When Goodroot's leadership team sought to link the fortunes of its affiliate companies together, CFO Jim Harper took several days off to consider the challenge.
Goodroot operates like a private equity firm, incubator, and back-office support provider for companies that try to reduce healthcare costs, whether by correcting improper medical billing, aligning incentives between pharmaceutical companies and payers, or by some other means.
Harper's solution was to create a model profits interest ownership structure for the affiliate companies' top executives. The model enabled Goodroot to provide them a financial incentive to work in alignment with one another's companies without burdening them, as equity owners, with a tax obligation.
"I cleared my mind of everything except this problem," Harper said last week in a CFO Thought Leader podcast. "It was a creative exercise."
A profits interest plan, unlike a capital interest plan, is based on future rather than past company profits, and therefore allows for equity-based bonus payments without generating a tax event.
"It fits well within the LLC structures that we have," he said, "and it [acts] a lot like a bonus. If you hit certain targets over three years you get a bonus. That keeps people rowing in the same direction for a longer time."
Harper became CFO of strategic pharmacy services company RemedyOne, one of Goodroot's affiliate companies, in 2019, and became CFO of Goodroot last year. The company's goal is to cut $30 billion in waste from the U.S. healthcare system by 2025, a tall order. To date, it has cut about $835 million.
"If you have a self-insured employer of, say, 1,000 employees, that's a big economic driver of our country," he said. "Their benefits are structured in such a way that they're not efficient. We peel down with them all the detail ... how you might restructure that to reduce those costs. That can be $1 million in savings for a company that size. That extra $1 million can increase your capital, your business."
Harper came up through the consulting ranks as a manager with Arthur Andersen before joining Stanley, the tool manufacturing giant, as its North American controller while it was merging with Black & Decker, another big tool maker.
"We created these special rooms that had a screen in front of you — this was well before Zoom — and another like room in China, France, Belgium," said Harper, describing the meetings company controllers had as the merger was underway.
The combination of the two companies meant integrating very different accounting approaches, with Stanley having a much more centralized process than Black & Decker.
"One of the major finance transformation projects we had, we had to physically go out to Black & Decker and understand the process, walk through the change management, because it's a fundamental change to move from one paradigm to a different one and then migrate that over," he said. "It took a lot of time, but it's something Stanley's very good at."
Cash flow focus
At the combined company, he and the other controllers and their teams were under the gun not to lose sight of free cash flow, one of the most important metrics the company tracked.
"Three things come out of free cash flow," he said. "One is investment in the business for organic growth, and also for efficiency. Two is acquisition of the No. 1 or No. 2 company in an industry that would fit in Stanley's portfolio. We're always looking at those targets. And three, to increase the share price, with stock buybacks or continued payment of the dividend. Stanley has one of the longest running dividend payments of any company in history."
Although it could be stressful to stay ahead of cash problems to ensure no surprises before earnings calls, there was never any question that it needed to be done.
"A lot of pressure and fear in these meetings," he said. "At the same time, everyone knew exactly why it mattered. We talked about it incessantly."
At Arthur Andersen, Harper said he rose through the ranks relatively quickly because of his willingness to put in 80-hour weeks and accept each opportunity that came his way.
"In your early 20s, you have all the energy in the world," he said.
The company, which dissolved in 2002 after two of its clients, Enron and Worldcom, were embroiled in accounting scandals, deployed a practice called chargeability to drive performance from its people. The company published a list on how much in charge fees each consultant was generating.
"You have a dollar sign on your head," he said. "It was very much black and white, and very clear to me you wanted to be on the top of that list. I made sure I was in the top 20."
The experience was central to his rise. It helped to condition him for the controllership rigors at Stanley and his move into the intricacies of healthcare.
"The U.S. has an extraordinarily innovative healthcare system and provides extraordinary service, but the way it's paid for and disseminated ... is extraordinarily complex," he said.