In a time of dramatic change, leading Finance functions are moving fast to deliver value to their organisations. To do that, Finance must balance its key priorities: cost reduction, capital structuring, strong controls and efficient operations. Diageo India – part of the world’s leading premium spirits firm– aims to grow its business at double-digit rates on a sustainable basis. Over the last few years, the Finance function has played a crucial role in enabling business performance, achieving efficiencies, managing risk, reducing debt, generating free cash flows and promoting strong governance. This has been enabled under the guidance of Sanjeev Churiwala, its CFO and a member of its Executive Committee.
Mr Churiwala plays the multifaceted role of strategic planner, analytics wizard, technology evangelist, governance specialist and leader par excellence – all at once. He has been the driving force in improving profitability through a relentless focus on costs, restoring the balance between long-term and short-term borrowings, bringing down debt levels, driving efficiencies through a shared services model, building an effective business partnering framework, enabling data-driven business insights, and raising governance standards.
Under Mr Churiwala’s leadership, Finance has undertaken several initiatives to improve business performance. The implementation of an aggressive and effective pan-India credit policy resulted in a favourable working capital scenario, with a significant reduction in DSO and a drop of over 1,000 bps in the average working capital for accounts receivables. This is perhaps the single-biggest such improvement in Diageo’s history. Also critical were such strategic decisions as creating a Shared Service Centre (SSC), and ensuring optimisation of human resources costs without compromising on quality output and service delivery. Diageo’s liquidity situation has also improved significantly, thanks to an aggressive weeding-out of unprofitable businesses, non-core assets and products, and selectively increasing prices on high-value lines, thereby improving margins, earnings and cash flow dramatically.
Mr Churiwala’s focus on systems and governance is storied, and recognised by industry regulators, who have lauded the quality of Diageo’s financial reporting and its high compliance standards. This is evident in its recent CGR-2 rating by ICRA, and a shareholder rating of 3.59/4. The Code of Business Conduct and Ethics (CoBCE) is the key policy that governs the compliance and ethical framework, which is not only applicable to employees but also to suppliers, customers, contractors and third-party manufacturers. The global risk and compliance team monitors the quality of investigation and remedial actions, while initiatives like ‘Path to Pride’ and ‘Speak Up’ have taken the compliance baton from top management to the grassroots level. For its high standards of governance, the company won the LACP’s Gold Award, which is often referred to as the ‘Oscars of Financial Reporting’. Its annual report has been ranked among the top 100 globally. The cumulative impact of these various governance measures is evident in the company’s credit rating rising to A1+.
With the aim to create enterprise value, Mr Churiwala has built an effective business partnering model enabled by three key interventions: outsourcing core transaction processing tasks; having the right blend of in-house and external talent; and supporting Finance Business Partner’s (BPs) through centres of excellence. Today, Finance BPs go beyond mere advice, actively participating in co-creating solutions. This not only leads to higher learning of Finance BPs, but also drives their acceptance as integral components of the function they support.
In a candid conversation with CFO Connect, Mr Churiwala shared his insights on the role of Finance in delivering value at Diageo India.The Big Picture
Some of the ongoing challenges that are unique to this category in India are:
The organisation structure needs to be cognisant of the evolving market landscape and changing customer expectations. Over the last few years, we have worked to make the organisation agile, less hierarchical, and more interconnected. In the Finance parlance, we have moved to a vertical structure in various knowledge streams, which are connected globally at Diageo, and this supports the market-facing teams. We have created centres of excellence across streams, upgraded our business Finance teams, and moved transactional work to shared services. Today, Finance works in a way that allows it to partner the business, and it is well placed to participate in strategy and provide pre-emptive inputs to the business. Our structure allows us to merge the dual benefit of optimising growth and flawless compliance, and puts us in a commanding position to extract the maximum value out of any opportunity.
As a forward-looking, growth-oriented CPG company, we aspire to grow our top-line at double-digit rates on a sustained basis on the back of continuous innovation. Within this double-digit growth, we would want the premium end of the business to grow faster than the overall portfolio.
As one of the world’s leading alcoholic beverage business, we want to be at the forefront of industry efforts to promote responsible drinking and reduce the harmful use of alcohol. Our sustainability and responsibility strategy integrates social responsibility into our core business to create value for society and shareholders, and shape the industry evolution from its current state to ‘celebrate responsibly’.
We aim to build an in-house ‘productivity muscle’ across the business value chain that enables continuous savings, which in turn provide the necessary fuel to invest in A&P to grow the category. Lastly, we want to create a ‘winning and engaged organisation’ by investing in capabilities that provide a competitive advantage and are critical to delivering results. At the core of our business strategy is our commitment to enable employees to ‘be the best they can be.’ We also aim to be a digitally-advanced organisation, and as digital winners, we have set high goals of creating the right scale of IT infrastructure.
We aim to build an in-house ‘productivity muscle’ across the business value chain that enables continuous savings, which in turn provide the necessary fuel to invest in A&P to grow the category.
The industry is exposed to multiple regulatory risks emanating from state taxes, adverse ruling from courts, and changes in regulations with respect to pricing, licensing, working of operating facilities, manufacturing processes, marketing, advertising and distribution. Further, the proliferation of spurious liquor consumption poses a threat to the growth of an organised business like ours.
In terms of opportunities, acceptance of alcohol consumption by consumers, an expanding population base of young people, and increasing per-capita income are the major driving forces that will spur growth for this segment in the coming period. The company’s strong focus on premiumisation coupled with rising disposable income and evolving consumer lifestyles also presents a significant opportunity to grow sales and expand margins. Additionally, increasing conversion from country liquor to branded IMFL, given the health issues associated with country liquor, presents a growth opportunity, especially for our popular segment brands. For instance, our premiumisation policies and responsible drinking socially-linked business strategies are well placed to create a positive impact in a well-informed, educated and strictly regulated market.
Over the last few years, the Finance function has played a crucial role in enabling business performance, achieving efficiencies, managing risk, reducing debt, generating free cash flows and promoting strong governance.
Building an in-house muscle around productivity is a key strategic priority. We focus on productivity through the business value chain across all the P&L lines. Some streams are more mature than others. Our operating performance over the last few years demonstrates how well we have negated inflation with our measures. The focus was around product features that are not consumer-facing, new/innovative procurement models and waste elimination. Manufacturing/warehouse foot-print correction, net revenue management efficiencies and marketing effectiveness have equipped us to better our performance.
Diageo has put in place an optimal capital structure for a balanced financial profile in both the short- and long-term, with sustainable leverage, providing headroom and financial flexibility for organic and inorganic growth.
Diageo has put in place an optimal capital structure for a balanced financial profile in both the short- and long-term, with sustainable leverage. This structure has provided headroom and financial flexibility for organic and inorganic growth. We have diversified the debt portfolio from 100% bank loans to an optimal mix of commercial paper, short-term bank loans and NCDs. This diversification has helped us manage liquidity and interest risks. It has deleveraged our balance sheet and has achieved interest cost reductions. The Treasury team periodically monitors rolling forecasts of the company’s liquidity position. Centralised cash management system across the company ensures the optimal use of funds. The company has sufficient borrowing facilities which get utilised to fund deficits, if any.
In larger companies like Diageo India, negative cash flow is more than an operational problem. It involves winning the support of external lenders in the initial stages before operational bleeding can be stopped. We delved into debt re-financing, involving complex negotiations, often with many banks. Actions were taken to raise internal sources of cash by managing working capital more efficiently and, if necessary, spinning off operations.
Further, the implementation of an aggressive and effective pan-India credit policy resulted in the favourable working capital scenario with DSO reducing significantly. Average working capital for accounts receivable as a percentage of NSV was brought down by more than 1,000 bps a couple of years ago. This is considered to be the best improvement in Diageo’s history. Strategic decisions like creating a Shared Service Centre (SSC) by centralising operations and ensuring optimisation of human resources costs without compromising on the quality of output and service delivery were also helpful.
The liquidity situation was improved by aggressively weeding out unprofitable businesses, non-core assets, products and selectively increasing prices on high-value lines, thereby improving margins, earnings and cash flow dramatically.
The primary objective of our SSC strategy was to enhance our overall compliance environment while driving efficiency, by eliminating disparate layers and bringing in standardisation, simplicity, speed, productivity and cost-efficiency
Establishing an SSC in a large organisation is not just Finance or an IT project but involves unbundling and reconfiguring the support services, representing more than merely a rational response to cost reduction and efficiency savings. Here the SSC has been approached from an overall business perspective and was part of the solution.
Typically, shared services initiatives focus on cost reduction. However, as Diageo’s Head of Finance, I found that shared services capabilities enhance compliance and mitigate significant financial exposure from associated risks. Making a business case for an SSC involved consideration of qualitative factors in addition to the traditional quantitative ones. The primary objective of our SSC strategy was to enhance our overall compliance environment while driving efficiency, by eliminating disparate layers and bringing in standardisation, simplicity, speed, productivity and cost-efficiency. The other objective was to create clear-focused finance cohorts that could add value to business by being able to sharply focus on overall business performance.
We would say we are still on the SSC and centralisation journey. We did ‘wave one’ of centralisation a couple of years ago when we moved all our Finance transaction processing to our captive global SSC. We then centralised all our employee services and IT application management. Any shared service transition would take about two years to fully stabilise. Our key risks primarily were around knowledge transfers, managing legacy issues, and driving change and crucially hand-holding people throughout this transition phase. We have robust governance programmes, and we closely monitor the journey to be able to make appropriate interventions. In my opinion, the critical success factors in shared service implementation processes are the alignment of targets with corporate strategy, coupled with executive commitment across the organisation, the right governance and focus, and a winning team.
SSC adoption has led to several administrative gains across various levels of the organisation, be it strategic, tactical or operational. It has brought benefits for processes and has delivered results. Specifically, the SSC has helped in the perpetuation of corporate knowledge developed over time. It is allowing standardisation of processes and its reuse in other areas and departments; helping top-level to focus on the core business of the company; allowing a more holistic and integrated analysis of the results due to the consolidation of KPIs; and enabling a sharper delineation of responsibilities and monitoring of performances more effectively. The first wave of SSC witnessed centralisation and outsourcing of processes/capabilities whereas the next 2-3 years would be about leveraging technology to leapfrog on each of the objectives that we have laid out. In terms of technology, we would leverage a combination of ERP, point applications, advanced analytics, and intelligent automation to enhance the Finance function’s effectiveness.
The Finance business partnering model has been enabled by three key interventions: outsourcing core transaction processing tasks; having the right blend of in-house and external talent; and supporting Finance BPs through centres of excellence
It required three big interventions:
We were clear in our vision for the Function and what we had to overcome in terms of the usual change management related issues that are normally associated with such large-scale transformation. Other functions, however, demonstrated a high degree of resilience as Finance was undergoing this massive change.
We are more demanding from our Finance BPs, expecting them to go beyond mere advice, and participating in co-creating solutions. That drives significantly higher learning, as they get to know the business more deeply. It also drives acceptance of the Finance BP as integral components of the functions they support. A good Finance mind will be able to straddle all critical finance experiences and we expect them to demonstrate that flexibility.
In our assessment, there are three key qualities of an effective Finance business partner. First, an inherent curiosity and inquisitiveness to know and understand the business better that enhances the partnership quotient. Second, the ability to get a dispassionate outside-in perspective that provides benchmarking with best-in-class industry practices and solutions. Third, the ability to provide a healthy challenge when needed by speaking the language of the business.
Considering the attributes that we look for in our Finance BPs, the training requirements are largely on the softer side of ‘leadership competencies and behaviours’. There are two specific interventions that we have consciously made to develop our Finance BPs into the leaders of tomorrow. First, even though they are thrown into the deep end of the business and the functions they support, the Finance Functional protection is not diluted. They remain closely anchored in the global/national Finance community that provides them consistent on-the-job learning interventions as part of the 70:20:10 model as well as appropriate counsel/mentorship from senior functional leaders. The second area focuses on the ‘leadership behaviour training interventions which includes formal training on softer areas such as situational and inclusive leadership, relationship building and effective communication. Such interventions keep the Finance team (especially the Business partnering team) united and bound together by common glue, giving them a sense of pride and identity.
We assess Finance BP effectiveness through a combination of functional, cross-functional, skip-level feedback and observation in workgroups and meetings. At a more senior level, BP’s are also assessed on employee engagement and Net Promoter scores.
Technology has had a major impact on our workplace, revolutionising the way business conducts daily activities. There has been a workplace transformation with solutions that enable us to connect, chat, meet and collaborate anywhere anytime. This has improved the productivity of each employee in the organisation. IT is a key enabler for achieving our growth and productivity agenda through simplification, standardisation and automation. The data and analytics platform collates data from multiple sources in an automated fashion and presents a single version of the truth. This allows the Finance teams to spend all their energies in analysis and deliver business-oriented insights to drive performance. Besides being a consumer of technology, the Finance function has also strongly partnered with IT teams to enable the choice of best technology investments to deliver long-term business impact. For instance, we had embarked on an automation project to enable the sales force in the field and hence, improved the quality of sales in the market. Finance team’s involvement ensured a better value delivery of the project and a stronger sponsorship for the business results.
When I started in 2015, the Finance activities were primarily manual and paper-based. Also, every unit and cluster used to have their variations to the stipulated process. Knowledge used to be in the minds of people who had done those activities for ages. In our effort to become process-centric, we took on the ambitious task of transforming our function end-to-end across people, processes and technology. We have created a strong team of Finance BPs who support multiple functions, and created CoEs and SSCs in the Head Office to support them with specialised knowledge. All the roles were enabled with technology solutions to support efficient working as well as have systemic controls to ensure compliance. This journey of simplification, standardisation and automation enabled enhanced partnering for growth, faster turnaround on all transactions, and 100% compliance.
Technology enables data-driven business insights in areas where transactional intensity is very high and where it is humanly impossible to decode the data through the usual means and mechanisms
We genuinely believe that technology enables data-driven business insights in areas where transactional intensity is very high and where it is humanly impossible to decode the data through the usual means and mechanisms. In line with this philosophy, a few areas where we are leveraging technology include: net revenue/trade spends management at an outlet level; in-store sales execution; and route planning for our frontline sales teams.
Technology is embedded in business operations and is a key enabler for business disruption. I believe that in today’s day and age, technology is not limited to a few roles. Everyone in the organisation needs to be technology savvy and comfortable with the use of digital tools. On the other hand, CIO-CFO collaboration is a critical success factor in creating the organisation of the future. The CFO has a bird’s eye view of the organisation performance and hence, is a key sponsor for organisational transformation. The CIO is the key enabler for bringing about this transformation. I believe the synergies between these two roles are going to be the need of the future as well.
Good governance practiced within fosters confidence and trust of all stakeholders
The corporate governance standards have remained high due to the relentless effort made in improving the reporting standard and close cycle time, and garnering improved investor satisfaction scores. Our practices have been recognised and vindicated by external stakeholders as well, as demonstrated by the recent CGR-2 rating for our corporate governance practices by ICRA (which is the second-highest rating for any existing company in India) as well as a shareholder rating of 3.59 out of 4 for our shareholder services. The company believes that good governance practiced within fosters confidence and trust of all stakeholders. We firmly believe in being fair to our employees and customers. The management is accountable and responsible for its actions and conducts at all times. Our sound risk management and internal control systems define our commitment to governance. We make sure our communication to stakeholders is regular and remains fair, transparent and balanced. We strive to improve our practices and promote social good through our CSR initiatives.
We have made substantial progress to empower teams in the lower rungs of the organisation. Last year, we doubled the financial authority limits across the board. Processes have been simplified and automated to ensure people spend time on what matters for customers. Meeting times have been cut and more decision-making authority has been devolved downwards.
The Code of Business Conduct and Ethics (CoBCE) is the key policy that governs the compliance and ethical framework, which is not only applicable to employees but also to suppliers, customers, contractors and third-party manufacturers
Integrity is deeply embedded in the way we do business. Our Code of Business Conduct and Ethics (CoBCE) – the key policy governing the compliance and ethical framework of the company – sets out Diageo India’s commitment of conducting business per our values and with all relevant laws and regulations. We ensure each one of us understands our responsibilities and are fully conversant with the code and policies. We are committed to doing things the right way. Indeed, there is just no other way! All employees must undergo training in CoBCE and a compliance certification programme anchored by policies and procedures, prescribed as per the global standards, covering many critical areas. CoBCE also applies to our suppliers, customers, contractors and third-party manufacturers. The company has a system of getting compliance reports periodically from the units to ensure compliance with the provisions of all applicable laws. Diageo India’s whistle-blower system – SpeakUp – got extended in five additional regional languages and training to workers across all manufacturing locations. The global risk and compliance team monitors the quality of investigation and remedial actions. The senior leadership team also periodically reviews the status of various aspects of the compliance programme. We also launched a campaign called #PathToPride, which focusses on middle management, taking ahead of the compliance baton from top management to the grass-root level of the organisation.
The entire corporate governance discussion is based on the premise that adopting good governance practices has a positive influence on company performance. Several benefits result from good governance practices such as improved top-level decision-making processes, better control environment and reduction in firms’ cost of capital. For companies listed on the stock exchange, the most commonly discussed benefit of good governance is the effect on share value, liquidity and investor portfolio composition. In addition to a significant improvement in company’s overall financial flexibility, corporate governance has led to further improvement in our credit rating. ICRA has upgraded the long-term rating from A+ to AA with a positive outlook, while the short-term rating was reaffirmed at A1+ - the highest possible in that category. The company won the Gold award from LACP, often referred to as Oscars of Financials Reporting. The annual report was also ranked amongst the top 100 globally. We are now in the top quartile for publishing quarterly results. Our compliance rate in SOX is the highest in Diageo.
We conceptualised, designed and rolled out fully automated audit analytics with monthly dashboards in Power BI for the Audit Committee and the executive management’s review and action. Over 15 such analytics are ready (including 9 SOX and business controls). It was out-of-the-box thinking to gain that extra mile which gives real-time information on data analytics compliance and overall audit risk rating of the company. This is a big leap to move towards a paperless environment. This app is first of its kind, which has transformed reporting around continuous auditing and governance, quarterly audit committee meetings, and executive summary of released reports. Our analytics is 100% centralised – a big step towards improving audit efficiency and helping the IA team build relations with internal and external stakeholders.
We have launched another project to automate all those controls where data analytics was being performed repeatedly and manually in MS Excel for each audit. We have moved 10 controls (through ~30 analytics) to continuous auditing. Further, we have designed DDI (Deep Dive intelligence), a fully automated audit data analytics tool with a detective and predictive analytics. This allows exceptions and red flags to be proactively highlighted for corrective actions, and also allows the business to get heads-up on potential control lapses. We have also introduced ‘Integrated Audits’ (IA), which involves performing an IT audit followed by sample testing of manual controls. Historically, IA involved only sample testing of manual controls, disregarding the all-pervasive IT controls. Today, the IA methodology reviews all significant risk areas, be it IT or manual.
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