Mumbai, April 30, 2014 – Going by forecasts of industry bodies and researchers, India is well poised to emerge as the SME nation, with a large and growing pool of small and medium enterprises as the trend of entrepreneurship gathers momentum. However, at the same time the industry is faced with a slew of challenges such as resource constraints, rising costs, talent crunch, etc. Also, with high influx of sophisticated investors such as private equity players and venture capitalists, there is a growing need for optimum financial management, need for integrating business & finance function well. But the current skill deficit and cost for full time CFO to a majority of these enterprises is often prohibitive. But help is now at hand, thanks to the concept of shared CFO services, a new yet robust concept pioneered and popularised by a Mumbai-based promising start-up, IxCFO. In a candid interview with The Global ANALYST, Sanjay Gaggar, Founder Partner, IxCFO, shares his firm’s objectives, growth opportunities, his experiences so far, competitive landscape, and challenges, going forward.
Where did the idea to start CFO outsourcing services come from?
The fundamental objective behind setting up a shared services centres (SSC) was to leverage economy of scale, manpower productivity, standardisation of non-core processes and liberate management time for more focus on business issues. Shared services for major back office functions like talent management, administration, accounting, monitoring statutory compliances, implementation and maintenance of computerised systems, etc., are very common in large business setups.
Of late, we have seen fundamental changes in Indian economy and business transformations across sectors and industries. Some of them are:
· Globalisation and integration of Indian economy with the world economy to a significant extent;
- Aspiration of Indian businesses to grow across geographies;
- Generation shift in ownership pattern with strategic shift to business outlook;
· Influx of highly sophisticated capital, e.g., Private Equity / Venture Capital Investors;
· Large advancement in share of services sector to about 64.8% of India’s GDP (Source – Economic Survey, Ministry of Finance, 2012-13, GoI) leading to plethora of new services and innovation around them;
· Advancement in all forms of communication and internet technology, and so on.
This led to our belief that it is the right time to get into this space by positioning a Shared CFO Platform. And thus was born the IxCFO platform. The model, while catering to MSME businesses also offers gainful and job enriching opportunities to highly skilled practicing CFOs/Controllers.
Can you explain about the business model of your firm? How does the concept work?
Our competent CFOs/Controller Partners manage multiple SME business owners under agreed virtual and shared CFO services mandate with high level of multi-faceted professional competencies and standards. While Virtual CFO is more about serving clients off-site via telecommunication technology, shared CFO is largely on-site presence at our clients’ offices. We have also chalked out unique proprietary engagement model keeping in mind traditional and strategic role of CFOs.
We also have extensive network of specialised advisors working under our guidance while providing CFO services and assist us in business and finance integration engagement per standard and customised solutions that defined quantifiable measurable matrix across our deliverables.
We first get into understanding of the complete business in terms of its size and complexities, organization structure, role of finance and accounts functions, etc. We also understand the current gaps in various back office functions required to support the client’s business and then map them to our CFO services engagement products in order to figure out expectations of the concerned business owners to bridge the gaps. This may take typically two to three meetings with the business owner, his senior leadership team and auditors, if required, to agree on a common page of clear understanding of issues.
Based on this understanding, a detailed draft of CFO services mandate is given to business owners in terms of engagement unfolding on quality matrix, timeline and commercial factors.
In terms of our pricing, we generally adopt very flexible engagement on many criteria like initial ramping up phase, ramping down and then even virtual CFO only. Pricing is the factor of company size, complexities, timeline for deliverables, knowledge skill to resolve issueand our efforts required to address with the mix of CFO resources we need to plug-in. However, in a typical engagement for CFO retainership (virtual or shared CFO)
our monthly engagement commands a price bandwidth of say Rs. 50,000 to Rs.3,00,000 per month (for a typical traditional operation centric CFO role in finance).
What are the various types of services your firm offers?
We are serving business owners under different ownership patterns like family setups, technocrats, professionals, PE/VC fund portfolio Companies and mid-size corporates on traditional CFO role under the following two services:
· Tx = Transaction Assurance, Processes and Controls, and
· Fx = Financial Health Management and Business Support Services
Under Tx offering, we believe that right IT platform for financial scorekeeping with robust interface with various other sub-systems on operations, CRM, etc., is the key to streamline and integrate processes centric controls. In the event clients soliciting our services to set up a suitable IT enabled platform for their financial accounting and reporting systems, we provide specialised services also which can in other words be termed as the services of a CIO.
With regard to Fx offering, this has to be seen with respect to measuring key KPIs coming from sound MIS system. Fx offering is key to monitor the business sustainability and growth measurement while addressing concerns on profitability, cash flow and line items of assets and liabilities in balance sheet at its core.
On CFO’s strategic side, we have an offering called Ix = Inorganic and Organic Growth business plan Xecution Services
Under this offering, we focus more on integrating finance with business strategy as an enabler and effective execution capabilities which will require high level of skill set at the disposal of CFO. Some of the issues, which we address here, are like post integration M&A issues, raising capital by addressing equity and / or business valuation / dilution issues as appropriate, corporate restructuring involving spin-offs, slump-sale, off-shore/on-shore cross country structuring and tax optimisation led business combinations, etc.
In all of the above service products, we stick to our logo of integrating best of management practices with excellence (X factor) and Integrity (Core of I)
How do you plan to differentiate your offerings from the competition? How is it different from the existing CA firms that offer consultancy and tax planning services amongst others?
It is very important to add clarity in terms of measurable matrix with defined drill down engagement under structured bucketed offering. This is then followed with proactive periodical review with business owners, cross-functional operations review led by our CFO partner so as to assess the impact on deliverables. This gives visibility on cost vis-a-vis benefit to Indian MSME business owners.
Our offerings are clearly packaged and bucketed to add clarity in terms of our engagement flow from bottom-up approach. It is very important to get into business understanding with MSME business owner by performing traditional CFO role and then gradually moving into high level of strategic deliverables, once business achieve scale, ready to accept our CFO Partner into more strategic assignment.
One big differentiating factor in our engagement is our people centric role led by a professional CFO/Controller with not less than 10 years’ industry experience and that makes entire engagement highly productive from day one with real value added to our clients.
Practicing CAs, we believe, bring altogether different set of expertise for governance, compliance, taxation, audit functions etc. This has been traditional forte of these professionals. And with growing complexities across tax / non-tax laws as regulatory forces are becoming more active on governance certification from independent professionals, all these leave little time to focus on the role of CFO at their end. This has created the need to have different set of professionals offering CFO services like us.
Your target client base essentially comprises of MSME. Why did you choose this segment? Can this service be extended to large corporates too?
SME in India is large segments if we look at the following statistical analyses:
“Worldwide, micro, small and medium enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development. MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production, services and exports.
In India too, they play a pivotal role in the overall industrial economy of the country. MSMEs in India account for more than 80% of the total number of industrial enterprises and produce over 8000 value-added products. It is estimated that in terms of value, the sector accounts for 45% of the manufacturing output and 40% of the total exports of the country and employs over 6 crore people.“ (Source – msmementor.in, Ministry of MSME, India)
Given the exposure of the above magnitude, we believe that shared CFO services has large market to address coupled with the fundamental shift in business outlook as pointed out earlier.
We do offer specialised assignments based offering to large corporates as they already have full time CFO function in-house. Our services are largely in the nature of assistance to existing CFO function in the form of providing value-added skills which large companies may not have in-house·
What kind of hurdles do you face while convincing clients of the value proposition your firm offers?
Many times, Clients in SMEs lack even basic understanding of finance, role and critical importance of back office function, including statutory compliances, and we need to build their finance function from scratch. This is where our standard and customised approach towards our traditional CFO offerings Tx and Fx come handy.
Given that the CFO function is vital from any firm’s point of view, do you feel that this can act as a major hindrance in convincing clients to go for shared services like yours?
Since our engagements are for MSME business owners, who have never experienced or hired full time CFO in past, in all our engagement, we practically work with BOOT (build-own-operate-transfer) model wherein we engage ourselves as Shared-CFOs by starting building finance function, take the complete responsibility on deliverables, as if we are a full time CFOs, operate for defined period of retainership engagement, say one year to start with, and then transfer the entire knowledge by recommending hiring a full time CFO and / or Controller at an appropriate point of time.
We realise the importance of CFO function at a time when business is into growth / hyper growth mode with full scalable traction. At that time, shared CFO services should better be migrated to full time CFO services and we proactively recommend this to business owners for transition.
In such migration, business owner may decide to continue our engagement in a strategic business consultant’s role
How do you view the competitive landscape in the shared CFO space in the country?
There are very few dedicated, organised and knowledge-led platforms like IxCFO with presence of experienced CFO partners across all major metros and Tier-1 Cities. Many of these SMEs are relying on traditional services from CAs / local city based ex-finance professionals / freelancers to build CFO finance backbone which falls short of requirements due to change in time, increasingly stringent regulatory provisions and multi-faceted business dynamics.
Also, with growing standardisation and customisable approach across our bucket-based offerings, our CFO services are a leading differentiation to our competitors and mitigate the risk of failed CFO function.
In a recent unofficial( but very reliable sources) based assessment on some of the niche criteria and regulatory filings, IxCFO stands amongst the top three organised CFO services providers in India.
We also believe that is important to have healthy competition in a nascent market like India at this stage to create awareness and for the future growth of CFO services market just as they are in other developed markets like the US, European zone. In CFO services space, we believe that knowledge management, benchmarking practices by raising the bar constantly and ethical practices will be key to differentiation in the long run.
How big is the market size, and also how do you plan to scale up your operations?
We regularly interact and network with various trade, knowledge and apex bodies in SME world. This gives us the platform to present our services via our “customer acquisition and retention” programme for the benefit of all. Our last 30 months’ learning experience has given us enough lead on conversion / renewals or extension of existing CFO mandates based on relationship, trust, quality of deliverables with strict turnaround on timeline factors.
Are you also looking at external funding sources such as Private Equity or Angel Investors?
At present, we do not have plans to tap funds from Angel and VC. However, there is some very preliminary level of interest shown by big financial services firm but we have not got back to them. PE investing is something which is far away given the current position about our company’s top-line and the number of clients.
As a part of our growth strategy, we are focused at present on customer service and our internal guidance to all our partners is “Listen to customer and deliver with speed and quality” to create high impact of shared CFO bringing valuation in the form of intangibles, brand building and sustained knowledge-based ‘Intellectual Practices’ which we are creating in the process.
We will be keen to certify our model with ISO certification as time progresses so as to take advantages of our inherent strengths around structured services offerings.
What are the key challenges your firm could face, going ahead? Also, what strategy do you have in place to deal with them?
Our key challenges will be as under –
– Lack of awareness about such services;
– Finance, being back office function, is a non-priority area for many of these SME’s;
– The given reality that the CFO as the key driver of business values along with the CEO, adopting partner centric approach, is not being understood by many owners of SME owners,
Talent crunch; i.e., the challenge to tap right skill with very balance state of ‘consulting’ cum ‘implementation’ ability.
