The Big Squeeze

With debt and equity markets closing for business, it's now time for CFOs to look closer to home for capital.

It’s also noteworthy that although 2002 was a tough year for the plastics industry, characterized by high volatility in demand, raw material costs, and sales prices, Borealis increased operating profit to €85 million from €54 million in 2001. Strong cash flow improvements trimmed the firm’s net debt by €297 million to just over €1 billion. Combined with low capital expenditure, that allowed the company to reduce its gearing to 79 percent from 102 percent at end of 2001.

Loud and Clear

The trickiest challenge of any working capital crackdown, experts say, is engaging not only finance but also other parts of a firm. “The problem with working capital management is that it’s fairly fragmented, in terms of responsibility across the organization,” observes David Knight, a treasury consulting partner at PricewaterhouseCoopers in London. “Half the battle is getting your arms around the problem.”

Over at Siemens Mobile, Kaeser came up with a nifty battle plan. To whip up enthusiasm for the Cash Plus program, he launched an internal competition that mimics European football’s Champions’ League. In June 2001, he divided the top 30 countries by revenue in the Siemens Mobile network into two leagues of 15 “teams” — a Champions’ League and a Premier League. Every three months, Kaeser awards points to each team based on the previous quarter’s performance — revenue growth gets one point, profitability gets two points, and asset reduction and cash generation get three points. The league tables are published every quarter in the internal newsletter, with a final, year-end table based on the sum of quarterly league positions. And just like in real football, the league champions are presented with trophies — an Economic Excellence Award cast in perspex — while the bottom two teams of the Champions’ League and the top two of the Premier League swap places. “You wouldn’t believe how competitive people get,” chuckles Kaeser. “It’s amazing, the momentum and the tension it creates.”

And like Watson at Borealis, Kaeser links Cash Plus targets to the corporate incentive system. Subject to particular functional and regional conditions, employees can take home a bonus of up to 25 percent of their base annual salary — and that applies not only to finance staff but also to logistics, manufacturing, and sales. “You have to make sure that everyone understands that cash and asset management are not just a back-office thing,” he says. “You need to create a scenario where there’s something in it for everyone, from top executives to the person in the lobby.”

Meanwhile, many of Kaeser’s methods have been adopted at the group level. Last summer CEO Heinrich von Pierer announced plans for the entire company to increase its focus on cash flow, buying into many of the features of the Cash Plus program. “In these difficult times, cash is king,” as von Pierer put it when speaking to journalists in a July conference call.

Where Now?

But the spigots of working capital management can only be tightened so far. For many CFOs who have successfully released trapped capital, the question is, where now?

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