Chief Financial Officer, 8X8 INC
M&A in Tech, Deal Desks, and Resource Allocation: Insights From 8x8 CFO Kevin Kraus
Kevin Kraus, the CFO of publicly traded technology company 8x8 is CJ's guest for this episode. Having done over 14 M&A ...
About Kevin Kraus
Kevin Kraus, CFO of 8x8, discussed the company's financial strategy and operational philosophy in a September 2024 podcast. He stated that "cash flow from operations is our Northstar," and that the company focuses on maximizing this metric and returning value to investors, including through paying down debt. Kraus described his approach to M&A, emphasizing the importance of a multifunctional team, strategic rationale, and cultural fit. He noted that the people who perform day-to-day jobs are often best suited for integration work, despite the challenge of balancing it with their regular duties. Kraus also outlined his views on deal desks, describing 8x8's as a "deal execution desk" that aims to speed up approvals by providing pricing tools with red-light or green-light answers. He mentioned that the company prioritizes paying down high-interest debt over share repurchases to deleverage the balance sheet. Regarding internal management, Kraus said he operates his FP&A teams with a "one throat to choke" philosophy, giving each functional leader a single finance contact. He added that he believes great CFOs demonstrate empathy, encourage continuous learning, and focus on succession planning to ensure the organization can operate without them.
Transcript (39 segments)
C
CJ0:00
Yesterday's price is not today's price. Hey, well thank you Fat Joe and welcome to Run the Numbers, where I interview world-class CFOs, operators, and the investors who fund them on how to get the most out of your company's performance. This podcast is a playbook of sorts for ambitious people in the world of finance, strategy, and operations. Today, my guest is Kevin Kraus, the CFO of publicly traded technology company 8x8. If you've ever called a customer support hotline, there's a good chance they were using 8x8 to help you out. Kevin has done over 14 M&A transactions in his career and has done the post-integration work to know what good looks like. He's also a pro when it comes to setting up deal desks to make sales go faster. More specifically, on this episode we cover: doing customer diligence in M&A transactions, why integration post-M&A should be done by the people within the company functions, not a separate integration team, tactical advice for standing up a deal desk, how he thinks about capital allocation decisions and how paying down debt is a form of returning capital to shareholders, the value of getting to a no quickly when you're an FP&A team fielding requests from leaders, and how employees who work with you will remember how you made them feel more so than what you said. Kevin gives a great explanation of why you should hire someone who wants to take your job and he makes me think about the value of succession planning, something that companies often shy away from discussing. All this and much more after a short word from our sponsors. Cash is king. As a CFO of a SaaS company, I know firsthand how important it is to maintain a healthy AR balance. If you can't effectively manage cash, you can't service debt, make payroll, or invest in growing your business. That's why I'm so excited to partner with the sponsor of today's episode, Maxio, the leading billing and financial operations platform for B2B SaaS. Maxio helps top SaaS companies like Chili Piper, Crunchbase, and Stack Overflow get cash in the door faster by automating collections and dunning. Gone are the days of manually chasing down invoices. Join the 2,500-plus subscription businesses using Maxio, formerly SaaS Optics and Chargify, to eliminate revenue leakage and streamline order to cash. It's never been easier to get paid. Visit maxio.com. Supercharge your financial operations in 2024. Not only does requesting a demo using the Run the Numbers link help support this podcast, you also receive a 10% discount on your first year with Maxio. That's maxio.com/run-the-numbers. OK, serious question for all my accounting pros here today. Are you doing what you were hired to do? What I mean is, do you have time to actually be a business partner or are you buried in tedious manual tasks just to get your journal entries prepared every month? I know how that feels. Leapfin is here to help with that. Leapfin is accounting automation software that automatically prepares and posts reliable journal entries, and that's just the beginning. High-growth businesses like Reddit, Canva, and SIE choose Leapfin to eliminate manual tasks, accelerate month-end close, and enable accounting leaders like you to provide faster insights that will help your company grow. If you're battling messy transaction data from Stripe, Adyen, Shopify, Apple Pay, and other PSPs, and then battling again to get it all into NetSuite, go to leapfin.com to watch their short product intro video. And if you like what you see, request a 15-minute conversation to learn how accounting automation can help you and your team. Check out leapfin.com today. That's leap, like jump, fin, like shark. I just made that up. I hope they're OK with it. leapfin.com. Hey Kevin, thanks for joining the podcast today.
K
Kevin Kraus0:00
Cash flow from operations is our Northstar. The value of a company is basically the value of its discounted future cash flows. And so what we're focused on is maximizing our cash flow from operations, returning value to our investors. You can also do that by paying down debt. If you did nothing else, all else being equal, if you pay down your debt, you're apportioning more of the company's value to your equity holders.
Hey, thanks CJ. I appreciate being invited. Glad to be with you.
Sure. It's kind of interesting because I've seen some really successful ones and some not so successful ones. And most of the ones I've done were on the buy side. I did a couple of sells, whole company sales to private equity and things like that, and also some spin-offs. So most of it was on the buy side. For me, how it's done right is first of all, you need to get a collective team that's multifunctional. Some of the stuff is probably pretty obvious to say, but a multi-functional team that can do diligence. Have a clear program management on your diligence, and don't lose sight of the strategic rationale for the acquisition. A lot of times companies can get hung up in the next bright shiny object type of situation, and you want to avoid that. At the end of the day, it's nice to acquire something that's cool, but you got to acquire something that's going to bring value to the company over the long term. Having gone through so many, don't lose sight of the strategic rationale for doing the deal. The other thing is the communication with the target. Developing a relationship with the leaders in the organization that you're looking to acquire, say if it's a startup, speaking with the founders and key decision makers. If it's a larger entity, get to know the people, spend time with them, visit them in person, and cultivate a relationship so there can be mutual trust. You're going to learn something about their culture and about them as people, and they're going to learn something about you and your culture, because the cultural fit has to work. In addition to not losing sight of the strategic rationale, the culture fit is absolutely critical because you don't want to have an 'us versus them' attitude. All the rest of the things, the diligence, obviously critically important. Don't gloss over it, particularly customer diligence and back office diligence as well. But I think the softer side of the diligence matters too.
Customer diligence is very delicate. Obviously the target company would not necessarily want their customers to know that they're for sale. So it can be a very delicate situation. NDAs would be involved, and you'd have to have a mutual agreement around when is the right time to go out and do any kind of customer diligence. I've been involved in deals where we had agreements in place that after the LOI is signed and you're farther along in the process, then there are times where you discreetly reach out to the customers to do diligence. You can do that directly or through a third party to keep anonymity. Sometimes you as the acquirer don't necessarily want people to know that you're the interested party. You don't want to spook the target's customers. So it's a fine line, and I think each situation is different. But done right, it is a very effective and critical tool in the diligence process. You kind of want to know if they're going to remain customers, what's their sentiment about the target's service offering. And sometimes you wouldn't do customer diligence at all, like for pre-revenue acquisitions where it wasn't necessary.
For good, bad, or ugly, the people who actually do the day-to-day jobs are usually the best people to do the integration. So that becomes your second job in the company. I know there are huge companies that have integration teams, and you can hire consultants to help project manage if you need that type of support. But I'm a big believer in getting a project management group, either third-party or internal, but the people who do the best at integrating are the people who know how the company operates. For example, in finance they understand the ERP system, the billing system, provisioning systems. That is very helpful, provided you have the right people doing those jobs in the first place. They need to have good company history, a lot of institutional knowledge, and understand the pitfalls. Those are generally the best people to do the integration. The downside is they've got their day job, but every time I've done an integration at the ground level, that was my night job. I think it can happen faster, with fewer mistakes, and you get better at it the more you do it.
C
CJ11:20
I tend to agree with you, Kevin, because the amount of tribal knowledge is underestimated when there's an acquisition. That's really what you're onboarding people into, the peculiarities and quirks of how the business functions. The time it takes to teach somebody how your company works, you could have done the work yourself. And for integrations, speed counts because the last thing you want is for your new colleagues to wonder what's going on. A Corp Dev guy I used to work with, shout out to Carrie, always stressed that the time to value for the people you're acquiring is really important because they're reaching out their arms like, 'Can I feel the walls around me? Do I know what's going on here?' And if you acquired the company primarily for the technical talent, you don't want them to leave just because they look at you like these guys do not have their stuff together.
K
Kevin Kraus12:15
It is impossible to over-communicate during an integration process. I'm not talking about daily standups, though that is productive, but reaching out, repeating yourself, all will be forgiven. Just communicate, because in the absence of communication, people are going to make up their own stories. So you have to have a very good communications plan, particularly with people implementation and integration within a larger entity. It defeats the purpose of doing the deal if you don't retain people. You want not only customer retention if it's a revenue-producing company, but also employee retention. We've done acquisitions in prior companies and here at my current company where employee retention was a real big part, especially with engineering teams. The technology is often in their brains, and you want to hold that within the company. So it's very important from an employee integration perspective to make them feel comfortable and that they belong.
C
CJ14:02
That's awesome. I want to transition to enabling sales teams. One of the reasons I was so excited to talk to you, Kevin, is that you have a deal desk set up at 8x8. Most people might have the gut reaction that a deal desk just slows things down, especially if you're in sales. In what ways have you structured yours to speed things up?
K
Kevin Kraus14:21
We're not the deal prevention desk, we're the deal execution desk. The commercial operations team reports into my work, and we want to make business operate with the least amount of friction possible. A lot of questions that would come in historically would be, 'Can I afford to give this price?' That's really what most questions are. We know what the list price is, and we give permission down to certain levels so it doesn't have to involve the deal desk at all. That's normal operations. When it comes to the deal desk, it's maybe on an exception basis. You want the fewest number of deals to have to touch the deal desk. You want to enable people and give them the authority set up the rules so they can make their own decisions. Give them a set of parameters, they don't have to send an email and wait for permission. Secondly, we created a pricing tool. It's a very simple front-end, basically a fancy Excel spreadsheet, but you put your parameters in and it gives you a red light or green light. That saves an email because they'd have to give that information anyway, so they might as well type in four or five things and see if it works. Those are a couple of things we do: give people authority and give them a tool to get an answer. We also look at how we can help run promotions, spiffs, or programs designed to grease the skids on deals. We try to get those set up in advance so they're baked into the tool. The whole idea is about how to get to a yes, not how to get to a no. The default is not no, it's a 'not yet' and we try to figure it out.
C
CJ20:45
I want to flag for the benefit of listeners that the key is to actually not let deals hit the deal desk, to prevent them ahead of time. The deal desk is there as a necessary control mechanism for exception cases, and the rest of the time it should be working with the team to speed things along. Make your quotation process as fast and self-service as possible. Kevin, you mentioned price as the core reason why things land on the deal desk. Can you speak to payment terms?
K
Kevin Kraus21:52
Price is one of the most popular reasons why things might hit the deal desk for discussion or as an exception that would bubble up to me. Also other things like time to ramp. If you're a subscription-based business like we are, if the customer signs up for a peak amount of service but it takes time to get there, that can need discussion. In terms of payment terms, in the SaaS world, you buy a subscription for something; it's a one-year prepay. That's just the way it is in our business. Annual prepay should be the default. A lot of customers will sign up for one, two, or five years but pay month-to-month. Most customers pay month-to-month, but we have plenty who do annual prepay. However, there are some telecom-related influences in our business, so it's not like buying a Salesforce. If I get a deal on my desk with a request around pricing and payment terms, I'd rather lean on price. Payment terms are not a big issue for us. Nobody's asking to pay in arrears or like, 'Give me the service now and I'll pay at the end of the year.' It's more like in different regions you can have 30-day terms in the US, 45-day terms elsewhere, 60-day in parts of Asia. That's normal. We do diligence on customer creditworthiness, but we don't get too many payment terms issues. For me, the ability to be more price flexible depends on the upsell potential with that customer. You can be a bit more flexible on pricing if you have a good sense of how the customer will grow with you, perhaps buying more of the same or other products. If you're dealing with a small shop that just wants low-cost unified communications, you set that up. But for a big customer that wants to start small, you can be more flexible because you'll make your money in the long term.
C
CJ25:25
One more question related to deal desk and then we can move on. Can you speak to the significance of ramp deals? I feel like they were really prevalent during COVID and still exist today, but perhaps under more scrutiny.
K
Kevin Kraus25:44
Ramp deals are pretty common, particularly in our market. Think about a customer on a collaboration tool like Zoom or Microsoft Teams. When you buy those products, you don't instantly deploy 50,000 of them at once. If you have a retail customer with multiple locations, a regional bank, or any company that deploys over time in a measured process, that's the ramp. If somebody buys 10,000 seats, they may take six months to ramp all of them. That's important for two things: first, you need to make sure the product is working as advertised on the customer side, and second, they want to work out the bugs. So the significance is how quickly you can get time to value for the customer. The faster they can deploy, the better. There have been layoffs in the last six months, so at renewal you can get some downsizing. A company might say, 'I bought 5,000 seats but now I only need 4,500 because we have fewer people.' Remote work stimulated the need, but back to the office might change license needs. Particularly in contact center, you want to be careful about the customer's experience. Our customers' customers use our product, so making sure it works properly is very important because it's their reputation as well. It's very deliberate when you ramp something up, especially in a contact center environment.
C
CJ29:43
Kevin, I really like that. It's about customer experience, and everybody needs to be thinking about their customer's customer.
K
Kevin Kraus30:21
I want to move on to a topic you're especially passionate about: resource allocation decisions. Before we started, you told me about a book called 'The Outsiders.' Can you tell the audience a little about the book and how it influenced how you think about capital allocation?
It's a great book. I brought it with me, not making any money by showing it. It's by William Thorndike, about 200 pages. I got introduced to it by our CEO Sam Wilson. It's about non-conventional ways that CEOs thought about adding value to their shareholders, from the 1960s into the 2000s, not necessarily tech companies. A common theme is that instead of focusing just on revenue growth, those CEOs focused on per-share metrics. They did a lot of share buybacks and looked at things differently. I highly recommend it. In our company, we focus on per-share metrics. Cash flow from operations is our Northstar. The value of a company is the value of its discounted future cash flows. We focus on maximizing our cash flow from operations and returning value to investors. You can also do that by paying down debt. If you pay down debt, you apportion more of the company's value to equity holders. So for us, paying down debt reduces interest expense, improves cash flow from operations, and it's a virtuous cycle. The market rewards efficient growth, not growth at all costs. Revenue growth that drops down to profit and cash flow. So efficiency is key. We've done a lot in that area, learned a lot about sales and marketing efficiency. Your go-to-market strategies, the type of people, sales playbooks, marketing pipe gen, all play a huge role in efficiencies. I like operating in a more debt-free manner because it gives greater flexibility for strategic or opportunistic M&A. The fortress balance sheet concept is a very low-leveraged balance sheet. Mike Saylor from MicroStrategy can borrow to buy Bitcoin, but I wouldn't encourage that.
C
CJ34:44
Kevin, as a CFO, how do you decide whether to use an incremental dollar of free cash flow to repurchase shares or buy back debt?
K
Kevin Kraus34:56
Technically, the yield and your WACC have to play a role. For us right now, we have a piece of high-interest-rate debt that isn't maturing for a while, so we choose to prepay it. More often than not, I focus on getting the balance sheet delevered, then using that cash flow in the future for buybacks later. Every company has a different circumstance. We've publicly stated we look at debt first. A lot of it for me is how it affects cash flow and how expensive the debt is.
C
CJ35:44
I was hanging out with a friend who is a private wealth manager, and I said I locked in an interest rate of 6.875% for a new house. He said that rate is your personal hurdle rate for capital allocation decisions. If you have an opportunity to invest in something at 5%, you'd probably pay down the debt instead. So I'm kind of the CFO of my own household.
K
Kevin Kraus36:23
You should be. It's opportunity cost. When I was early in my career, I had a friend who got a loan at 6.35% and we were high-fiving because rates were coming down from 7-8%. We got used to artificially low rates, but 6% for a mortgage is not abnormal historically. It's good your friend told you to think about opportunity cost.
C
CJ37:32
I want to talk about the qualities of great finance teams. You operate your FP&A teams around the 'one throat to choke' philosophy, which I love. Can you unpack how that works in terms of staffing and alignment?
K
Kevin Kraus37:50
Much of my career was spent in FP&A. The philosophy is about being a good service provider to your internal customer. The sales leader, marketing leadership, R&D, etc., each has a dedicated finance contact. I like to organize the FP&A team around that model so it's easier for the leaders. The sales leader goes to their key finance contact for any problem, rather than having to remember who to go to for different issues. It keeps things simple and helps develop a trusting and productive relationship. You can't underestimate that. The finance person learns more about their function, and the functional leader understands the issues finance cares about. Eventually, that finance person becomes an extended member of the functional team, gets invited to staff meetings, and becomes a valued member. It's all about operational efficiency and making business easier. If you need to get to a no, get to it quickly. Don't waste anybody's time. A quick, painless no is better than a drawn-out one. That's respect.
C
CJ42:22
Kevin, what qualities separate good CFOs from great ones?
K
Kevin Kraus42:28
There's technical confidence, with brilliant people who do great jobs enhancing value. But standout items are empathy for people. Make people feel good about what they're doing, say thank you. At the end of your career, how people felt about working with you is what they'll remember. They won't remember a great acquisition or stock price, but how it felt to work with you. That separates people. I've followed people to other companies because I thought they were great. The other thing is embrace continuous learning. Great CFOs are not afraid to say 'I don't know' and ask for help. Give your team a development plan, a learning plan. My career was about learning as much as I could in each job. If you have a learning plan, your career takes care of itself. Finally, surround yourself with excellence. A players hire other A players. B's hire C's, C's hire D's, and D's hire failures. So surround yourself with excellence and you'll be rewarded.
C
CJ45:26
I've heard the phrase 'hire somebody that wants to take your job.' How do you square that with hiring really smart, ambitious people while also needing patience and empathy?
K
Kevin Kraus45:40
You can teach super smart, ambitious people patience. The more I thought I knew, the more I realized how little I know. I don't have a problem hiring somebody smarter than me; I love it. I always think about how to work myself out of a job, not because I don't want it, but to make something so efficient I'm not needed in that job anymore, but I'll be needed for another. I love ambitious people, but they also need to be reasonably patient because they have a lot to learn. I'm not worried about someone wanting my job; part of my role is succession planning. You can't say you'll be the boss forever. I'm rated as a leader based on the succession plan I can show colleagues and the board. You want people who are aggressive and want to move up because that helps the company.
C
CJ48:26
What does a succession plan look like on paper? Is it a depth chart with quarterbacks, or a description of the type of person you'd want?
K
Kevin Kraus48:38
The ones I've been involved with have actual names in the organization. If your successor isn't in the organization today, what are you going to do? Develop somebody or hire from outside? It forces people to think about life in the company without them. It's your obligation to make sure the company can operate without you. That's the mark of a good leader: if they disappeared, the company could keep going.
C
CJ49:38
I'm going to take you into what we call our Long Ass Lightning Round. First question: we're all human. What's an example of something you've screwed up on the job?
K
Kevin Kraus49:55
Several companies ago, I had an issue where I didn't fully understand the comp structure in our sales team. We had annual plans, and as the person responsible for forecasting the expense for sales commissions, I didn't fully understand the potential for the expense to inflect. We clearly did not forecast the exponential ramp that ensued. It was great for the company because we were doing really good business, but I looked like a complete fool. It elevated to the point where the CEO asked what happened. It was a great learning experience. One way to mitigate that is to have half-year or quarterly plans instead of full annual plans. I also had an example where I didn't fully comprehend a contractual arrangement with take-or-pay services, which blew up into a bit of an expense fiasco. I've made my share of mistakes, but they were all learning experiences. Just make sure you don't make the same mistake twice.
C
CJ52:26
If you could tell your younger self something knowing what you know now, what would it be?
K
Kevin Kraus52:32
The joking answer is go to Silicon Valley and look up this startup called Google. But seriously, I probably should have taken myself a little less seriously early on. I was more pessimistic as a younger professional than I should have been. I had a very senior guy who told me, 'Kevin, when I ask you for something, you very quickly say why it's hard to do, and then you go do it.' I'm grateful for that advice. It was about attitude. I was very serious about doing a good job, but I could have been more light-hearted. I'm reminded to balance that now. Taking risks, being more positive, and showing more confidence are important. I did take risks—I left a company, took a pay cut, joined a startup, and a year later we were bought for over a billion dollars. So I had no problem with risk-taking. I just wish I did it earlier.
C
CJ55:31
Kevin, can you walk me through your finance software stack? What are you using to get the job done today?
K
Kevin Kraus55:37
For ERP, it's NetSuite. We also have a bit of SAP in a division, but basically NetSuite. Budgeting and forecasting is Workday Adaptive Planning. That's a popular combo. We use Avalara for indirect taxes. We have Anaplan for sales team commissions, which was a bunch of spreadsheets before. We recently implemented a new T&E system, Navan, which has a better user experience than the previous tool. We use Coupa for procurement, which was a fantastic improvement. And ADP for payroll in the US, and Papaya for international, which we're implementing in about 13 countries. That's our basic finance tech stack.
C
CJ57:44
Last one: what's the craziest thing you've ever had someone try to expense?
K
Kevin Kraus57:49
There is something that comes to mind which I cannot discuss in polite company. But I did have someone who thought expensing DoorDash to their house during the pandemic was appropriate. Fortunately, in all my companies, we tend to be upfront about policy. The normal things are flight class upgrades, like someone thinking they should fly business class on a 200-mile flight, but that's easy to rectify. There were some things back in the day that were pretty interesting, which I won't describe.
C
CJ59:49
Kevin, thanks so much for joining me. I had a blast.
K
Kevin Kraus59:55
Thank you, CJ. I'm happy to do it. I appreciate the opportunity to speak with you. I really enjoyed it.