from those they respect. The economic stress is heightened by the national stress of watching the increasingly negative performances on the national stage. Communicate with your organization and provide as much calming infl uence as possible through your words and actions. Constructive discussion will allay fears and help increase productivity. Don’t forget: the unknown creates stress and anxiety that leadership must attempt to minimize.

WHAT NEXT?
This is a time to demonstrate true leadership by learning from history and recognizing the need to adopt a new perspective. Tap into the intellectual capital of seasoned leaders to be sure you understand dynamics and focus on the most important priorities.

Seamless IT Integration for Mergers & Acquisitions

As they emerge from the recession, many companies are gun shy when it comes to major transactions. But overall, your goal should be identifying cost savings mergers and acquisitions are the lifeblood of growth. Merging IT functions quickly and smoothly requires careful planning
and integration.

Although the dust has not yet settled from the recession, companies are, at last, looking ahead. As they begin to position themselves for the recovery, the word “growth” is reappearing in their vocabularies. Despite ongoing economic worries and lagging consumer confidence, the hardiest companies are taking steps toward mergers and acquisitions as they plan for 2010. Still others are considering divesting non-essential assets.

All are positive signs that strategic thinking and intelligent risk taking are on the rise. But mergers, acquisitions and divestitures are not to be entered into lightly. A truly successful transaction requires careful analysis and planning, particularly in the integration of IT functions.

Making Your Assessment
Consider the intricacies of virtually any organization’s IT function. Now imagine merging it with the equally complex environment of a separate organization. Each has its own unique platforms, applications, hardware configurations and data centers. Companies that approach such an integration hastily are often unpleasantly surprised by the complexity of the acquired company’s IT environment or the cost it will add to the transaction.

That is why the first step in an effective IT integration should be due diligence – working with the team that will be merging with you to conduct a thorough technology assessment. You’ll need a complete inventory of all the technology components, including the number of data centers and where that data resides. A critical component is ensuring the compatibility of platforms and the migration and efficiencies. By conducting portfolio analysis and rationalization, you will see how the acquiring company’s platforms and applications mesh with the owning company.

Are there redundancies? Determine if and how they can be eliminated.

It may well be that the company you’re acquiring has better technology, and you’ll find yourself shutting down your own platforms or technologies instead. Your assessment must therefore be bi-directional in nature. But it must also be open-minded to determine which entity’s technology is the best fit for the long term operation of the company.

Avoiding Redundancies
After deciding which technology is best, it’s time to dive deeper by looking at critical data from a higher level architectural perspective. A bi-directional view can help you see how data is organized. This approach ensures that you retain critical pieces without keeping things that are redundant or unnecessary. It also provides a common architecture for deploying and enhancing the existing data. You can eventually turn that data into actionable information around areas like financial reporting, customer insight and supply chain or manufacturing processes.

Addressing The Human Element
The last area to focus is the organization structure – merging the acquired team into the existing IT department or function. Unless the acquired company will be a stand- alone entity, most organizations will have only one leader, so it’s important to rationalize and identify synergies among staff.

Estimate how many people you will need incrementally on your team by assessing both skills and workloads. Keep in mind, there will be a period of time where retaining the acquired team will be critical.

Consider tools like retention bonuses, and if the time comes, severance packages, and outplacement programs.

Planning for Separation
Now let’s flip the coin. Each time you enter a merger or acquisition scenarios, it is equally important to think about how you might unplug any operation from your existing technology platforms and send it out as an independent organization. While there are no set ways of doing that, every organization should consider what would be required to spin off an operation.

Remember, if you divest a company that is completely hobbled from an IT perspective, it will likely affect the company’s valuation. So unless the acquiring company already knows how they would integrate that business into their existing platforms, reviewing various options is a valuable exercise. Consider what infrastructure would be required, what type and number of applications would be divested from the parent company, along with necessary people, data, hardware, technology, and data centers.

Whether you are going through a merger, acquisition or divestiture, also remember that communication is critical at every stage – from day one up until every old system is shut down. In fact, it’s best to over-communicate with the people who you will be working with – they are likely the people you will need to retain for a period of time. From a people perspective, you want this transaction to be a positive one, avoiding confrontation or negative feelings.

In the coming months, companies will likely be wary of risk and how they use cash. That puts added pressure on those handling major transactions. But mergers and acquisitions will always be a critical step on the path toward growth.

To ensure your organization’s success, focus on efficiency and simplicity. Consolidate where you can. Reduce complexity as quickly as possible and keep your applications and hardware footprint as small as possible. When you do, you’ll enjoy a smoother transition and a stronger position from which you can begin reaching your goals.

Responsible Growth in an Uncertain Economy

Few in the business community were reluctant to bid farewell to 2009. Most companies have taken their hits from the recession and are glad to close the books on this difficult chapter in our history. As more positive indicators appear on the horizon many business leaders have begun to shift thinking away from the recession and towards planning for growth.

The initial stages of the recovery present many opportunities, particularly for organizations that are poised to take advantage of the good times, when they roll again. The companies that will succeed are those who come out of the starting gate strong – but not so fast and furious as to make hasty strategic decisions.

The key to success this year is responsible growth – balancing the need to invest in growth with financial caution. This critical balancing act puts serious pressure on the C-suite to set the stage properly in an environment with little margin for error.

Is your organization positioned to take advantage of emerging opportunities in these uncertain times? How will you grow with the recovery?

Responsible growth in today’s economic climate requires a thoughtful approach and a laser focus on three key areas of improvement: Learning to grow “lean”.

1. Learning to grow “lean”. Do you have flexibility to pursue opportunities without incurring permanent overhead? Investing too heavily too soon could accelerate risk, and an atmosphere of persistent risk doesn’t offer room for error.

2. Developing a capital strategy married to your growth strategy. In a capital-constrained marketplace, any discussion of growth must include a pragmatic approach to capital to fund each stage of growth.

3. Building organizational insight to increase responsiveness in uncertain times. One of the lessons of the recession for many companies was that all too often, visibility into the drivers of cash flow and profits is inadequate. Management teams are often “flying blind” regarding what actions to take in order to adjust to changing market conditions.


Growing "Lean"
Any seasoned leader can cite examples of growth through aggressive investment. Consider the “.com” boom of the late 1990s, in which money was freely invested and cash “burn rates” were accepted as an investment in potentially massive future profits. The private equity boom of the 2006-2008 period was similar in spirit, often investing staggering amounts of money in order to build market share, quickly achieve a financial goal and profitably exit the investment.

Those days are over. The rules have changed, possibly forever.

In response to market imperatives since late 2008, companies from the largest to the smallest scaled back across the board. Many made cuts at lightning speed in order to survive. A December 2009 research study conducted by CFO Research Services revealed that 79% of companies reduced their workforce in 2009, and most will not reverse that action in 2010. Companies also cut back on marketing and advertising and delayed investment opportunities. Nearly half of the companies surveyed believe these actions may reduce their future prospects and expose them to greater risk.

Now that the worst of the recession appears to be behind us, businesses must determine how to proceed with strategic growth initiatives with a leaner structure – without returning to former levels of overhead spending. So what are pragmatic steps to growing lean? Two of the keys are rethinking strategic resources and intelligently using strategic partnerships.

79% of companies reduced their workforce in 2009;
84% said they were not likely to reverse those cuts in 2010.

Flexible Strategic Resources
In the example of the “.com” era, companies took an idea and immediately hired people to build it, manage it, sell it and support it. This approach ensures focus and speed, but also ensures“cash burn.” Today’s business leaders identify ideas that need to be explored and validated with a sound business strategy prior to infusing capital.

Unfortunately, the people most qualified to accomplish the vetting of ideas and the building of business strategies to capitalize on opportunities are already drowning in demands of countless operational issues that must be addressed with reduced staffs.

Happily, the same recession that created the lean organization has created an emerging trend in the use of flexible strategic resources at the highest levels of an organization. The C-suite today can bring in a temporary team of resources with experience tailored to the activity at hand, be it considering an acquisition or preparing for an initial public offering or another critical strategic imperative.

Responsible growth requires a nimble strategy that addresses any potential source of capital, including internal, external and non-traditional sources to pursue organic growth or strategic acquisitions. Find that tipping point where systems and flexible staffing needs meet, without necessarily investing in headcount. That may mean bringing in the expertise you need to make the right strategic moves for your organization. Looking into 2010 and beyond, your C-suite may have little room for error, but by keeping focused on both stability and opportunity, your organization can regain its footing and advance to the next stage in your growth trajectory.

Flexible Leadership for Uncertain Times

Management guru and longtime GE CEO Jack Welch once said, “When the rate of changes outside the company exceeds the rate of change inside the company, the end is near.” This year this observation is truer than ever before.

At your organization’s birth, it probably had a more limited scope than it does today. Focusing on the service or product that buyers wanted was how the company became successful. As companies grow they spend an increasing amount of focus on building and improving infrastructure like IT, HR and other support services.

As it becomes more challenging to maintain high standards in all functions while still focusing on core competencies that drive growth, seeking outside help becomes an attractive option. So when should you outsource services? The answer is not black and white – it continues to evolve.

Today, it’s generally accepted that organizations use a mix of internal and external services, even at the highest levels. As the economy has created a sustained era of uncertainty, many companies have turned to a new approach to investing at the highest levels of the organization: flexible leadership capacity. Simply stated, flexible leadership is bringing in operating executives on an as-needed basis to take on targeted management initiatives without incurring permanent overhead.

In-sourcing is also a decision
As you look at your organization’s needs, remember the famous words of Jack Welch cited above: outsourcing offers a way to remain nimble in a high-risk, rapidly changing business environment. At the support service level, outsourcing is a way to minimize resources devoted to non-core activities. At higher levels, it can help you complete an important initiative that you would otherwise lack either the capacity or technical expertise to handle. It can also help you accelerate progress toward strategic goals.

When considering flexible leadership, you must retain ultimate responsibility for the initiatives by overseeing the service provider to ensure they are fulfilling the services contracted for and are helping you adapt those services to your changing needs. The executive still spends time on the initiative, but the time required is vastly reduced by having a seasoned resource to manage the daily minutia.

Remember, deciding to manage every aspect of the business with internal management is also a decision. Complete in-sourcing means you are deciding to incur top salary talent on a permanent basis with a defined capacity that can only be expanded with the risk of executive turnover. The implication is that you accept certain constraints on leadership capacity and the inability to dramatically accelerate progress because of those constraints.
Budgets remain tight and business conditions are still too uncertain to warrant rehiring.

Deploying flexible leadership
The economic roller-coaster is old news but budgets are still tight, and business conditions are still too uncertain to warrant rehiring. These now chronic conditions have left many companies with a talent void – especially in staff capable of managing strategic projects. The answer for these uncertain times is flexible management capacity from an outside provider. These specialized firms can deliver highly experienced operating executives on-demand to integrate immediately into your management team.

Flexible leadership sits outside the domain of traditional outsourcing, addressing core initiatives and programs. It deploys extremely experienced executives whose level of expertise enables them to hold interim roles as “seated” executives for companies experiencing executive turnover. This level of skill enables a resource, or a team, to quickly understand and manage a critical initiative for a C-level executive who has too many priorities due to reduced internal staffing.

Competitive pressures haven’t reduced simply because our organizations became leaner; executives are under pressure to accomplish more objectives, priorities and initiatives than they can realistically deliver. At the same time, they cannot risk failure or a cost over-run and must make time to work with the Board, CEO and other top executives on mission-critical issues.

Getting started
When looking for an interim executive, look for operating experience – a “been there; done that,” capability. They should have previously been in the same role (CFO, CIO, etc.) as the executive being served so they will be able to offer an objective viewpoint on what resources will be needed to meet your goals. This level of experience should enable the flex leader to quickly see the “big picture” but execute at a highly detailed level.

Like a baseball “utility infielder” who can play a number of different positions, a “flex” leadership provider can take on an entire set of projects, managing inter-dependencies between them to efficiently deploy resources. The interim executive specifies what they need from your organization, making assumptions and inter-dependencies explicit. This makes it easier for them to achieve results with minimal demands on management’s time. This approach is an extension of the Program Management Organization concept, a mechanism for overseeing IT projects that has become familiar in recent years.

Flexible leadership deploys extremely experienced executives whose level of expertise enables them to quickly see the “big picture” but execute at a highly detailed level.

Among today’s forward-looking organizations, the model of on-demand, high velocity, flexible management capacity is an ever more popular option. These early adopters have achieved some impressive successes with this approach. “Fast follower” companies are starting to emulate them. This new model may well become the next “big idea” for results-oriented companies seeking to minimize fixed costs and maximize flexibility in an increasingly complex business environment.

Perhaps the lawyers are smarter than the rest of us
Flexible leadership is not a new idea in one key area of corporate life: legal. Legal is often one of the smallest departments in an organization because they don’t add internal staff to handle specialties like intellectual property and litigation. The person who manages daily operations also manages the specialist who goes to court. This is more effective management than assuming the role of Superman and personally tackling every area of law, no matter how time-consuming or technically demanding.

Mergers & Acquisitions: Special Report: Tips for the New Acquirer

The signs of recovery are there: factories humming, stocks rising and a third straight quarter of expanding GDP. After a year of near record lows in M&A activity, conditions are ripe for attracting strategic buyers. Those buyers have likely been sitting on cash, and sellers are extremely motivated so many deals are closing quickly. And with a backlog of transactions, M&A activity is picking up dramatically. In fact, Robert W. Baird & Co., reported an impressive 93% increase in U.S. middle market M&A transactions in March – the largest monthly deal count since June of 2000.

Clearly, it is a buyer’s market. Although opportunities are ripe and liquidity is loosening, it’s important not to rush into a merger or acquisition, particularly for first time acquirers. There are a variety of risks and rewards associated with this type of growth, and a successful transaction requires a solid understanding of each.

"An analysis run of 24,000 acquisitions from 1996 to 2006 found the deals done during or just after a recession returned three times the return of those done at other points in the economic cycle." - “Winning in Turbulence,” Darrell Rigby

HOW HUNGRY ARE YOU?
One of the first steps is evaluating both your appetite and your readiness for growth. Before entering any transaction, you must determine if you have the financial wherewithal by performing a thorough financial health check. Since the recession, most organizations have shifted their focus away from profit and loss statements and towards liquidity. Do you have enough liquidity to carry off a transaction successfully?

Once you determine if you have the liquidity to make and sustain an investment, then ask if your capital structure can bear the added strain. If not, assess a range of debt and equity capital funding strategies that will give you the balance sheet you need to be successful in the M&A game. Also ensure you have a team in place with the experience to assess a transaction, complete an investment, forecast its performance and tolerate sensitivities around the results.

Absolutely key is the ability to envision and solve the challenges (financial and organizational) you will face in integrating the transaction and creating a smoothly functioning new company. If not, consider bringing in flexible executive leadership to help you through. In all, you must be dead-sure that the projected benefits, synergies and savings from the transaction can be realized in fact.

BASICS
The way you structure the deal ultimately has a great influence on your ability to control and maintain risk, which is why integration planning should be part of the due diligence phase. During the deal stage it is imperative you verify how you will recognize the strategic value post-purchase. For starters, understand the business you are buying.

Don’t let wild-eyed projections drive your synergies. Review the acquiree’s strategy and operations to validate assumptions. Meticulously plan for how you would integrate operations. Which IT applications would you keep? How will you merge the two companies’ information? Test assumptions about how the combined business will operate, along with its projected sales, cash flows and margins.

Ultimately, strategy drives due diligence and integration. The planning for due diligence and integration need to be an integral part of developing the strategy, and the highest value elements of due diligence are those that test the key drivers of the strategy. For example, if you’re buying technology and don’t care too much about existing costs or infrastructure, the strategy dictates that you spend more time testing the technology and less time on the other items.

As you structure the deal, avoid scenarios that allow value to leak from your transaction. For example, leaks can occur when it takes too long to define your strategy, and you miss an opportunity; or when integration becomes drawn out or doesn’t achieve your objectives. Your value will also fall short if you fail to operationalize intended benefits, as when organizations continue operating separately or when morale drops or confusion arises about roles and productivity.

Also plan generously for transition and closing costs – making sure the deal is financially viable pre-purchase. As a rule of thumb: integration will cost at least 10% of the acquisition price. If you cannot absorb a wide swath of sensitivities around forecasted performance – if it all must go right from day one - it won’t succeed. Pre-close planning should include performance tracking measures that post-close will help you monitor the transaction’s success.

AN ACQUISITION PRIMER
After verifying your readiness for an acquisition, there are key steps to follow to realize value and mitigate risks.

DEFINE YOUR GOALS & SUCCESS FACTORS
The basis of your M&A strategy should stem from an analysis of your current competitive position and your future objectives. That means understanding what you’re doing with your business, where you want to go and what you value most. Make sure you understand what it is you are trying to gain through this transaction. Is your goal to increase market share? Do you want to enter markets contiguous to the ones you already play in? To acquire new products, processes and intellectual capital? To increase your economies of scale so that you can be the low cost company in your market? Perhaps you are trying to eliminate a competitor, expand a product line or achieve a vertical integration.

Regardless of your goals, focus on them relentlessly throughout the process and align your decisions with them. The acquisition should be a way to bridge the gap between your company’s current state and the future state you desire for it. These factors become the items to test for in screening prospective targets and then performing due diligence.

There are a number of important factors to consider as you screen targets for acquisition. One is integration feasibility. What are the organizational and operational challenges of integrating them? For example, which of the key people would you want to keep and would they stay? Another integral step in evaluating targets is developing revenue and cost models for the combined organization. Define key success factors to realize value along with “threshold” assumptions and a business forecast to understand what you must achieve for the acquisition to be successful.

As you search for acquisition candidates, avoid becoming too fixed on a particular one – search for alternatives and understand the pros and cons of each. Though a target may seem to be a perfect fit with just the right management and expertise, there may well be drawbacks. For example, it may require that you seek additional capital, either through debt or equity. Its financial statements may be “dressed up” or it may be overly reliant on a few key people. Hidden issues like a culture clash can also sink any transaction.

PLAN AND EXECUTE DUE DILIGENCE
Due diligence is more than just “audit lite” or an exercise of checking arithmetic. When done properly, due diligence should test the strategic fit of the acquisition.

Start by considering your goals for this acquisition and the drivers of the valuation. Knowing what you need to preserve will dictate what you need to test for in due diligence. Your overriding goal is to verify that the value you expect is actually there. It encompasses financial, operational, legal, technology and people due diligence. There is also customer due diligence – understanding what cements those relationships and how to sustain them.

INTEGRATION
Remember – value is not made when you sign the deal; it is made during integration. More deals fail due to poor integration than any other factor, so begin planning as soon as the target is identified. Develop your plans according to function and accountability and concentrate on those issues raised during due diligence that threaten your ability to realize value.

THE FOUR Cs:
• Compensate – If you want existing management to stay, make their targets achievable and compensate appropriately.
• Communicate – People on both sides of the transaction should be completely aware of what’s going on to help quell rumors and paranoia. People will respond to uncertainty by assuming the worst.
• Care – How you react to challenges can make all of the difference. Even small inconveniences can generate ill feelings. Respond quickly and completely.
• Cull – If you must say goodbye to any members of management, make your decisions quickly, but carefully.

Major transitions require strong leadership; it sets the tone for savings and efficiencies. That is why it is critical to create a transition steering committee and a functional team. These groups should engage leaders from both sides – those with a stake in the acquisition. Members of the integration team should understand their role in realizing value assumptions. They should set their expectations high and work from a well-defined work plan, revisiting it as conditions on the ground change. The integration team must include line managers who are close to the action and can see problems brewing.

PERFORM THE INTEGRATION
Now is the time to merge operations, processes and cultures to realize your objectives. As you integrate, focus on re-validating all of the plans you have developed since the deal was first considered. Remember, this is an iterative process – evaluate what drives value, what is working and what is not. And throughout, remember speed is critical at this stage – delay drives failure and may cost you key people. This is the time to sweat the small stuff, like being sure that acquired employees know how to enter expense reports and check their benefits.

Document, document, document – tracking performance at every stage. Before the deal ever closes, determine key metrics and develop a reporting process around them. First, thoroughly document your expectations, potential savings, and your plan. If you neglect this step, your savings are likely to slip away. Report early and often - when public companies merge, Wall Street analysts closely track their success in achieving the savings they claimed for the deal. Private companies should do no less.

Establish integration milestones that are on equal footing with performance milestones. They should also measure and drive value creation. If you expect revenue growth in the first year, you must expect to hit each integration milestone. Tie incentive plans and earn outs to the completion of milestones. Also execute essential day one activities: control, communications and governance. Drive the integration deep into the organization, holding managers responsible for successful execution of each. Throughout, focus on the future – not how things “used to be done.”

THE TIME TO GROW... IS NOW
Growth during - or in advance of - a recovery can be extremely successful. But transacting in this economy is unlike any time in history – the rules have changed. In order to succeed, know your organization well: your identity, your resources and your goals. Plan carefully and thoroughly, and before you take action, evaluate every alternative. Be aggressive in pursuing and negotiating but conservative in forecasting and integrating. Once you understand that every transaction impacts the economic recovery in a positive way, you can overcome the risks and reap the rewards.

Remember: many mergers don’t succeed. But successful companies have often executed many mergers successfully. In today’s “buyer’s market” undertaking an acquisition with the right combination of strategy, planning and sheer determination can help you accelerate your company’s growth trajectory and achieve your strategic vision.

Financial Reform: SEC Regulation and the Implications for Private Equity Groups

The implications of the newly signed Financial Reform legislation are generating serious conversations among Private Equity Groups. After much debate, the U.S. House and Senate reached a compromise which now requires Private Equity Groups with $150 million or more in assets to register with the Securities and Exchange Commission. The passage of this legislation means new reporting and compliance obligations for Private Equity Groups and their portfolio companies.

With the memory of Sarbanes Oxley compliance still fresh in most of our memories, the prospect of additional compliance weighs heavily. Through its goal of improving financial accuracy and corporate responsibility, SOX significantly redefined corporate accounting and reporting. Compliance with SOX has also proved costly and onerous for many organizations. Will the implications of the new financial reform legislation prove just as burdensome? The answer remains to be seen.

Private equity groups must now establish formal compliance policies and procedures under the 2,300 page Dodd-Frank Bill (just slightly shorter than the recently passed Healthcare Reform Bill). The scope of which includes pricing and valuation, conflict of interest, securities trading policies and more. Private Equity Groups will also be subject to regular SEC inspections. Meeting these requirements will be challenging, especially in light of the downsizing that many Private Equity Groups experienced over the past several years. Although firms have until July 2011 to comply, now is the time to familiarize yourself with the new regulations and begin your preparations.

New Requirements
What are the implications for your Private Equity Group? In order to be compliant, there are some key requirements you must meet:

• Register a Form ADV with the SEC, and update annually
• Establish formal compliance policies and procedures
• Hire or appoint a chief compliance officer
• Disclose information, including agreements made with investors; also provide detailed records to the SEC upon request
• Maintain client funds with a “qualified custodian” who creates quarterly client account statements and meets surprise examination requirements to verify client securities and funds
• Report on each fund you advise, disclosing information like assets under management, valuations, use of leverage, credit risk, trading and investment practices
• Prepare for regular inspections by the SEC

How to Proceed

1. Understand the legislation, its requirements and implications for you
2. Assess your options for compliance, identifying costs/benefits/risks of alternative approaches
3. Utilize in-house resources for planning and implementation
4. Outsource the compliance function
5. Use a combination of outside experts with in-house resources to plan for and implement the regulatory response
6. Select option and develop an implementation plan3
7. Begin phase one of the implementation

Tatum can help you understand and comply with this legislation. Our “hands-on” approach leverages the knowledge of our compliance and financial experts. Contact us to schedule a confidential briefing or learn more.