7.2.1 When We Say That “Business Plays a Leading Role and Accounting Plays an Oversight Role”, We Mean That We Do Not Focus Solely on Financial Returns on Investment
We must stick firmly to our macro management approaches and systems, under which business plays a leading role and accounting plays an oversight role. When we say that “business plays a leading role”, we mean that we optimally develop our business based on our goals and needs. When we say that “accounting plays an oversight role”, we mean that managers at all levels must fulfill their financial management responsibility, implement effective project management, and enhance accounting and cost control. This is how we can strike a balance between development and control. (Ren Zhengfei: Key Points for Management, 1999)
When we say that “accounting plays an oversight role”, we mean that Finance provides standardized services. During this process, accountants exercise oversight. Services need to be standardized based on plans, budgets, and costs. At the current stage, the internal audit team mainly manages exceptions, but they also manage daily routine. After that stage, processes must not be changed and the sole task of the internal audit team is to manage exceptions. Our internal audit team also needs to oversee our accounting team outside China. (Ren Zhengfei: Speech at a Briefing on Four Unifications and 2000 Work Plan of Finance, 1999)
When we say that “business plays a leading role and accounting plays an oversight role”, we mean that business managers have decision-making authority and are responsible for their own decisions. They are also responsible for the growth and financial robustness of the regions within their purview. Finance needs to serve and oversee business. By fulfilling their oversight responsibility, Finance will ensure that financial data truly reflects actual business activities and will help business managers make correct choices and decisions. (Ren Zhengfei: Speech at a Briefing on Methods and Results of CFO Appraisals, 2011)
Business managers are the primary owners of operating risks and internal controls within their purview. Financial personnel are assistants to business managers at all levels. You’re there to give advice and disclose risks. You are part of their team and must play your role. Finance and business are highly interdependent, so you can only achieve shared success when you grow together. If Finance does a poor job, business will suffer. (Ren Zhengfei: Speech at a Meeting with Financial Staff, Huawei Executive Office Speech No. [2011] 032)
Business plays a leading role and accounting plays an oversight role. I said this over a decade ago to criticize those who were driven only by financial returns on investment. By saying “business plays a leading role”, I meant we need to earn profits through technological innovation, talent introduction, and market expansion. Accounting, as I see it, does not simply keep our books. It also carries out project accounting and other financial management activities. By saying “accounting plays an oversight role”, I mean Finance provides services and support while fulfilling management and oversight responsibilities. (Ren Zhengfei: Speech at a Meeting with Financial Managers, Huawei Executive Office Speech No. [2012] 029)
7.2.2 Accurately Recognizing Revenue, Accelerating Cash Inflows, Ensuring Visibility of Project Profits and Losses, and Managing Business Risks
Accurately recognizing revenue based on actual business activities is the basis for robust business operations
Currently, IFS is the most important business transformation at Huawei. Its critical value to the company can be described as “accurately recognizing revenue, accelerating cash inflows, ensuring visibility of project profits and losses, and managing business risks”. (Guo Ping: Respecting Professionalism and Doing Financial Work Well in 2009—Speech at the Annual Meeting of Finance on January 17, 2009, Improvement Issue No. 327, 2009)
We need to link customer contract information to procurement contract information to support the company’s fine-grained management. Our IDS1
2 focuses on transactions, which has streamlined the Opportunity to Cash (OTC) and Procure-to-Pay (PTP) processes from end to end, optimized and delivered a series of processes and rules, built integrated IT systems, and integrated customer contract information with procurement contract information. These results have helped achieve business goals like fast and accurate billing and accurate revenue recognition. Based on this, we are now able to access data on financial performance, operating efficiency, and operating quality like order, shipment, revenue, and payment collection on our business fulfillment monitoring platform iSee. This has helped us accurately locate problems, take effective business management actions, and enable fine-grained management in business units at all levels.
(Meng Wanzhou: IFS: Working with Business Teams to Comprehensively Improve the Capabilities of Financial Staff, Improvement Issue No. 407, 2012)
Sales revenue is one of the most important financial indicators that are used to measure the company’s business operations and quality. Objective, accurate, and prompt revenue recognition is crucial for robust operations. All business units must strictly observe the company’s policies, rules, and processes for sales revenue recognition to ensure company operations are compliant and robust. Those who falsely recognize revenue will be held accountable. The following are all punishable offences: Recognizing revenue in advance or postponing revenue recognition by falsifying delivery progress information or delivery documents, and hiding true business information. These are all serious violations of Huawei’s Business Conduct Guidelines (BCGs) and may have a material impact on the company’s financial statements. The company has zero tolerance towards such misconduct and will immediately handle any such cases that are discovered. Extra bonuses granted because of inflated revenue must be returned and employees and managers directly responsible for these intentional violations will be disciplined according to the BCGs. (Source: Resolution on Disciplining Those Who Have Falsely Recognized Sales Revenue, Finance Committee Resolution No. [2014] 016)
We must strengthen our control and management of cash flow
Emphasizing both sales revenue and profits is not enough. We also need to strengthen cash flow management. We may have good contract terms, high prices, and high profits on our books, but if customers make payments years later, we may run short of cash and drive the company into the ground. Therefore, it is critical to control and manage cash flow. (Ren Zhengfei: Speech at the Mid-year Market Conference, Huawei Executive Office Speech No. [2006] 036)
The purpose of sales is not only to secure orders or sign contracts. “Any order, no matter how exciting it is, must generate revenue. All revenue, no matter how large it is, must bring profits and cash flow.” Otherwise, we will just be quenching our thirst with poison and will ultimately be walking towards our company’s demise. (Source: Resolution on Designating Team Members of the Joint Committee of Regions for Promoting Contract Quality Improvement, EMT Resolution No. [2011] 029)
Cash flow is a major issue, and is our life line. If we don’t have money to pay salaries, employees will leave and we will lose the strategic accomplishments made over the past two decades. We have managed to build an organization through hard work. Once it collapses, what can we do then? We must pay attention to local financing and further develop our local financing team to disperse financing risks. (Ren Zhengfei: Speech at the EMT ST Meeting, 2012)
Project management is the basis for the company’s business management
We must remain project-centered and improve our project operations management. This is how we will increase efficiency and profits over the next couple of years. We need to focus on three types of projects: customer, R&D, and transformation projects, and establish a project operations management framework that includes projects, programs, and project portfolios. We need to develop a complete system that runs from “doing the right things” to “doing things right” to drive the company’s organizational change from a pyramid, function-centered structure to a project-centered structure with functional departments playing an auxiliary role. (Guo Ping: Transform Continuously and Improve Field Operating Capabilities to Ensure the Company’s Sustainable and Profitable Growth—Speech at Huawei Annual Management Conference 2013, Huawei Executive Office Speech No. [2014] 020)
In the future, we will implement a project-based total budget system. Under this system, we will first deduct the company-borne expenses from project budgets, because the company spends money transferring resources to projects. The remaining budget will be given to projects, and with the money, project managers can buy resources from Supply Chain and services from HQ. Project managers do not have to buy unnecessary resources. Functional departments do not have any budget pressure right now. As a result, they are not motivated to sell resources to projects. That is why we have a bloated organization at HQ. We must manage project plans and budgets. When a project is completed, we need to do project accounting to see if it has made or lost money. Project profitability is a key criterion for assessing a project manager’s performance. (Ren Zhengfei: Remarks at a Meeting with Members of the Project & Financial Management Enablement Program for High Potentials, Huawei Executive Office Speech No. [2014] 054)
Over the next five to ten years, we will gradually shift from a centralized management model to one that allows employees closest to customers to call for backup. Currently, we are tentatively shifting from function-centered to project-centered operations. If we can truly delegate managerial authority to field offices and if back offices can provide better support services in five to ten years, we will be able to increase our response speed and our ability to meet customer needs. We will then survive the surging waves of massive data traffic. (Ren Zhengfei: Our Transformation Goals Are to Harvest More Crops and Increase Soil Fertility—Speech at the 2015 Huawei Market Conference, Huawei Executive Office Speech No. [2015] 016)
While shifting from a function-centered structure to a project-centered structure, we need to clearly specify how projects should operate and what management systems we should adopt, so that our project line is separate from our resource line. For sales and delivery projects on the front line, SDTs at all levels are our decision-making teams, and physical organizations at representative offices, regions, and HQ are our resource departments. Projects have budgets and resource departments provide resources, so that project teams can deliver to customers what contracts require. Under this operations management system, project operations, budget management, resource management, and project teams will all need to change to support the shift from a function-centered model to a project-centered model. (Source: Minutes of the Work Report on the Project for Changing Function-centered Operations into Project-centered Operations, BOD Executive Committee Meeting Minutes No. [2015] 020)
Controlling risks from a perspective of value management
We need to guard against the operating risks arising from some possible high-risk customers, for example, carriers that may be acquired. We also need to strengthen our internal controls and auditing processes and systems, and conscientiously implement them to fend off corruption. We also need to pay attention to the possible impact of protectionism and further plan for and meet local manufacturing requirements. (Source: 2010 Key Work Requirements, EMT Resolution No. [2010] 007)
Corruption and overstocking are the two biggest challenges the Consumer BG faces. I won’t compromise on these two things. Overstocking even only once or twice may lead to our demise. I would rather take a longer time to meet consumer needs, rather than engage in overstocking. As consumer products become increasingly customized, overstocking will pose ever greater risks. (Ren Zhengfei: Be Bold at Work, Be a Humble Person, and Follow the Patterns of Consumer Products in the Pursuit of Maximum Growth and Success—Speech at a Meeting with the Key Employees of the Consumer BG, Huawei Executive Office Speech No. [2011] 014)
Adopting a new business model is always risky. This requires us to establish a stringent control mechanism. (Ren Zhengfei: Guidelines on the Analysis of the Business Environment and Key Business Strategies, Corp. Doc. No. [2012] 081)
We need to summarize our past experience and determine our strategic goals for tomorrow based on where we are today. Over the past 25 years, Huawei has generally adopted a correct strategy. When the global economy was growing, we emphasized growth through economies of scale. As long as we operated at a large scale and won lots of contracts, we were able to dilute our fixed costs and generate profits. If our products were expensive at that time, would customers buy them? Of course not. Now though, our people are still doing the same thing. They focus too much on getting orders and contracts without considering their quality. They win contracts blindly as long as they can drive up sales. If we hadn’t strengthened contract quality management, resolutely changed our strategic goals, and emphasized that we must be profit-oriented during the past two years, we would have been unable to have a meeting here today and most of you would probably have already been sent home. That’s why over the past couple of years, we have emphasized that we focus on profits for managed services and consumer products and don’t measure their sales revenue. This shift in KPIs is a kind of transformation. Of course, we still need to further transform our budgeting. Over time, we will see more change. (Ren Zhengfei: Why Can’t Water from the Himalayas Flow to the Amazon River?—Remarks at the Work Conferences of the Latin America Region, Key Account Departments, and Carrier BG, Huawei Executive Office Speech No. [2014] 044)
A financial crisis could arise any time now. We must reduce long overdue inventories and long overdue accounts receivable (AR). (Ren Zhengfei: Speech at a Meeting with Employees of the Quality, Business Process & IT Management Department, Huawei Executive Office Speech No. [2016] 094)
7.2.3 How Can Financial Personnel Effectively Serve and Oversee Business If They Do Not Understand It?
Financial personnel are not decision makers. Rather, you are there to give advice and oversee business. If you don’t understand business, how can you effectively serve and oversee it? You need to meet reasonable business needs and provide valuable financial services. You should be able to identify whether business needs are real and reasonable. You need to effectively oversee business operations and help business managers grow. You must have your own judgment and cannot just blindly rely on what others are saying. (Ren Zhengfei: Speech at a Meeting with Financial Staff, Huawei Executive Office Speech No. [2011] 032)
Business departments take responsibility for all risks. Finance analyzes and reminds business departments of the risks. Business departments are responsible for growth, profits, and most importantly, for legal compliance. (Ren Zhengfei: Minutes of the Meeting with Staff of the Romania Accounting SSC, Huawei Executive Office Speech No. [2011] 021)
Regional and representative office CFOs are responsible for overseeing the quality of contracts in regions within their purview. They must dare to veto poor-quality contracts. This can help establish checks and balances between regional CEOs and CFOs. CFOs at all levels must participate in pre-sales contract reviews and must have the courage to veto poor-quality contracts. Contracts vetoed by CFOs must be escalated to a higher-level contract review team. The contract review team of the same level will no longer have the decision-making authority over the vetoed contracts. CFOs that can’t handle this work must be replaced promptly. (Source: Minutes of the Report on the 2011 H1 Performance Review, EMT Meeting Minutes No. [2011] 011)
CFO authority to veto contracts is primarily the authority to escalate contracts to an upper-level decision-making team. When CFOs voice a differing opinion about contract terms or business models, the contract decision-making team of their same level can no longer make decisions on the contract. In such cases, a decision needs to be made by a higher-level team. (Source: Minutes of the Report on Improving Contract Quality, EMT Meeting Minutes No. [2011] 012)
Our management must respect facts. Those who manipulate business data and commit fraud will be held accountable. (Ren Zhengfei: Minutes of the Report on the Opportunity to Order for 2017, EMT Meeting Minutes No. [2016] 021)
7.2.4 Oversight Means Firm Commitment to Process Management
Modern management systems are actually founded on distrust. If they weren’t, we would not need process-based operations, authentication, or enhanced oversight. It’s just that no one says this openly in the books. Although systems do not place trust in people, we are people-friendly when implementing these systems. There are always risks out there, but we cannot stop our processes for the sake of guarding against risks. Such a system at Huawei will help us constantly improve ourselves. (Ren Zhengfei: Remarks at a Meeting with Procurement Managers, 2000)
Financial policies must be developed centrally by the Finance Management Department. Regional offices cannot develop them. If regional offices want to add some additional provisions or notes, they must obtain approval from the Finance Management Department. (Ren Zhengfei: Speech at the Briefing by the Audit Department on Audit Projects in Latin America and South Africa, 2004)
Finance must oversee business operations while providing fast, accurate, secure, and standardized services to business departments. Standardized management is the basis for providing fast, accurate, and secure services to business departments. This is precisely the value that Finance can bring to business. (Ren Zhengfei: Building Finance into an Invincible Organization That Adapts Quickly to Our Business Development—Speech at the Training Class for Financial Managers in the European Region, 2005)
Huawei’s management philosophy is like a cloud in the sky. Both internal and external factors, such as management philosophy, strategic requirements, and the industry environment, are the forces that push the company’s operations forward. Rainwater from the cloud needs to be properly channeled to ensure accurate execution. The cloud must turn into rain, and rainwater must flow along the proper channels, eventually reaching the sea. That’s the water cycle. At Huawei, rainwater is our business activities, including financial activities. Financial oversight must be in place at key channel nodes, in order to ensure rainwater flows in the channels at a proper speed and with the desired quality. (Ren Zhengfei: Remarks at the Briefing on Finance Process Building, Huawei Executive Office Speech No. [2013] 091)
Financial oversight means firm commitments to process management. We must build oversight into every part of our processes. We must dare to expose problems and push for improvement. (Ren Zhengfei: Speech at a Meeting with Staff in Mauritius, Huawei Executive Office Speech No. [2013] 016)
Oversight is part of business. It is based on processes and realized in business practice. The majority of our oversight will be built into processes. Processes themselves are lines of defense, so if we have well-designed processes, we will already have an effective oversight system. (Source: Huawei’s Oversight Philosophy, 2015)
7.2.5 Everything We Do Must Support Field Operations, Serve Business, and Contribute to Business Success
The primary goal of establishing a management system is to increase operating capabilities of field teams. We need to learn from the US military’s practices in the twenty-first century: On the front line are highly competent units that focus on goals and pursue success. At the back office is the decision-making center that sets the direction, develops strategy, and fully delegates authority. All competence centers have clear responsibilities, are targeted at operations, and form a joint support platform. This system is like a dragon, whose head moves flexibly to look for food or attack a target. Its highly developed bone systems are well-coordinated to ensure that the whole body moves to support any attack the head may start. (Guo Ping: Transform Continuously and Improve Field Operating Capabilities to Ensure the Company’s Sustainable and Profitable Growth—Speech at Huawei Annual Management Conference 2013, Huawei Executive Office Speech No. [2014] 020)
“Everything we do must support field operations, serve business, and contribute to business success.” This could become the slogan for our era of transformation. Within the next decade, we will implement a strategy of deploying highly competent elite teams with the support of a large platform and gradually separate resource management authority from command authority. The latter authority should be further delegated to field offices, which will allow for more flexible decision making and encourage more outstanding leaders to work in the field. Representative offices serve as profit centers and are responsible for results. Our command and decision-making authority should first be delegated to representative offices. Likewise, oversight authority should move to field offices as well. After several years of exploration and development in field offices, our subsidiary boards of directors have gradually matured in terms of compliance management, both internally and externally. These efforts have started to pay off, so we can begin piloting authority delegation to field business departments in certain countries. We need to allow representative offices to approve more contracts. This is what authority delegation is all about. Our workflows should be linked both vertically and horizontally. We must allow those who are closest to customers to call for support and ensure that the support they request will be provided. We must strive to improve contract quality, so that we can earn money promptly. Each project should have a CFO, who must participate in the end-to-end process from contract planning to contract closure. (Ren Zhengfei: Firm Belief and Strong Focus Lead to Greater Success—Speech at the 2016 Huawei Market Conference, Huawei Executive Office Speech No. [2016] 007)
All managers in field offices must focus on achieving success, giving functional departments the authority to manage things that are certain. All managers in functional departments should keep a close eye on field offices and urge their own departments to provide prompt and accurate services. Your appraisals will be based on the services you have provided to field offices. If field offices fail, you will have also failed. We must learn to find faults in success and identify the root causes of failure. People in ancient China had ritual rooms for self-reflection. Why can’t we learn to reflect on our failure? Heroes can also emerge from failures. The faults of managers should not overshadow the efforts of their subordinates, as some of them might have done things that deserve praise. (Ren Zhengfei: Firm Belief and Strong Focus Lead to Greater Success—Speech at the 2016 Huawei Market Conference, Huawei Executive Office Speech No. [2016] 007)