Risk Narratives, the “Strategic Advisor” & Industry 4.0 with Gerardo Adame of XP Power
“There’s a third step in a finance professional’s journey — the strategic advisor role. This happens once you start mentoring your peers and influencing their decisions beyond their plans. That really is when what I call ‘financial engineering’ comes into place.”
How do you help a company navigate uncertain times in an industry that’s been dramatically hit by the pandemic? And how can finance leaders step up to become true strategic advisors to influence the long term visions of their firms?
Gerardo Adame has the answers to all these questions. After nearly 10 years at Monsanto, he moved to help Silicon Valley startups set up their financial processes. He then joined XP Power, the manufacturer and supplier of critical power control systems, as VP Finance North America.
Throughout his career, despite holding various positions and working in different industries (AgTech, EdTech, Automation services and semiconductors), manufacturing and industry 4.0 have remained constants for him. And working in fast-moving industries gave him a unique perspective on the evolving role of finance leaders.
In this episode of CFO Yeah!, we discussed with Gerardo how finance leaders can lead their companies through difficult times, and how their role is naturally moving beyond data and into the realm of strategic business advisory.
Table of contents
From Monsanto to XP Power: Following the manufacturing thread
“I'm from Mexico and relocated to the U.S. 16 years ago. At the time, I was working at Monsanto, and they were looking to conduct a regional-wide SAP implementation, in order to centralize the administrative functions (HR, finance, admin…). I knew the company, the region, the systems and the procedures very well, so I ended up leading capital planning and other financial operation activities in the headquarters in St. Louis, Missouri.
“There, I had a variety of roles: financial planning, cost analysis, marketing intelligence, business analytics, and leading teams remotely. I think that's part of what defines me — I’ve always had teams with diverse backgrounds in multiple countries, speaking different languages.
“One of my last roles at Monsanto was setting up the financial planning and analysis processes for The Climate Corporation. It was the first AgTech unicorn, and was acquired by Monsanto. I moved to the Bay Area for this role, and fell in love with it!
“My family and I decided to stay. From there, I worked for two startups: Endless, which is trying to close the digital divide in countries by developing infrastructure. Then I worked for Tempo Automation, a series B startup manufacturing software-accelerated electronics.
“Eventually, the pandemic hit. I had to take some time off to take care of my second daughter. And finally, I decided that it was time for me to go back to a publicly traded company. I wanted something a little bit more stable — and that’s when a great opportunity came up at XP Power.
“They were looking for someone who had public and private experience. And I could apply my prior experience, not only on the manufacturing side, but also in the issues that a small public company could encounter and in private companies.”
Shaking up a traditional industry with innovation: the rise of industry 4.0
“Beyond manufacturing, across all the industries that I've been working in, the common denominator is innovation. And more specifically, innovation in the form of Industry 4.0. This field of innovation is all about digitizing, automating. We even work with virtual reality, augmented reality, and with components of deep, machine learning. And the main question we’re asking ourselves is: how do you make agile manufacturing?
“How do you take what happened in software a few decades ago, and apply these agile software development methodologies to agile manufacturing development and innovation?
“It’s a fascinating challenge, because we’re redefining an industry that has remained untouched by 21st century technology. For the past decades, innovation was focused on hardware. At XP Power, we’re all about figuring out how to make more, with less.
“And to tackle this challenge, the role of finance is very dynamic, because we need to keep the lights on, so to say. I would say finance is a controllership function. It’s the engine that allows you not to worry about the day to day. Finance thinks beyond the month, or the quarter in terms of closing, and really becomes a strategic partner to the business. And I think that is the key to a successful finance team: getting the proper engine working, with the right people, processes and tools.”
The importance of understanding data and the key drivers of business
“Besides this role, our job is also about focusing on understanding the key drivers of the business. When you're a finance leader, after all, you have the luxury of data! You get to see all the company’s data, not just the financial numbers, but how finance connects with manufacturing, with yields, with productivity, with efficiency…
“You can answer the important questions, like : “How many leads are we getting?” or “What is our customer acquisition cost?” Even in a manufacturing environment, you can calculate and implement what I call growth frameworks, which can be applied across multiple industries.
“Finance has to be a partner to the business with the help of data. I always see myself as an independent thought process partner within a company, and try to keep my eyes out of the equation and see it from up above. It’s all about questioning whether the decisions made by the company are making sense both internally and externally.”
Building risk narratives with data: finance leaders need to be storytellers
“Once you have a good overview of your data, and that you trust it, financial analysis and planning is next. Finance leaders need to take that information and start predicting, setting up targets, creating KPI dashboards which people can have at their fingertips to make decisions.
“What I think is important to realize, is that there's always an overlap between financial metrics and operational metrics. If you provide your data to the Head of Marketing versus the Head of Manufacturing or the Head of Engineering, they will have very different readings of the same dashboard. They will tell you their perspective, and it’s your responsibility to make sense out of all of those perspectives.
“Bringing order out of all of that chaos, defining what the right narrative is, is the finance team’s role. You need to measure risk, adjust the numbers and provide perspective across all of the departments. So, at the end of the day, finance leaders have to be proper storytellers. You have to be constantly on top of your data and tell the story behind the numbers.”
Shifting the role of finance leaders to growth strategic advisors
“I think in finance roles, ‘level two’ of the career ladder is all about knowing how to use the data, explain it and influence decision making. But then, there’s a third step in one’s professional journey, which is the strategic advisor role. This happens once you start mentoring your peers, and influencing their decisions beyond what their plans are. That really is when the complexity of what I call financial engineering comes into place.
“There's a lot of ways to grow a company beyond doing a great job at execution, having a proper product pipeline and recruiting a killer team. Indeed, we've seen time and again very complex financial structuring activities that influence the growth of a company.
“Nowadays, there are a lot of companies going public through SPACs, Special Purpose Acquisition Companies, and many other strategies which go beyond the organic growth of business type of strategic investments… This strategic planning is not something that is very much in the DNA of finance teams. I’m overgeneralizing, but traditional finance leaders tend to be very risk averse.
“However, today, I think you need to be able to properly manage risk and change the risk profile of a company, according to the type of opportunities that you identify. This is where the strategic advisor role of a finance leader comes into place.”
Navigating uncharted supply chain territories through the pandemic
“With the pandemic hitting supply chains across the world, companies have had to adjust drastically.
“At XP Power, I'm dealing with a large macro-scale impact on supply. Our primary vertical is semiconductor fabricators. And unfortunately, there's a large shortage of microchips all over the world. There's a lot of movement around this specific supply chain, and we’re in the middle of it.
“When you are in this kind of situation, to work around it, you need to increase your level of risk. What this implies is that the long term impact of your short term decisions needs to be really thought through.
“The main reason for that is the cash commercial cycle. Before the pandemic, you used to finish your product, ship it and collect it within 80 to 100 days. Now, there's a scarcity of components, so you have a lot of cash strapped into inventory.
“One other reason is that labor inflation increases the cost of labor, so you need to pay higher wages and to keep your people focused in a very challenging environment. Mental health also impacts the supply chain, thousands of people are leaving their jobs. All of this impacts companies drastically: if you don't have the labor, you cannot finish your product.
“And once you have your finished product, you need to ship it out to your customer. So what is happening right now, is that customers understand the impact of the pandemic on the supply chain. And there are record-breaking bookings and orders ahead of time. Clients now understand that they need to place an order a year before if they want to get what they need in time. All these elements are impacting finance dramatically.”
The impact of Covid on fundraising
“Of course, all those issues I’ve mentioned have an impact on several aspects of companies today, including the fundraising cycle. But companies are impacted differently. If you're a company that has a strong cash position, you have many more tools at your disposal. If your EBITDA is positive, you have debt financing tools at your disposal. You have revolving credit line growth for example. Or even supply chain financing, which we’ve started seeing a lot in the finance world! This consists in reverse-financing your company through your suppliers. And there's a lot of tools to do so.
“If your EBITDA is negative, then you might not get access to certain credit facilities that banks could provide. However, there's always a way to find support if you know how to properly structure a deal. And I think that's a part of the strategic advisory role of finance leaders right now, to identify those opportunities quickly and understand what works best in the situation of your company.
“It might be that you just need to request a breach loan to your investors. Or to request a prepaid payment to your largest customer. Customer alliances play a big role — they can, for example, give you equity convertible debt notes. That is a cash infusion and it's a win-win for both the larger customer, which requires your input, and your company, which gets the necessary operating funds in challenging times. And that is where the part of the finance strategic advisor comes into play. It’s all about figuring out what type of deal you’ll structure, and with whom. A bank, a private investor, a customer, a supplier? It's your job to create the best scenario for your company.”
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