Neil Wood is the CFO of LOCOG, the organisation responsible for staging the 2012 Olympic and Paralympic Games in London. Here he tells us about the unique challenges faced by an organisation which has a set lifespan of seven years and is due to grow from 200 to 100,000 staff in the next five years.

What is LOCOG?

First of all I should point out that there are two organisations associated with the London Olympic Games. The Olympic Delivery Authority (ODA) is responsible for building all the venues and doing all the regeneration work in the Olympic park and elsewhere. The ODA is publicly funded and there was an announcement in Parliament by the Secretary of State some months ago setting out their budget of around £9 billion.

LOCOG, of which I am the CFO, is the London Organising Committee of the Olympic and Paralympic Games. LOCOG is responsible for staging the event, so effectively the ODA hands over the venues to us and we are responsible for organising the event itself. LOCOG has a budget of approximately £2 billion and is entirely privately financed. We raise our money from sponsorship, from a contribution from the IOC (International Olympic Committee), from their broadcast rights income and their contribution from their sponsors, and also from ticket income, merchandise and a number of other sources. We’re a private company set up as a joint venture between our three stakeholders, which are the government in the form of the DCMS (Department for Culture, Media and Sport), the Mayor of London and the British Olympic Association.

The two organisations work very closely with each other – we’re located in the same building and not a week goes by when I don’t meet with the ODA finance director at least two or three times. So we work hand in glove with the ODA but we’re two separate organisations.

LOCOG itself currently has about 200 staff. That will rise considerably in the next five years to something in the order of 2,500 permanent employees, around 20-30,000 contractors and up to 70,000 volunteers. Managing growth is an issue for many companies but the advantage we have is that we know it’s going to happen, so we can plan for it. However, we’ve effectively got to put in place processes and procedures that are appropriate for an organisation that’s going to be the size of a FTSE 100 company in five years time, and it’s no good trying to do that in five years’ time – we have to start investing and putting the processes and procedures in now.

In terms of budget, we have an overall budget of around £2 billion. At the moment, our spend is relatively modest as we are still in planning phase, albeit moving from strategic planning into more detailed operational planning. Our budget for the current year is just over £50m, a relatively small percentage of the overall spend.

When was LOCOG set up?

LOCOG was actually set up prior to us winning the bid, so constitutionally it was created in late 2004. It started to trade in November 2005, although work began immediately after we won the bid, as for the first couple of months the bid company acted as agent for the organising committee.

We’ve been working now for just over two years, which is unusual – probably the first time that an organising committee has got itself set up and started working straightaway. There are huge advantages to that. It gave us a seven year planning period, so we’ve had the benefit over the last two years of being able to do some very thorough strategic planning continuing from what we were doing at bid stage. The benefits of having an extra period to plan and organise ourselves outweigh the cost.

What’s your role?

As the Chief Financial Officer, I’m one of two executive directors that sit on the Board along with our Chief Executive Officer. As well as having an oversight role by virtue of being a board member, my specific responsibilities currently cover four areas:

1. Financial control – the accounting function, the provision of management information, monitoring variations against budget, managing foreign exchange risk etc.
2. Financial planning, which is really about looking at the whole seven year project, the £2 billion budget, working with functional areas to allocate resources to particular areas and managing the overall financial aspects of the business plan for the next five years.
3. Internal audit and risk management, all the work that’s done around providing assurance over the processes and procedures we are putting in place to mitigate the risks we face as an organisation.
4. Procurement, which is a function that has just started. At the moment, most of our spend is on people, but as we go forward, a significant amount of our spend will be on product. Procurement’s role includes coordinating and planning that spend across the whole organisation.

In an organisation of this type you have to recognise that you’re only around for a defined period of time and therefore you don’t design and set up functions in-house as if you were an organisation that was going to exist in perpetuity. So we will outsource as much as we can whilst maintaining and exercising executive control from within the organisation.

What areas are you outsourcing?

Like many organisations we outsource payroll. Internal audit is something else that we outsource because we will require a series of different expertises over the course of the five years. It makes much more sense to buy in the expertise you need at the time you need it rather than building what would either be a very generalist internal team or a very large group of specialists. Neither of those makes sense, so we outsource that.

This isn’t true outsourcing, but when it comes to something like foreign exchange risk management we don’t have an in-house treasury function. Lloyds TSB, who are our banking and insurance partners, work on foreign exchange mitigation strategies with us. They understand our overall strategy and what our objective and aims are, they bring solutions to us and we work through them with them to decide whether they’re appropriate or not and whether we’re going to enter into deals.

What types of exposure do you face?

We do have some exposure to foreign currency. We receive all of the IOC’s contribution from broadcast rights income in foreign currencies, principally in USD. What is slightly unusual is that it’s very long dated. Most of the $700m IOC contribution is actually received in 2011 and 2012.

If you go back to the beginning of the organising committee two years ago, we had a seven year exposure, which is unlike most corporates. Most corporates would be looking at 12-18 months, possibly slightly longer in some industries. The long dated nature of our exposure does give us some advantages in the current market, as we have the opportunity to wait for a while to see if the dollar will strengthen in the next two or three years.

By 2010 we will be making significant sterling expenditure commitments, so at that point we need to have some certainty as to what our foreign currency income represents in sterling. Our strategy wasn’t to go out and cover 100% of our exposure on day one. Nor was it to sit on our hands and hope that it will all be fine some time in 2010. We’ve chosen to build up cover over time.

We’ve plotted an indicative curve of increasing cover over the period to 2010 but recognise that the exact amount of cover we seek to achieve at any point in time will be affected by marketconditions. Our aim is not necessarily to be 100% covered, as we’d actually like a bit of exposure, but probably 85-90% covered by some time in 2010.

Are you managing any other types of exposure?

Obviously we’re looking at an insurance programme to cover us in the event of a significant curtailment or cancellation of the Games, albeit the Games have never been cancelled before and the only times where the Games did not take place were during the two World Wars. That is work that we’ve just started in the last six months and we’ve probably got at least another nine months to a year to go. We’re looking at some fairly significant theoretical exposures.

The way our income is structured, our sponsors effectively accrue sponsorship rights over the whole period from the day they sign their sponsorship agreement with us up until the Games. So if the Games were to be cancelled at the last moment we wouldn’t repay all of the sponsorship income because the sponsors would have had the benefit of the association for a significant period of time.

However, we are exposed in two other areas. It’s likely that if there were to be a cancellation that we would refund ticket income. I can’t foresee a situation where we wouldn’t want to insure ourselves against that. And also there are some contractual obligations to repay the IOC, were there to be a cancellation.

So out of our £2 billion there is in theory up to £800m-£900m of exposure that arises from a number of events. These could be events associated with problems with venues – in which case we are working in the property insurance market along with the ODA who have their own insurance programme, as they have an obligation to provide venues to us – or else risks that have nothing to do with venues, where we have to approach the contingency market. It’s a pretty big insurance programme, and it’s relatively complex – there are a number of different approaches that can be taken, so we probably have at least another nine months of work in that arena.

What sort of financing structures do you use?

We don’t really use any complex financing structures. At the moment we have a revolving credit facility with Lloyds TSB. We don’t have much current income to fund our operations so we have to borrow until funds start to flow. One of the issues with an organising committee is that the timing of your cash flows can be quite uncertain.

Generally speaking, tickets will go on sale in the beginning of 2011, so we will start generating income in 2011. The majority of your merchandising income is in the lead-up and during the Games, so that’s back-ended. Most of the IOC’s broadcast rights income is back-ended and it’s really only the local sponsorship income that can be phased in over the period leading up to the Games. Having said that, our expenditure levels in the context of the whole are relatively modest at the existing operational expenditure, and that facility will be available to us right to 2013. There are periods because of the nature of the uncertainty around cash flows where we will need to draw on that facility even in a few years’ time.

We’re potentially going to be sitting on quite large balances of cash just before the Games, so depending on the timing of some of these cash flows we could in say 2011 have £200m-£300m. Obviously we’ll address how to invest that at the time and will consider whether there is a need to bring in a dedicated corporate treasurer. Our strategy isn’t to speculate with any cash balances.

So we have a debt facility that funds us, and we are starting to generate cash flows and sponsorship deals. We’ve got two tier one sponsors that have already been announced and both of these organisations have already made signing deposits.

What sort of challenges does the company’s rapid growth pose from a financial point of view?

The first challenge is this isn’t like a business that operates in perpetuity. It’s a project that has an end date and when we wind up the organising committee we’ve got to make sure that we haven’t spent more than we’ve earned.

That does represent a challenge, as you’ve got to manage the making of commitments against how much income you’re earning. So you’ve got that in terms of balancing your total budget. And that absolutely is our aim – that at worst we will balance our budget, but hopefully we will generate an operating surplus.

The Host City Contract lays down how any operating surplus is to be divided up: 20% of any surplus is returned to the IOC, which invests it in sport through the Olympic Solidarity Programme; 20% is directed to the host country’s National Olympic Committee, so in our case the British Olympic Association; the balancing 60% is to be used for the benefit of grass roots sport in your country. So there is an objective that we will make a surplus that can be put to good use to support grass roots sport in our country.

That objective differentiates us from most corporates, who do have the opportunity to look to the longer term, to ride out lean years and go on in perpetuity. We don’t. We have to draw a line in the summer of 2012 – that’s when everything stops.

Another challenge is managing cash flow. At this stage there are significant uncertainties about the timing of certain cash inflows. Those uncertainties will reduce over time as we sign more sponsors and obtain contractual agreements as to when payments are made.

More generally there are challenges around running an organisation that is growing at such a pace, making sure that the procedures and controls are in place, and that they can cope with the increasing size and complexity as the business grows. In an organisation of less than 100, you can do what I call “managing by walking around” – you can get away without too many formalised procedures because the management team can get a good idea of what’s going on by walking the floor and talking to people.

That’s an entirely inappropriate way of controlling a very large business. The challenge we have is that we are going from a very small business to a very large business.

Our attitude is that we should compare ourselves even now to a FTSE 100 company in terms of the complexity and robustness of controls that we need to have in place.

What happens to LOCOG once the Olympics and Paralympics are over?

What tends to happen is you go very rapidly from an organisation with 2,500 permanent employees to having a core staff of a couple of hundred – literally within weeks of the closing ceremony of the Paralympics, in September 2012. So it’s a very rapid scale down. Even thereafter, within a couple of months you are down to 20 or 30 employees.

The whole idea is to wind the company up as quickly as possible, because you don’t want to continue to bear overhead and dissipate any operating surplus you might have made. The way you do that is to start to plan the dissolution two years prior to the Games so you know exactly what you’re going to do to wind the company up.