Larry Carter won’t stop to declare victory. Sometime in the past year, Cisco Systems Inc.’s finance organization–arguably the most efficient in the world–achieved its much- touted aim of a “virtual close.” On any given workday, the San Jose, California-based Internet networking company can now produce consolidated financial data and balance sheets by about 2 p.m. It has been two years since it has had any adjusted entries close the following day.
Cisco’s senior vice president and CFO can’t pinpoint exactly when the virtual close crossed over from goal to reality. “This is an ongoing process, where you are always making improvements,” says Carter–and a process that is far from finished. “There are so many other aspects besides just getting the monthly books done. I don’t think you’ve seen anything yet,” he continues, seeming almost to play down one of the proudest accomplishments of his finance department.
Indeed, he considers the “close” part of the phrase something of a misnomer; the process is actually most valuable to Cisco for the way it opens a world of real-time company information for use throughout the workforce. The same systems that feed the ledger also provide Cisco executives with the data they need to react to lightning-fast business changes in the Internet world. That means the totals on bookings, revenue, discounts, margins, and order status are available on a daily basis. “Even when I get the [close] numbers, I already know what the answer is because we have been monitoring it all along,” the CFO notes. And that makes Carter a more valuable source outside the company, as well.
“To me, as an analyst, Larry’s ability to drill down and see the productivity of the week by product, by region, or by account is actually more valuable than the virtual close,” says Martin Pyykkonen, an analyst with CIBC World Markets. “It gives me confidence in Cisco’s ability to actively manage the product and sales pipeline–almost in real time.” And the abundance of data has helped Cisco achieve other breakthroughs in recent months, including a nearly 50 percent reduction in the time it takes to collect past-due invoice payments, to just over 30 days.
That range of accomplishments earned the 57-year- old Carter the 2000 CFO Excellence Award for Implementing Best Practices in Finance, making him the first two-time winner in the category.
A Virtual Revelation
The idea of a virtual close was not fully formed when Carter, a 19-year veteran of Motorola Inc., joined Cisco in 1995. Instead, he wanted to reduce Cisco’s 14-day close to 1 day–something Motorola had achieved–while cutting costs in half.
Carter could see that his new employer was facing massive growth, which could be very hard to handle with such slow financial systems in place. “I was concerned about the timeliness and integrity of our overall financial information,” he recalls. “If you have a 14- day close at a company like Cisco–which even five years ago had the opportunity to grow pretty rapidly–you can spin out of control.”
He was certainly right about the growth. The company has experienced a 56 percent annual compounded climb in revenues in the past five years, during which time it acquired 68 companies. But Carter takes pride in having prepared for a range of other possible problems that might result from that growth. And he credits his preparedness in part to his experience with Motorola’s Six Sigma quality improvement program, which that company applied not only to manufacturing, but also to each functional group in the company.
“The close process in a finance group is very akin to manufacturing,” he says. “Anyone in manufacturing will tell you if you can reduce the cycle time to manufacture a product, good things happen. Costs go down, inventory goes down, productivity improves, and quality goes up.”
With this view in mind, Carter set to work reengineering many of the financial processes at Cisco and compressing their cycle times. Wherever possible, he used the Web to automate transactions, pushing the finance organization toward that one- day close.
Then, in 1997, Carter had a revelation. “Because of the nature of the Web, transactions were being downloaded to our ledger virtually every day,” he recalls. “Suddenly, it dawned on me that by having this information, selecting the right metrics, and making sure they were in the management reporting system, we could change the way we ran the company.”
With up-to-the-minute information available to executives worldwide, there is little danger of a Cisco spinout these days. But Carter is also careful to avoid information overload. “We try to be very selective and precise on the metrics that we need to run the company,” he says. That means that data on market share, for example, is pulled only once a quarter, while revenues and margins are available daily. “Could I get EPS every day?” he asks. “Sure. But would it be useful? Probably not.”
This past year, Carter extended many of the applications used by senior management to other managers throughout the company. The status of orders, for example, is available hourly to the company’s far-flung sales force. “I want our sales teams and managers around the world to know where they are at any point in time,” says Carter. That allows for speedy reaction to market changes, whether caused by a single customer or an entire continent. “If we have one region that is slowing down,” he says, “we could start to increase resources somewhere else to pick up the difference.”
If anything, Cisco’s back office is even more automated. More than 85 percent of orders arrive via the Internet, and half of those are never touched by a Cisco employee. Rather, they are automatically farmed out to subcontractors, who ship finished products directly to customers. “The only thing I have to do is collect the money,” says Carter. Not for long, though. A new initiative would also automate invoice and collections using electronic data interchange.
Even without that system, Carter’s team has reduced its days sales outstanding (DSO) average from 60 days in late 1998 to 32 days by year-end 1999, nearly a 50 percent reduction. While the number has recently crept up to 36 days, is still well below Carter’s goal. “Anything below 50 days is pretty good,” he says. “Companies with very high DSOs usually are not linear.”
Maintaining a linear revenue profile is a top priority for Carter. Cisco’s record of meeting or exceeding Wall Street’s expectations for 40 straight quarters has caused some analysts to grumble about managed earnings. “It’s about managing your business, not earnings,” responds Carter. “If you’re nonlinear, you’ll have excess capacity, people, and inventory, and at the end of the day you will probably miss on Wall Street.”
Carter also keeps a tight rein on expenses. Head count–one clear measure of Cisco’s growth– represents half of Cisco’s cost structure. Even though the company plans to hire 4,500 people worldwide this quarter, “I still approve every requisition in the company for head count,” he says.
Perhaps an even better indicator of Cisco’s best practices, however, is the time Carter spends talking with customers–primarily CEOs and CFOs–often discussing the virtual close and other finance accomplishments. He calculates that 30 to 40 percent of his time is spent in such conversations. “In the last six months,” he says, “I have personally talked to 400-plus CFOs or finance directors around the world.”
Of course, there’s a self- serving element to this, because of the company’s business line. “Cisco would love to have everybody do a virtual close, because they would buy more Cisco equipment,” remarks analyst Pyykkonen. But it will be a while before anyone else catches up to Cisco’s current real-time finance capability.
“It is not just a matter of putting in a lot of computing power,” the analyst says. “You need a lot of operational know-how to work with the information.”