Organizational Alignment.pdf

8/14/2019 Organizational Alignment.pdf

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tions, sales, and functions were all integrated and aligned to the site goals. The site controller typicallyhad a staff of support accountants and financial analysts, ranging from two to six members, dependingon the size of the business. When Mick joined the organization, the controller linkage to the financeorganization was a fragmented relationship. Specifically, the goals and objectives for the controllers andtheir finance organizations were established at the site level and not reviewed with the finance director.The relationship was representative of the distributed business structure in place at the time. In addi-

tion, the finance director rarely discussed performance of the site controller on a proactive basis todetermine and assess the controllers capabilities. This made setting priorities and work direction diffi-cult when combined with the distance of the dispersal units; very little coordination was achievedbetween the sites and HQ with regards to finance activity. The recruiting and hiring processes were alsodisconnected from the headquarters team. The local management filled controller positions with noinvolvement from the headquarters staff. The competencies of the controllers hired at the local siteswere not consistent with the core expectations and competencies held by the global finance organiza-tion, but rather were based on local site needs.

Business Conditions Worsen

The effects of the various accounting scandals at Enron and WorldCom, and the resulting legislation(Sarbanes-Oxley), more clearly defined the reality of the accountability of finance professionals. A mere

month after landing in the finance director position, Mick was confronted with several issues thatsignaled a deep organizational problem.

Early in the year, Sven, the new controller of the German site, highlighted suspicious financials forthe business and began an investigation. The investigation started in April 2002 and resulted in a$15,000,000 list of issues or concerns. The prior AERO Aftermarket unit finance leader flew to Ger-many to investigate, but was unsatisfied with the information provided; the site leader was very defen-sive of the issues, and not much progress was made. Since the connectivity was not present, the issuefestered and, because the lines of communication had broken down, no data had been exchanged suc-cessfully since the visit. A mere $1,000,000 reserve was put aside to cover what was viewed as theresulting future write-offs, as no one could believe a $100,000,000 site could have a $15,000,000 write-off. When Mick arrived in August, the original list had actually grown and the communication processbetween headquarters and the site had ceased. After a month of intensive reviews, Mick determined thatthe problem was real and needed to be dealt with immediately. In early September 2002, Mick left forGermany along with the CFO of AERO Group, to do an intensive review and determine the nextcourse of action.

At about the same time Mick was dealing with the Germany issue, a secondary issue arose regard-ing an alliance held between AERO Group and The Logistics Group. AERO Group had entered into anill-defined alliance with The Logistics Group to provide logistical services for aircraft. The business hadbeen established and very little finance support provided. When researching to find out who approvedthe original deal, no documentation could be found, including approvals from management. The busi-ness had taken aggressive accounting actions in an effort to bolster the appearance of growth and finan-cial returns. When Mick arrived in August, he had suspicions surrounding this business simply becausehe could not find one person in the organization who had total accountability for the business. The

business had been essentially formed and then left on its own; the finance support had been formed ina similar manner, with several people in different organizations taking on different aspects of the ac-counting and financial management. Micks suspicions proved valid; upon returning from Germany, hewas presented with a $5,000,000 unexplained accrual on the balance sheet. He felt a sinking feeling inhis stomach. As the financial manager tasked with investigating the issue continued to explain, the starkrealization of the situation hit him hard.

As if things could not get worse, he was confronted with an unauthorized consulting agreementthat had been instigated by one of the site leaders and a sales representative of the company. The con-tract, with Milken Consulting Group, resulted in a $500,000 invoice presented to the company for

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payment. The consulting agreement had not been run through proper channels and was essentially anunauthorized agreement. Mick knew that the CEO of AERO Group must first approve any consultingagreements, and the limitations on the arrangements were immense to ensure there were no conflicts ofinterest. When Mick confronted the manager and the sales representative about the issue, the responsewas a fl ippant, It is always better to ask for forgiveness than to ask for permission! Mick felt that thebusiness was quickly spinning out of controlif this much had presented itself in just three months,

what else lay beneath the surface?And more importantly, it seemed that the employees had completelydisregarded the code of conduct document they signed each year which clearly outlined expected be-havior and the way of doing business.

A Burning Platform

Mick had served in enough finance leadership roles to know that when clarity and accountability areabsent, troubles will occur. The role he had walked into was a test case for this. The finance organizationhad little or no connectivity, the reporting relationship had not been defined, and, as such, an informalnetwork had arisen. This informal network was one where the finance leaders looked to their businessfirst and finance second, essentially discounting the controllership role that is paramount to financessuccess. Making the numbers was the number one goal of the business, with no clari fication of makingthe number the right way. Finally, the lack of controls and clear accountability had trickled into the

business and resulted in a lack of attention to details, a pervasive culture of uncalculated risk-taking, andan ambivalence to the rules that should govern the business.

The connectivity and consistency of the finance function had been compromised. The financefunction had been staffed at the local level, resulting in varying levels of skills and abilities. Whenaddressed in aggregate, there were pockets of strengths and weaknesses, and no continuity in hiringcriteria, skills and abilities, pay, and organizational fit. The horizontal finance function within theAERO Aftermarket unit was essentially nonexistent; there was a headquarters finance team and a dis-tributed network of finance groups within the business. The groups were not connected nor were theydriving for consistent goals.

The end result of the lack of discipline and functional connectivity was that the controls withinthe business had suffered tremendous damage. Business leaders were not held accountable for theirperformance and actions. Finance was not held accountable for the effectiveness of business controls,and business controls were not even identified as a priority in the goals. As a result, by the close of 2002,Mick had to provision for $20,000,000 in bad or fraudulent accounting. Something had to be done,and had to be done fast. The AERO Aftermarket unit missed its 2002 financial commitments for theyear. Since there was obviously a problem and the financial performance of the business was in question,the CFO for AERO Group held back approval and funding for several critical growth programs. Thelack of trust and confidence in the business had dealt a significant blow, not only to the financialperformance of the business, but also to investment in the businesss future competitive position.

The CFO of AERO Group had initiated an investigation of the entire AERO Aftermarket unit,and was also directing the internal audit function to rearrange their audit schedule to make other AEROAftermarket unit sites a priority. By the end of the year, Mick and Bob had had several meetings with

internal auditors, company attorneys, and senior management. The key questions that had to be ad-dressed were: Why did this happen and how?What was being done to prevent this from occurringagain?What changes were required to change the pattern of behavior? How could more control beplaced on the business without hampering competitive advantage in local markets?Mick knew he hadbut one chance to address these issues. The companys tolerance for this situation was minimal, and inlight of the recent Enron and WorldCom scandals, the sensitivity to these issues was tremendous. As theChristmas season approached, the offices at the AERO Aftermarket units New Mexico-based head-quarters had emptied, and Mick was left sitting in his office organizing his thoughts for the two-weekwinter break. As he watched darkness set and the airplane traffic enter and exit the airport, he ponderedhow he would address the problems in front of him. The pressure was on; he knew that effectively

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addressing the issues would certainly bode well for the companys confidence in the business, thusfreeing up critical investment. On the flip side, failure to act aggressively and effectively would certainlybe negative for the competitiveness of his business unit. As he left the building, the front lobby guardwished him and his family the best for the holidays. Mick returned the salutation and jokingly addedthat he hoped they could have the same discussion the same time next year.

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Documents

Organizational Alignment.pdf