As published in San Diego Daily Transcript, Tuesday October 31, 2002

As I talk to the CEOs of companies, I am struck by how many really do not know what a chief financial officer does or how to use their CFO effectively.

Some believe a CFO is the same thing as an accountant and just has to make sure that the numbers add up at the end of the month. Others believe a CFOs job is to raise money for a company, and that he or she must have a fat Rolodex to raise money from investors. Neither of these beliefs is right. Neither allows a company to hire the most effective CFO for its business or to fully utilize the skills that it may already have with its current CFO.

So just what does a CFO do anyway?

The CFO function can be broken down into several functional areas. Let's take a look at each of them.

Controllership. This relates to the accounting, reporting and financial controls in a company for the purpose of producing timely and accurate historical financial statements. The controllership function is mostly backward-looking. It measures what happened last month, last quarter and last year for the purpose of reporting financial performance to management, investors, lenders, taxing authorities and others. This area may have a significant number of people working in it, and it is what most people mention when they think about the duties of a CFO. To be sure, it is a major responsibility of the CFO. Sometimes, a controller who reports to the CFO manages this area.

Treasury. This relates to the stewardship of a company's cash and similar assets according to policies laid down by the board or management. The purpose here is to invest the company's cash so that there is a balance between risk and return and so that cash is available when the company needs it. The treasurer may also be responsible for tracking all of a company's equipment and for safeguarding those assets through insurance. Sometimes a treasurer who reports to the CFO manages this area.

Capital Structure. This involves developing the optimum short- and long-term capital structure of the business and managing investor relations and capital procurement to obtain the desired structure. This area is of major strategic importance and is particularly important for early stage or quickly growing companies. Size and timing of stock and debt offerings are important to a company's stability and growth and to the creation of value for shareholders. The effective CFO works directly with the CEO to identify investors, make presentations to them and negotiate terms.

Executive Reporting System and Economic Modeling. This relates to identifying the activities with the greatest impact on the performance of the business and reporting those activities on a real time basis to senior management and to line managers who can directly affect those activities. This may involve engineering information systems to allow for the gathering of essential information. The controllership function can tell a company where it was, but a successful company needs to know where it is going. An economic model and effective executive reporting system is a must. This is not the same as a budget. Rather, it is a tool that incorporates the key success measures and economic variables of a company into a robust model of what is happening in a company. It allows management to forecast where it is going based upon its assumptions for products, pricing, growth, expenses, employees and so on. The American Express Card ad said, “Don't leave home without it.” We can restate this for an effective economic model, “Don't run your business without one.”

Strategic Business Advice and Financial Market Intelligence. This involves providing senior management with radically objective, forward-looking, micro-economic analysis of the business and serving as a seasoned business confidant. It includes bringing a range of resources, contacts and financial market intelligence to the company to enhance management's ability to execute the company's mission. This is crucial for determining a company's exit strategy. For example, what is the desire of the company's owners? An initial public offering? Acquisition by a strategic partner? Remaining privately held? Remaining family held? By knowing the final goal, operational decisions can be made in the context of taking a company to its goal.

The astute reader will see that the above functions fall into three temporal categories: backward-looking, present and forward-looking. The backward-looking controllership function and the present-focused treasury function are important, but they do not take advantage of the expertise that a complete CFO can bring to a company. For a CEO to only look to filling the ac- counting or money-raising areas is to greatly underutilize the power that a competent CFO can provide. It is the forward-looking functions that distinguish the CFO from a controller or a treasurer.

By hiring a CFO with a balanced set of the above skills, a company can do a much better job of meeting its challenges head on. Understanding the responsibilities of a CFO also allows senior management to make the most effective use of an existing CFO. Either by taking advantage of un-utilized skills or providing additional support in key areas.

As published in San Diego Daily Transcript, Tuesday December 3, 2002

I often hear from CEOs, business owners and managers that they receive monthly financial reports, but that they don't understand them. Usually they blame themselves for not having the knowledge or the inclination to make sense of the reports.

Baloney.

CEOs and others are plenty smart. It is the reports that are the problem. One of a CFO's duties is to create an executive reporting system and a financial model that generate understandable reports that can be used by management to run the business. These are very different than the financial statements typically created by the accounting department and the controller.

Most accounting reports address the requirements of the Internal Revenue Service, regulatory authorities, banks and investors. These entities want to know how well the company did in the last month, quarter or year. Various rules known as Generally Accepted Accounting Principles (GAAP) help to make reports comparable from company to company.

To be effective, managers don't need to know how the company did, they need to know how it is doing, and where it is going. They need information and tools that will help them make decisions about hiring, expanding production and acquiring capital equipment. They want to know when the company will need more office space or when to shut down a production line for extended maintenance. The in- formation varies by company, by the person's management level, and by the type of job held by that person in the company.

Moreover, the type of information needed changes over time. Performance measures that were important last year may no longer be important after a major new product line has been launched or the company has divested a division. The board of directors needs different information than the manager of production. Knowing what information to present is critical to making it useful.

Even when the right information is presented, I often see major problems with how that information is presented; columns and columns of figures, page after page after page. Sometimes they go on for 20 or 30 pages, when a simple graph would really provide more information and be easier to understand.

But just using the cool graphing tools in Microsoft Excel or other software doesn't mean you will automatically get the most effective graph to present the information. Bar charts, pie charts, line graphs, percentage bars, radar charts and other charts all have different purposes. I recently received an industry report from one of the Big Four accounting firms. Even though they do extensive industry sector reports and get paid handsomely for the work they do, the type of graph used for seven out of 15 graphs was poorly chosen.

I find that many people do not know how to use their tools effectively. Here are some examples:

• I see financial reports dealing with millions of dollars and the numbers are presented all the way down to the penny. Could this be true? Can a five-year business projection dealing with millions of dollars really be exact down to the penny? If you know someone with that ability, I want them to be my investment adviser. I can't even get that close estimating the tab for tomorrow's lunch.

• Printed spreadsheets with all the grid lines turned on. Yuck. Using a computer to print graph paper is crazy. Especially when only a few of the cells contain any information. Use lines where they help guide the eye of the user to essential information. A few lines are good. More are not necessarily better.

• Believe it or not, I have also seen computer spreadsheets with no formulas. The totals for the rows and columns were totaled using a handheld calculator and then plugged in manually.

• Why have a computer? Sometimes these people are the ones that complain that their computer isn't fast enough. Please. Learn the basics. Most spreadsheets have amazing power. I consider myself a power user and am still amazed by the types of calculations and auto formatting abilities that my spreadsheet can do.

• From the look of some reports that I see, some people have just discovered color and others haven't discovered it at all. Handing out a report with full page graphs with a solid color background and meaningless data to a room full of people may look impressive, but it only points out that its creator doesn't know what they are doing and doesn't care about the cost. Likewise, excessive use of colors and fonts on a financial statement is actually distracting from the purpose for which the report was created. Some color is good. More is not necessarily better.

Marketing information for hospital system turnaround while a partner with Tatum

AT A GLANCE

Empire Health Services, with an annual operating loss of nearly $34 million, threatens solvency posing risk bondholders could call loans forcing organization into bankruptcy. Tatum curtailed losses, improved cash position, restored bondholder confidence and resulted in operating profit of $4 million within one year.

Empire Health Services suffered from poor financial reporting and metrics which prevented effective decision making. Tatum developed a clear financial reporting system with online access for Board members and online executive dashboard for daily information.

Empire Health Services had no IT strategy, governance structure or service-level agreements. Tatum provided clear assessment of needs and capabilities and developed governance structure and operational implementation plan.

Empire Health Services had no comprehensive multi year financial model or strategic market analysis. Tatum created a robust ongoing financial model by operating unit and comprehensive market demographics.

Brief Overview

For more than 100 years, the hospitals and clinics of Empire Health Services provided inpatient and outpatient healthcare in and around Spokane, Washington. Empire’s two hospitals, Deaconess Medical Center and Valley Hospital and Medical Center, have 508 licensed acute-care beds. In addition, four urgent-care clinics treat basic illnesses and injuries and two outreach clinics care for the underserved community.

Empire Health Services is no ordinary provider. Deaconess Medical Center was recognized by HealthGrades as a national leader in cardiac, vascular and GI care. It was also named one of the top 100 U.S. heart hospitals by Solucient’s 100 Top Hospitals® study. With 2,600 employees, Empire Health is among Spokane’s largest employers and is a prominent and trusted fixture in the community. Empire Health’s financial health, however, did not keep up with its medical reputation. In 2004, its operating loss reached $34 million on revenues of $238 million.

Situation

Although Empire Health is a not-for-profit provider, it is not exempt from economic reality. In mid 2004, the company was reeling from fiscal mismanagement, outdated operational processes and an absence of strong executive leadership. Its 2004 operating loss of $34 million violated bondholder covenants and prompted its Board of Directors to think about the unthinkable: selling, merging or closing the venerable, century-old health system.

The pain was felt by the entire organization and it affected financial decisions, daily operations, and organizational culture. “The institution was experiencing continuing and heavy losses,” said Mike Taylor, a prominent Spokane business owner who sits on Empire Health’s Board of Directors. “The management team was unable—not unwilling, but unable—to bring the situation into steady control and stabilization.” Taylor believes Empire Health had failed to overhaul old business practices in reimbursements, collections and other basic operations, leaving the organization vulnerable to a seizure by its creditors. Furthermore, Empire’s ability to raise capital was crippled.

To reduce costs, Empire previously resorted to across-the-board wage cuts sapping employee morale. Worries about the company’s financial health led to an exodus of medical staff. With losses mounting and bondholders considering calling their loans, the Board was weighing a bankruptcy filing. As former Board Chairman Chris Marr told a local newspaper, “there were alligators at the door.”

“Tatum focused not just on short-term fixes but also on the organization’s ability to sustain the improvements.” - Mike Taylor, Member of Empire HealthServices Board of Directors

Why Tatum

Empire Health’s Board of Directors, recognizing the urgency of the crisis and examined outside specialists with experience in turning around distressed operations. Empire chose Tatum for a comprehensive management program to restore the company’s financial and operational health. “We needed someone who could come in to make some very quick, drastic changes to improve our situation,” says Patty White, Empire Health’s Vice President of Leadership and Organizational Development. A Tatum team consisting of a CEO, a CFO and a Vice President of Business Development was immediately integrated to lead Empire’s restructuring. Tatum rapidly assessed critical problems, evaluated the company’s immediate cash needs and identified ways to curtail daily operating losses.

Results

Within weeks, Tatum addressed immediate cash-management and collection issues bleeding the organization of needed cash. The team wrote-off stale assets and instituted methodical improvements in budgeting, capital and contract approval processes and moved decisively to demand more participation from the Board. Further, Tatum changed Empire’s traditional 12-month budget in favor of a six- month budget process enforcing an enterprise-wide sense of urgency. Additionally, Tatum developed an online executive dashboard of key financial and operating metrics giving executives and managers instant access to previously buried information about cash, patient census, collection rates and other critical factors.

“Tatum was able to distill the strategic implications of what was happening, giving the Board a better basis of making governance decisions.” - Mike Taylor, Member of Empire Health Services Board of Directors Chairman

Tatum focused not just on short-term fixes but also on the organization’s ability to sustain the improvements. The changes made by Tatum improved cash available and calmed nervous bondholders. With the bleeding arrested, the Tatum team went deeper implementing changes that would have a longer-term impact. A complicated negotiation with a labor union stalled for more than a year was completed. Tatum’s Technology Leadership Practice was engaged to assess Empire’s critical information technology systems and recommend strategic improvements while specialists from Tatum’s Healthcare Practice developed a strategic market assessment and a multi-year financial model.

Tatum also changed the way employees viewed their jobs building enthusiasm for achieving what is now Empire Health’s BHAG (Big, Hairy, Audacious Goal). This ten-year goal is to make Empire Health Services the nation’s number one healthcare provider in safety and satisfaction. When it closed the books on 2005, Empire Health Services swung from a $34 million loss to a $4 million profit on revenues of $263 million in 2005. The company’s cash on-hand doubled to nearly $35 million. Pay cuts were restored and an incentive plan was implemented. Morale climbed. With operations greatly improved, Tatum began advising Empire Health about options for raising fresh capital to support new projects —a course that was unthinkable less than two years before.

“Tatum had a very surgical approach. They didn’t just go in wholesale and cut staff and get to a budget number,” says Taylor. “They looked at individual aspects of the organization and how they performed and empowered employees to help themselves.”

About Tatum

Companies turn to Tatum when critical business challenges arise because we immediately deliver C-level financial and technology operational expertise via solutions tailored to the Office of the CFO. We understand the urgency of NOW and our VELOCI–T solutions were designed to help business leaders accelerate results to create more value ™.

©2011, Tatum. All rights reserved. Tatum, the Tatum logo, Create more value., and Tatum Way are trademarks of Tatum.

Marketing information for biotech CFO project while a partner with Tatum

“There had never been a full-time CEO and there had not been a sound business management perspective. NewBiotics had almost no infrastructure. However, it had good people, novel and proprietary technology, and an excellent opportunity if it could get its products to the market- place. NewBiotics needed discipline. At the same time, we did not want to impede the growth of the company.” -Tom Mizelle, President and CEO, NewBiotics

At NewBiotics, excitement and expectations are high. The biotech company has begun clinical trials for its cancer treatment drug at two prominent medical centers in California. It has another compound for rheumatoid arthritis for which it is planning clinical trials in Europe. The budget is balanced; cash flow is under control; information technology systems are solid; the company’s facility is spacious and efficient; productivity is up; and a fourth round of venture capital is promising.

The scene at NewBiotics today is dramatically different from the one Tom Mizelle faced when he stepped in as CEO last year. Essentially, the company had been formed by a group of cutting-edge scientists pursuing an innovative approach to develop new drugs for cancer and infectious diseases. The company’s technology embeds a powerful toxin into a benign compound. The diseased cell’s resistance mechanism activates the toxin, causing the cell to self-destruct with minimal side effects to the patient. “It was break-through science, but the company was not operating as an efficient business,” says Mizelle. In fact, since its founding in 1997, the biotech firm had never had a clear and detailed budget nor very structured financial or management systems in place. It was growing fast in cramped quarters and increasing research and development spending rapidly. “There had never been a full-time CEO and there had not been a sound business management perspective,“ he comments. “NewBiotics had almost no infrastructure. However, it had good people, novel and proprietary technology, and an excellent opportunity if it could get its products to the marketplace. NewBiotics needed discipline, but we did not want to impede the growth of the company.”

As CEO, Mizelle set out to bring that discipline to NewBiotics. The first need was in finance. He heard about Tatum CFO Partners through NewBiotics’ law firm and made contact. Two months after Mizelle took the reins as CEO, Tatum CFO Partner Irwin Hurn joined NewBiotics. “We could not have found a better partner than Irwin,” says Mizelle. “He brought maturity, leadership and good, sound business reasoning where there was none. He has so many skill sets and he stepped up to the plate in any number of things.” An added plus was Hurn’s background in biology as a researcher and as a CFO in the healthcare and biomedical industries. It gave him credibility with NewBiotics’ scientists, and an intimate understanding of the company’s physical and operational needs.

Within two weeks of his arrival at NewBiotics, Hurn’s responsibilities expanded from finance to include information systems and facilities. “The mission was to change a freewheeling research group into a business,” Hurn notes. It was a challenging assignment. In the first month, he created a forward-looking cash flow model, which identified a severe cash flow crisis only six months away. By the second month, he implemented a comprehensive plan to manage $15 million in cash that had been received from venture capitalists. Within three months, he created a comprehensive departmental budget, set accounting and reporting policies, and prepared for a major accounting system conversion. He introduced NewBiotics to venture capital sources and assisted in presentations to venture capital and investment banking firms. He also put in place the first directors and officers and employment practices insurance. Skillful planning and negotiation yielded hundreds of thousands of dollars in savings while improving results. Throughout the process, Hurn used other Tatum partners, Tatum’s CFO Link, and Tatum’s BluePlan as resources for these sweeping changes.

Says Mizelle, “Money was our biggest concern and the need for financial controls was very important. Irwin put in place the first meaningful budget the company had ever had. It was a sophisticated departmentalized budget to provide NewBiotics with financial stability for 15 months. Getting that budget widely accepted took some convincing and some politicking as well,” he adds. “We worked hard to develop a corporate culture of cost consciousness. It didn’t take long for everyone to see the value of financial discipline and the procedures we established. It’s amazing what a different view our people have now.”

While making the financial changes, Hurn evaluated information technology systems and infrastructure. Within one month, he introduced NewBiotics to Tatum CIO and engaged Tatum CIO Partner Norbert Kubilus to perform an in-depth analysis of information technology needs and prepare a plan for action. NewBiotics restructured the entire information system. Over the next six months, Hurn restructured and hardened network architecture to improve security and hired a full-time IT specialist. He also began an electronic document management system compatible with FDA requirements, started a system to archive critical intellectual property resources such as scientific records and patent documents, and developed an intranet to form a corporate “digital nervous system.”

Meanwhile, NewBiotics was bursting out of its 14,000 square feet of cramped, inefficient laboratory space. Hurn took immediate action. Within one month, he evaluated architectural designs and construction plans and worked with the research scientists so that they knew their needs were being met. As a result of the planning, it became clear that there was a critical need for larger and more efficient laboratory space to accommodate growth. Hurn searched for new corporate headquarters and within two months found what Mizelle calls a “fabulous opportunity.” A large biotech company was building “beautiful new space with state-of-the-art scientific labs,” and wanted to sublease 35,000 square feet of office and lab space, explains Mizelle. Hurn negotiated a lease at below market rate, with terms that preserved NewBiotics’ precious cash. Hurn led the design and construction team for fast track modifications to the new facilities. Moving the entire company required precise orchestrating that included the transfer of numerous radioactive materials, toxic chemicals and delicate temperature-sensitive biologic samples (some at minus 250 degrees F). All this while NewBiotics’ research and business continued.

“It was a complex move that was well-coordinated,” says Mizelle. “And there is no question that the move improved our productivity. NewBiotics’ goal is to have a new molecule in clinical trials every year. One year later, we are a disciplined organization, with finance, business systems and productivity running at top level. Now, NewBiotics can accomplish that goal.”

©2011, Tatum. All rights reserved. Tatum, the Tatum logo, Create more value., and Tatum Way are trademarks of Tatum.

Marketing information for not-for-profit turnaround CFO while with Tatum

“It’s a new day here. We are forward-focused. The transition began with the arrival of Tatum.” -Dr. Mick Hager, CEO, San Diego Natural History Museum

The board members and management team of the not-for-profit San Diego Natural History Museum held a special party in June 2004. Its purpose was to symbolically put behind them four difficult years and to celebrate a new day. “We beat a piñata that represented past construction problems, and we wrote down our negative thoughts about the past budget difficulties, put them in a coffin, nailed it shut, and burned the coffin,” says Dr. Mick Hager, CEO of the Museum. “It’s a new day here. We are forward-focused. The transition began with the arrival of Tatum.”

The San Diego Society of Natural History, founded in 1874, is the second oldest scientific institution west of the Mississippi. Established to support the natural science of southern California, the Society opened its first museum in 1912. Over the years, the Museum focused its research and edu- cation on southern California and Baja California. In April 2001 it more than doubled the size of its 1933 vintage building in historic Balboa Park, with a $40 million, 90,000 square foot addition. It was this recent expansion that drove the Museum to the edge.

Hager says the Museum was in a critical financial state, caused by a long construction project. “The project resulted in challenges and obligations that took time, money and energy. This diverted attention from operations, especially finance, and it pretty much put a stop to fund-raising as well,” he notes. The morale of the 23-member board and the staff plummeted. The Museum needed financial turn- around expertise.

Recommended by the Museum’s audit firm, Tatum was selected for its financial knowledge and because of the ease of bringing in high-level financial leadership quickly with- out making a long-term commitment. Tatum partner, Irwin Hurn, was engaged for a four-month, part-time assignment. Hurn’s financial expertise and leadership capabilities as well as his scientific background in biology and natural sciences made him the ideal executive for this transitional leadership position.

“Bringing in Tatum was the start of our turnaround,” says Hager. “Irwin is a person who engenders a lot of trust. Knowing we had the backing of the Tatum organization, our board and staff quickly regained their confidence in our ability to solve the issues, get the Museum back on track and move forward.” Hager adds that Hurn’s scientific background was a big plus. “It gave him credibility with our staff of about 120 people. He understood that the staff is not financially minded and he was able to explain to every department its budget and how it relates to the whole Museum. He eased a lot of their concerns about how to manage money.”

Hurn faced immediate and critical challenges: Accounting and financial functions and records needed attention; the accounting staff was dispirited; and he had to deal with major cash flow problems to meet daily needs. Moreover, within three weeks after Hurn started, a major fire caused extensive damage to the museum, requiring the Museum to shut down for one month while round-the-clock crews re- paired the smoke and water damage.

Hurn became an essential part of the executive team and reported to the board and its executive, finance and audit committees. “Tatum rapidly stabilized the situation,” says Hager. “It was intense and hard work, but Irwin brought order to what seemed like chaos.” Hurn set straight the Museum’s cash flow and accounts payable. For example, the Museum was spending valuable time dealing with angry vendors who had not been paid. Yet there were grant funds available. “The system and the people were not functioning properly, so the vendors went unpaid,” remarks Hager. Using Tatum’s knowledge network of its 400 partners as a resource, Hurn established a payroll system that was more efficient and followed best practices. He also dramatically improved financial reporting and then trained members of each department to understand their role in the budget process. “That really helped us get the budget back on target and in order,” notes Hager. A difficult audit was completed successfully with an unqualified audit opinion. With the financial situation stabilized, the Museum staff and Board, in early 2004, were able to secure a major $5 million gift. Because of the resources provided by the gift, the Museum is now actively planning its future.

The Museum extended Hurn’s part-time CFO position by four months and Hurn restructured the accounting department and hired an experienced controller. He also coordinated an open search for a permanent full-time CFO who would lead the Museum forward on strong financial footing. With numerous experienced candidates to choose from, the Museum unanimously selected a Tatum partner, George Brooks-Gonyer. Brooks-Gonyer’s education, financial experience, and leadership record made him the “dream candidate” for the Museum. Brooks-Gonyer immediately established a rapport with the Museum and began a strong budgeting and financial planning process involving the staff, a key element for moving accountability to the departments. “Both Irwin and George love the museum environment and believe strongly in the Museum’s mission,” says Hager. “Tatum inspired us and led us through an unbelievably tough time. I have tremendous respect for Tatum Partners and what they do.”

©2011, Tatum. All rights reserved. Tatum, the Tatum logo, Create more value., and Tatum Way are trademarks of Tatum.