Bruce Felt, SuccessFactors – A CFO's perspective on controlling workforce costs

Steve

Hi, this is Steve Hunt with People Performance Radio. This week we interviewed Bruce Felt, who’s the CFO here at SuccessFactors, about managing workforce costs, obviously in the current economic climate, Bruce provides a lot of great insight and ideas about how to do it effectively, and really goes through the whole process that a CFO goes through, or at least should go through, in terms of workforce costs.

Now, if you find this podcast interesting, I’d really encourage you to go to http://www.successfactors.com/podcast/, which is our URL, and there are actually several other podcasts on similar themes in terms of workforce costs as it’s been such a big issue, there’s one by Bob Phillips, for example, where he talks about managing major headcount reductions. You can also subscribe via iTunes to the podcasts, if you just go to iTunes and search on People Performance.

Great interview with Bruce Felt today, lot of really good information and just encouraging, if you find this interesting, there’s a lot more podcasts that we’ve done, I think we’ve up to almost over 50 with different thought leaders on topics such as this, as well as a wide variety of others. So, let’s listen to Bruce Felt here on People Performance Radio.

Hi, this is Steve Hunt with People Performance Radio, and this week we’re talking with Bruce Felt, who’s the CFO of SuccessFactors, and I’m going to be talking with Bruce about some of the things that he’s done from a CFO perspective to maximize workforce productivity and control workforce costs in the current economic climate.

Bruce, thank you so much for appearing on People Performance Radio.

Bruce

Well, thank you for having me.

Steve

So, we were talking a little bit before the podcast about this issue of, from a CFO perspective, how to control costs, and one of the things that I guess to start out with is, assuming that a company’s not over-spending on its workforce, at what point does a CFO decide that it needs to start really thinking about how to reduce workforce costs? – what are the triggers that say, it’s not business as usual any more, we need to re-think how we’re spending on our workforce?

Bruce

Well I think what we’ll call the first warning sign is certainly what is going on in the world around us. The reason this is important is that every company is impacted by the macro environment, and some would argue that that’s the most important determinant of how a company is going to perform.

Given that, the second is to determine the risk and magnitude of the macro environment’s impact on the business. The first sign of this is what the company will see as the interaction between the company and its customers. What you have to ask the company is, “Are you seeing any of the following: are the prospects slowing their engagement with us, are budgets seen to be frozen or cut, do you see that additional signatories are needed on deals, or frankly if you just actually hear comments about the macro environment from your customers or prospects, that means you’re probably going to feel an impact at some point, so if the company finds itself facing these issues, then it certainly needs to revisit or revise its forecast in all its forecasting areas.

Then a prudent action to take for planning is simply to take one of the most conservative top line scenarios and then adjust the spending to one of the more conservative scenarios. This is the most prudent, and what I’d also say pro-active action that a company can take, and operationally it doesn’t mean that the company cannot seek higher performance in a conservative scenario, the point is that it’s prudent to base spending off a conservative scenario, but to plan obviously to out-perform that base case, so if out-performance materializes, the company is in good shape, but if it hits its conservative plan, then its earning has been protected.

So I would say that’s, in summary, it’s just when it would be triggered, what the signs are, and then what the first action is that a company should take.

Steve

I think that’s interesting, I think how you’ve proved the point that you’re really not looking initially internally to the company at the workforce, you’re looking at the things that the workforce does, the market that it serves. So when you look at that market, and you think, “Wow, the weather’s changing, things are going in a different direction”, and suddenly realize we need to take some significant costs, and I think that has to be a big conversation in the C-suite when people say, “I think we really need to rethink our workforce costs”. Can you talk a little bit about how that conversation comes of place, is it elevated in the organization, the discussion about touching the workforce, which I think has to be a sensitive topic in any organization?

Bruce

Yes, it’s very sensitive, and really what drives it is just the overall aggregate financial performance of the organization, and by that what I mean is most companies have earnings or cash targets that the company is striving to hit, and often these targets are public, or the companies provide a guidance, so to speak, to public companies to Wall Street, even the private companies to the board, and the major investor. And so it really starts with the top down target setting approach, so once the company agrees on what that is, and what top line they can count on, then they can determine what needs to happen to the cost structure to make it happen, so again very macro-oriented. Then, once it’s determined that we understand what’s going on in the top line and where we need to, where costs need to be, for purposes of hitting these cash or earnings targets.

Then the company just has to ask, what do you do about it? – and, as you might imagine, the first area to look at, and what we recommend, or what I recommend, is you really look at discretionary spending first, and for that what’s important is to be able to review all the costs, to make sure that anything that does not provide even an immediate or high ROI, be taken down or out completely, and as somebody’s going through that process, no costs should really go unreviewed, and every cost needs to be considered.

And then after that is done, then the company really needs to focus on what it does with its headcount, and obviously we’d like to really manage out as much discretionary spend first to have the lowest impact on the workforce, but, and as we’re finding in this environment, it’s impossible to avoid looking at your personnel costs.

So the first thing to look at then is just focus on taking out the bottom performers, the bottom performers can usually be adjusted and I would say without, not only without an adverse effect on the business, often there happens to be a net improvement in the overall company performance when that happens, and the reason that is the case is, the bottom performers, I mean the lowest, and most people would say, the lowest 10%, something in that range, is they just tend to have a negative impact on performance of the company, either on quality or in quantity of work, or maybe just the way they go about work, so it could be different, the levels at what somebody, where there might be an impact, obviously is different for every company. So what we, what you’ll usually find out that companies tend to just, are able to make those adjustments, again without much impact in the overall operations of the business.

Now, what we’ve seen in this environment is that has not been enough, so when the company finds that it has to go even deeper, this is where it really gets difficult, and this is where companies really do have to focus on how to get to the objective that they want, and how they do it right, so for that it really does take, well we think, I think it takes some real discipline, and having the right tools and processes to do that right. You just can’t make a mistake when you get to that point, and so generally it’s all about trying to determine what’s important for the organization, what characteristics are most important, who can contribute the most, and then focus on obviously identifying the group of people that can impact the company the most positively, and then you have to really look at who will most likely, going forward, contribute the least, and it takes a lot of work and there’s a lot of factors that come into play, there may be five or ten very important factors, and that’s difficult to actually work through an organization, so again it really takes discipline, a process, and a tool to help you do that.

You can’t just rely on manager-specific biases, it really has to come from the top, and the company management and the CEO really have to determine what’s important, process throughout the organization, and make sure that they mold the organization in the form that they think will really work for the future, and it’s really hard to do, but that’s where you’re left with when you really need to make additional adjustments than just the lower performers because the macro environment requires you to do that.

Steve

So it sounds like you’re basically saying, when you see this real change, and you start saying, we have to have this serious look at it, that you go through a very systematic approach, which is start with the discretionary expenses, and I imagine a lot of the things that were considered necessities in more flush economic times become discretionary, like in a private household, cable TV may be a necessary, something you think as being necessary until your pay check gets cut, so part of the necessities become discretionary.

Then the second thing to talk about - getting low performers, and I’d imagine too that what might be acceptable performance in one business model and in a growth model might not be acceptable when the company’s really having to maximize the return it gets from its assets.

And the third thing that you mentioned was that the hardest is when you’re saying, we’ve got to go beyond the low performers to really restructuring the company, thinking, who can we take out, and part of that is realizing that what we need people to do in the future may be different from what we had them do in the past, and getting managers to really think differently about their workforce, and say, even if somebody was really really critical when we were growing, now we’re in a cost control mode, that role may have changed, that person’s talents may not be as critical for the organization – is that an accurate capturing of what you described there?

Bruce

Yes it is, it really boils down to, where’s the company now, where does it want to go, and who can get them there, and you really do have to almost, you really have to take a fresh approach to that, and you have to collect as much data as you have available, and that includes things like obviously how a person’s performed in the past, what skills they have, what their general attitude is, and there may be a whole host of things, but the important thing is, you have to factor in performance and ability and agility, possibly the division they’re in, possibly the geography they’re in, could be many many other factors, all lined up with, what’s the company want to do, where’s the strategic direction, what’s the new strategy, and how do we execute against this?

So it’s a very top down approach where the management team really needs to be able to take all that, all those determinants or all those characteristic sets, according to them, and then apply it to the workforce. That’s hard to deal with 100,000 or 50,000 or 10,000; even 1,000 employees, very hard to do, but yes, that’s what you need to do, and it’s really to preserve the value of the organization, and make sure it’s put in a position where it can perform really well in whatever new environment it now is facing. In this environment, things have changed, the whole dynamics of customers has changed for many many companies, they need to respond in an appropriate way, it could mean new products, geographies, re-allocation under different divisions, different product areas, could include M and A, and every one of those decisions has a dramatic impact on the workforce and who the company should retain to get through that.

Steve

So the focus then, it’s interesting, don’t start with the workforce, start with really understanding how your strategy needs to change, and once you figure out that strategy as best you can, then look at changing the workforce.

I’ve a couple of questions, in your career, as anybody who’s been in a career, has a lot of experience in an financial career has probably gone through more than one of these reductions unfortunately, because it’s just the nature of business cycles, and I’m curious, in your experiences going through these, what are some of the more creative things you’ve seen done, are there things you’ve seen that are really innovative, I imagine it’s never an enjoyable process, but ways that said, hey, that really worked, that made this more effective for us?

Bruce

Certainly the way most companies go about it is, they take a top down approach, which is an extremely important exercise, and it’s important to have the tools to do that, certainly when you get to the personnel side of the house, but as you’re working on discretionary spending, the company can make some macro decisions on discretionary, what’s important and how dollars ought to be allocated, that’s something the CFO does all the time, so there’s also, one of the more creative approaches is to take the bottoms up approach, that is let the ideas and solicit ideas from the employee base itself, because when it gets to the micro spend, the decision, the feet on the streets then, where a lot of decisions are made, not the overall allocation decisions, but the literal execution of the spend, it’s the feet on the street, and that means all the employees actually have insight into how that’s happening, and actually have a lot of control on that spend, and to take it further, if they have a lot of information about whether that spend is smart or whether there’s way to avoid spend, so a creative idea is just to actually go through a cost-cutting/containment survey, where you simply ask employees for suggestions. There’s many benefits to this approach, the first is again you’ll find cost reduction ideas that you simply might not have thought of, but a hidden but extremely powerful effect of doing this is that you will also find suggestions that would not have been palatable, had they come from the top, but the fact that they actually come from the employee base itself makes it that much more acceptable to take very difficult actions, and I guess I should even add a third component to this, that of value by this bottoms up approach, and that is an entire company, if you really have 100,000 again, or 50,000 employees participating in this, it really conditions the employee base to really think about how they really can help the company save costs, and it conditions them to the environment that, look, this is a different time, that the behavior from the employee base needs to modify or be modified to be applicable in this tough environment, I mean everybody has to be tough on spending, so that everybody has to find new ways to do what they did before, that everybody probably in the end is going to have to do a lot more with a lot less.

So I’ve seen companies go through this, and all kinds of costs get taken out of the equation that you wouldn’t necessarily be able to do otherwise, I mean things like reducing excess mail, getting rid of paper cups, reducing home office expenses, ways to reduce cellphone costs, ways to do online meetings instead of travel, in fact different ways to do online meetings, so you actually do the least expensive one first, changes in vacation policies, that wouldn't have been acceptable before, or ideas, and that can come out of this, freeware, free phone calls, public services, all kinds of things like that.

Steve

So it sounds like, by leveraging the employees this way, one, you get a lot of creativity, but I think the other thing you touched on, and from a psychological perspective, is a huge value-add, is it gives the employees some sense of participation and control in the process and what’s happening in the organization which, when they talk about dealing with change, the thing that people struggle with, and it stresses them out, is the feeling that they don’t have any control over that change, but by enlisting them in the process, they feel some sense of ownership control, which probably psychologically leads to a healthier workforce as well.

What about on the flipside, are there any common mistakes you’ve seen companies do when they go through this sort of workforce change?

Bruce

Yes, probably the worst thing that a company can do is, will just say, take the peanut butter approach to cost cutting, that’s just indiscriminate certain percentage cuts across the board, and particularly when it comes to headcount, and because it really gets back to, if you are indiscriminate about it and just across the board cuts without a lot of direction from the top, then you’re going to get an answer that’s just particular for the manager that’s making the decision that might not be related at all to what the company has to do strategically, so what a company really has to do is avoid that, avoid indiscriminate cuts, make sure that what’s really important to the company is well communicated, it’s communicated to everybody in the organization, communicated to all the managers, and there’s a process put in place to identify all those traits and characteristics, that includes people’s performance reviews, their ratings, what their compensation is, what their career development plans are, what their special skills and talents are, factor all that in to make sure it’s the opposite of the peanut butter, that it’s extremely discriminating in favor of those that really can make a difference to the company going forward, so that’s the number one mistake, it’s the number one and it’s quite easily avoidable if you just spend a little bit of time up front working through the process and working through what’s really important to the company, and then making sure that happens.

Steve

Which I think goes back to your point right at the beginning, that you should start thinking about these things well in advance of the economic realities actually hitting your workforce, if you start looking at how the market’s changing, that gives you time to plan in advance, and get those systems in place, which I think a lot of companies probably make that peanut butter approach, because they don’t realize they’re going to have change their workforce costs until they’re in panic mode, and in which case they’d probably just do that more peanut butter approach. What I’d like to say is, you should at least spend as much thought about who you fire as you do thinking about who you hire.

Bruce

Yes, very much so, and it doesn’t necessarily take a lot of time to get prepared, that’s the point, even though the macro environment or changes in the business can be dramatic, or results could fall short unexpectedly, it doesn’t take a lot of time to really make sure that you get some process in place to make sure you identify, one, what’s important, and two, who fits behind that, so I would just suggest any company that’s in that space really look at what tools they could get to really help accelerate that, and it’s not a quarter’s worth of work, it’s not even a month’s worth of work, can be as low as weeks, and to invest a few weeks to get it right, when you’re really talking about the future of the company, I think’s imperative.

Steve

Yes, I think that’s a good point, it’s sort of like, there’s one person who’s liking workforce cuts, at a certain point you’re cutting into the muscle, and you don’t want to do that hastily, you want to plan it out and get the right tools.

The last question I have is, what would be the key for an HR person who’s trying to engage a CFO maybe in these discussions around thinking about their workforce more systematically? What’s key to capturing the CFO’s attention in these conversations?

Bruce

For the people that work in HR that are listening to this, I think one of the best things they could do, just philosophically, is really think that, adopt the idea and the concept that they’re really partners to the business unit from partners to, in my case, with the CFO, how can they really partner with the CFO to help get things done, and probably the most strategic kind of decision they can make is really just focus on performance of the organization first, as opposed to focusing on the people, and saying this, obviously the people are extremely important in how they’re managed, in how you get the most out of them, but the most important thing in the end is to get the end result that you want through the people, so the HR personnel, the HR professionals, that think like that, are actually thought by not just the CFO, the entire C-suite, that they will find that they are much more involved in the operation of the business if they think like that, so I’d say that’s a most important principle to be adopted, and they will find, if they act like that and provide solution to the C-suite on what they ought to do with the workforce to help the company perform better, which means getting the right people in the right places, getting the workforce at the right size, so an HR department that actually thinks like that, making sure that the whole workforce is at the right size, deployed in the right areas with the right skills, and they’re proactive in providing that insight to the business, that’s a real win for the company, and I’ll say maybe just as important, it’s a real win for the HR professional that does that, that’s high value add, they’re going to be sought after, they’re going to get paid more, they’re going to have more opportunities, they’re going to be a lot more marketable, they’re going to get a lot more valuable, so I would just like to offer that up to those in the HR field that are listening to this.

Steve

I think that’s great advice, I mean really saying, as I’ve heard it put, the purpose of talent management is to get people to do things which you have to really partner with the business leaders to find out what those things are that you need them to do, and really understanding where the business is going.

Well Bruce, thank you so much for appearing on People Performance Radio, are there any last comments you’d like to share before we sign off?

Bruce

Maybe just to summarize, it is about where the company needs to go, obviously in this environment companies need to adjust their strategies accordingly. It often means doing a lot more with less, so you obviously start on discretionary spending, take a top down approach, take a bottom up approach, using any tool that you have, one being a nice cost cutting survey where everybody participates, and then after that you obviously need to look at your personnel costs which tends to be about 70% of the total operating costs, so optimizing that, getting the most out of it, using the right process and tools to do so is just critical for making sure you’ve done, the company’s done everything they can to perform the best in this kind of environment, so I’d just like to close down with that, and I want to thank you.

Steve

Thank you so much Bruce, and we look forward to talking to you again on People Performance Radio.

Bruce

Great, thank you.

Speaker

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