P2P Special Focus - Q&A: Jeff Jacobson, Pitney Bowes
Speaking ahead of his presentation to the 13th Annual Shared Services Week in Orlando, Jeff Jacobson - VP Transaction Finance, Pitney Bowes - speaks with the Shared Services & Outsourcing Network about how the financial crisis and global economic downturn have affected working capital management practices.
SSON: What would you say have been the major consequences for working capital management of the financial crisis and the recession that we’re now in?
Jeff Jacobson: I think it’s had a lot of positive effects on a lot of corporate cultures. What we see is, the prior focus was mostly on income statements, expenses, revenue, profit. And it still has to be the major focus, but with the economic conditions out there in the world today there’s been a lot more focus on working capital – and people didn’t really understand what working capital meant, so as we talk about accounts receivable, inventory, accounts payable, you’ve now got a higher level of interest because investors are really focused on how much cash you have, how much access do you have to credit markets, how are you paying your bills, how are you collecting your cash – and what liquidity factors do you have, to continue to go on with business?
It’s really changing the internal focus of organizations to look at: cash is important. So is income. The investor community’s already been there, and it’s kind of bringing the two organizations together.
SSON: Is there a danger at present that despite the renewed focus on working capital, firms might be unwilling or unable to look beyond the bottom line by, for example, make critical investments in working capital processes?
JJ: That is absolutely a risk out there. As people are really focusing on "what’s our rate of return of doing something – or not doing something?" whereas before it was a little more freeflow – I mean, we absolutely had processes to look at rates of return, but if there were two projects that had virtually the same rate of return you’d probably do both. In today’s environment you’re going to look at those, from a tangible view, a long-term growth view, whether they help with innovation – really looking at what makes the most amount of sense.
So it’s really focusing organizations to have a higher level of diligence around how they spend their money. And they’re really saying "ok: how do I collect faster from my customers? How do I really manage that? Do I have too much inventory? Because I need that money to make critical investment decisions." So it absolutely puts – I think danger is a very strong word, but it absolutely puts another level of diligence on top of things that says "I only have so much discretionary funds to spend on" - let’s say – "R&D or investments, or training, and I’m going to make the best decisions for the organization."
SSON: What quick wins can be put in place to improve working capital practices and maximize the amount of cash that can be recovered from processes?
JJ: One of the things that we’ve focused on is that we look at the components – and I’ll start with payables. We really focused on what we call terms management: how fast we pay our vendors. And in looking at that, we’ve said "ok, the faster we pay our vendors, that means I have to go out into the external markets and borrow money." So that’s not a new concept, but what is, is "ok, what discounts can I take? How am I going to move terms around so I can maximise my working capital and my cash?"
The other piece that we’ve done on quick wins and long-term wins is really working with our customers, saying "we want to sell you things, we want to collect as fast as possible, but where do you sit in the economic food chain? Do you have access to credit markets or not? And how can I help you there?" We have different products that are in the financing arena to help companies, so we’ve really looked at it from both sides, really taking a customer-value-centric standpoint, saying that we want to help them be successful so that they continue to use and buy our products.
SSON: How can working capital management be improved by inclusion in the shared services model and what are the key considerations for companies looking to leverage shared services in this area?
JJ: Wonderful question. What the value proposition around shared services is, is commonality, standardization and of course doing it at a lower cost – but let me just spend a minute talking about standardization. In a lot of organizations you have businesses who have their own customer basis who sit in multiple towers. You could have a vendor or a customer that could be the same with different terms on both an accounts receivable basis and an accounts payable basis, and you’re really not maximizing your opportunities because you’re looking at everything as distinct within a different line.
Shared services comes in and says "I serve all those customers – both internal and external – and I can put things together, I can make a faster model to, let’s say, pay our vendors" – which isn’t a core competency of business, but it is a core competency of shared services. And in that model they say "ok, I also need to be the lowest-cost provider – how do I look at that? What opportunities are there out there to get there?" And what that’ll do is, free up expenses, leave more cash in the business. "How do I want to target my customers for billing? How do I want to target them for cash applications?"
And it’s really looking at your customer base uniformly, not "in Business A we do it like that, in Business B we do it differently from Business C" where you’ve got three processes that all may be good but you’re really not maximizing the value proposition. In looking at shared services at the end of the day we look at that because it produces more income, it produces more cash and working capital.
SSON: And finally, Jeff, what have been the consequences of globalization for working capital and how can organizations minimize the negative effects thereof?
JJ: This has been one of the biggest challenges of, I’d say, the last 18 months – because before when the economy took a turn either up or down it was very regional. It wasn’t global. Now that we’re seeing much globalization, where if something happens in one part of the world it absolutely affects what happens in another part of the world, the continued value chain goes back to like whether you look at shared services and look at things from a global point of view, saying "ok, what I do over here from Company A really isn’t different from what I do over here from Company B, and how do I get the best leverage points of that, and how do I maximize cash across the globe?"
At the end of the day whether I borrow on Company A, on Company B, whether I borrow in total, that volume make-up is going to give me a better leverage point with my lenders. So by putting that all together, showing a larger face to the external public, really allows you to get better volume discounting, better collections, better management of customers; so globalization is the path forward of growth, and managing that, and managing your working capital, will allow organizations to be successful moving forward.
The views expressed herein are the personal opinions of Jeff Jacobson and do NOT necessarily represent the official policy or position of Pitney Bowes.