Back in 2002, when Stephen Grist was nearing the end of a year-long process to get his company out of Chapter 11 bankruptcy, he took a step back from the 7-day a week workload as CFO and realized the company wasn’t well prepared to thrive once it exited the process. The company, Viatel, had been making its money developing and selling fiber optic networks but that business was disappearing fast.
"As I looked at what was happening in the industry, I recognized that the business model really wasn’t going to end up being a success for the company," Grist said last week in a CFO Thought Leader podcast. "We needed to fundamentally shift our thinking. The business managers were so focused on taking the hill — 'This is our business!' — you’re not really capable of identifying where those disruptive risks affecting the company are coming from."
After the company exited, Grist worked with the general counsel to reposition the company for future revenue opportunities.
"We took it upon ourselves to engage some bankers to go look for some complimentary add-ons and we picked up a couple of Internet companies and completely changed the way the company looked from that point on," he said.
"Every time I come into a company and it’s time to do the long-term business plan, as a CFO you’ve got a different view of the world and you can ask those questions, in particular if you’re going into a founder-led business. Given they’re so caught up in their vision of the company and its future, they don’t have the ability to see those shifts in the underlying industry."
Today, Grist is CFO of Bohemia Interactive Simulations, a company that provides virtual environments for the U.S. and NATO-aligned militaries and their contractors to train personnel in combat and other decision-making environments without having to incur the costs and risks of live training.
"You could be talking about a mine-clearing operation," he said, "or how you operate in a convoy which has an IED exploding next to it. What’s the next steps soldiers need to take to protect themselves? What’s interesting about our software is it's flexible, so people can create any sort of scenario."
Traditional licensing model
Because of the secure nature of the platforms they work on, the company operates using a traditional transactional business model, relying on licensing fees and maintenance contracts, rather than as a software-as-a-service (SaaS) model, which in recent years has become the model of choice for most software companies.
"We are behind super firewalls," he said. "There are some things we are providing that are on their own internal cloud systems, but it is for the most part a fairly traditional server client relationship. [Also], as we move from simulation to closer to operations, we’ve now got technology where, if you’re at a forward operating base, you can potentially get some drone data of the location you’re actually going to be operating in tomorrow. You can suck that drone data up, put it into a simulated terrain, and start training on what you’re going to see over the next hill. In that kind of environment, your internet connectivity might be compromised. So a SaaS solution is not necessarily going to work for you."
As part of its model, it works with its military clients to customize the training platforms. That generates additional income, with clients paying for the upgrades, but it also helps them offer better simulations to others.
"The Swedes might say the way you do snow just isn’t quite how the snow is in Sweden, so we’d like to pay you some money to improve the dealing with snow," he said. "And you can put that back into the product baseline."
In a relatively new move, the company is expanding beyond militaries to work with private contractors like Lockheed Martin and Northrop Grumman. The goal is to add revenue opportunities to fill gaps in the payment lag times characteristic of government procurement.
"The government buying cycle can be very fraught and elongated," he said. "In the U.S. it’s actually relatively straight-forward compared to what we’ve experienced in certain European countries where projects keep getting put out to tender and the tender gets canceled and put out all over again, multiple times over.
"It makes my life as a CFO difficult. It’s really difficult to effectively predict when a deal is actually going to be awarded, because even though they might have a date for an award, there can be all sorts of hiccups along the way and stuff can get pushed out," Grist said.
Grist got started in finance a little more than 20 years ago as an auditor with Deloitte in Chile. After two years, he took a position overseeing the entire Latin American finance operations for the company he was auditing, an Australian-based mining software provider.
"I was 27 years old and I thought, 'Gosh, I’ve got this responsibility for an entire continent for this mining software company,'" he said.
He then moved to Viacom, the telecoms company, which went bankrupt while trying to spend $2 billion creating fiber optic networks.
"The CEO called me up to say the CFO had left the company, and would I accept the position?" Grist said. "And so, facing down the daunting task of how on earth do you drag a company out of Chapter 11 bankruptcy and you owe $2 billion to high-yield debt investors, I said, 'Yeah, absolutely. Count me in. I’m up for this challenge,' because I couldn’t think of a more interesting way to get thrown into the deep end, and try to create something exciting."
After guiding the company out of bankruptcy, Grist took a number of CFO jobs in venture capital- and private equity-backed technology companies before landing at Bohemia.
Grist said the key to success with these types of companies is to bring an entrepreneurial mindset to the CFO job, something you won’t necessarily get in your training as a chartered accountant in the U.K. (the equivalent of CPA training in the United States). You also need to believe in the promise of the technology.
"You have to buy into what the company is doing," he said. "But you also need to bring a degree of pragmatism and general business knowledge."
At Bohemia, because of its traditional revenue model and the slow sales cycle, he has little need to look at the kind of metrics that SaaS companies fixate on, such as annual recurring revenue and customer churn. Instead, he looks at customer sales.
"Every couple of weeks, with every sprint of the development cycle, that’s when I’ll get the metrics on the development we’ve achieved in that period, whether that is customer facing development or our own internally funded research and development, and I’ll look at how those are progressing compared with budget and what we were expecting for our customer billings."
Grist said he follows a roadmap of things the company wants to do. "We’ve costed out that roadmap and we also have the end dates of those things we want to do," he said. "So, I can accurately tell quarter by quarter where our internal R&D dollars are being spent and where they should be tracking to. Every two weeks I get information from the sprints developers are going through, so I can see if we’re still spending money on an activity that should have stopped by now."
That's where the pragmatism comes in. It's the CFOs job to see the business as a whole and make the decisions that will keep the company on the roadmap.