Setting out detailed, measurable expectations can help guide the relationship. “You don’t want to micromanage what you’ve outsourced, so you need to have the right reference points to measure them against,” says ETS’s Gatti. He recommends asking the vendor for an easy-to-read dashboard showing early warning signs for problems, along with more-detailed weekly or monthly reports.
Finally, realize that managing vendors now carries the additional burden of being responsible, at least to a degree, for the quality of their internal controls. “It’s bad enough trying to monitor your own internal controls,” Stephen Bainbridge, a law professor at the University of California, said at a recent symposium. But overseeing another company is “more difficult and more expensive.”
Develop X-ray Vision
The CFO is in a unique position to have a window into every aspect of a company, but that’s no substitute for real vision.
“We participate in or lead some of the most complex decisions an enterprise can make, so one of our jobs is to see the consequences of all those paths that others can’t see,” says The Hartford’s Johnson. And that, says Robert Mittelstaedt, dean of Arizona State University’s business school and board member at two public companies, requires being “analytic enough to constantly think about ‘what-if’ scenarios.” After all, CFOs “are better versed than anyone about the financial implications of any of those risks,” he says.
Many CFOs are analytic by nature, of course, but Johnson says that what really helps hone a CFO’s powers of perception is trouble, and the more the better. “Until things go very wrong in ways that were completely unanticipated, you don’t develop those skills,” he says. And he should know. Having helped clean up fraud at Cendant and worked with companies in bankruptcy as an investment banker, Johnson has seen his fair share of crises. He actually reads forensic audit reports of disasters at other companies to help keep him on his toes.
The last thing any company needs is a lawsuit. But in Corporate America, they come with the territory. Patent infringement, employee discrimination, workers’ compensation, and, perhaps scariest of all, securities class-action cases are all a fact of life.
The real issue is risk avoidance, and there are some simple safeguards, says Cynthia Jamison, national director of CFO Services for Tatum LLC. For example, “Have routine legal forms that are used for ‘usual’ business [that is, customer contracts, NDAs, option agreements, and so on]. Then, whenever something is out of the ordinary, or someone requests a substantial change to normal policy, call a lawyer.”
Bill Stephan, the former CFO of Harborside Healthcare, added another layer of protection. “We had a policy that no field personnel could enter into contracts.” Instead, the company, an 80-location nursing-home operator, mandated that only the CFO and the in-house counsel were allowed to sign. But Stephan avoided bottlenecks by pledging to turn around any documents very quickly — often in the same day.