A15-04-0008

Copyright 2004 Thunderbird, TheGarvin School of International Management. All rightsreserved. Thiscasewas
prepared under thesupervision of Dr. Caren Siehl byMichael Speetzen, for thepurposeof classroomdiscussion only, and
not to indicateeither effectiveor ineffectivemanagement.
Organizat ional Al ignment :
Managing Gl obal and Local Int egrat ion
In August of 2002, Mick Powers was named the Finance Director of AERO Groups Aftermarket Ser-
vices unit. Mick came to the position with over 10 years of financial experience, most of which was at
AERO Group. The assignment as the Director of Finance for the Aftermarket Services unit was a large
stretch for Mick. The Aftermarket Services business, at the time, had $1.4B in revenue, was comprised
of 25 facilities located throughout the globe, and had a finance organization of over 90 professionals. By
December 2002, the business had missed its financial targets, incurred $20,000,000 in accounting
write-offs, and incurred liabilities as a result of employees violating company policy. Critical invest-
ments and deals were being held at the corporate level, as an investigation into the business occurred to
ensure that the companys assets and investment were under control.
Business Background
The AERO Aftermarket unit was a key component of the AERO Groups aerospace portfolio. The
business provided service for key commercial and military aerospace. It was headquartered in New
Mexico, and managed by a minimal staff who coordinated business activities as well as the strategic
planning for the business. The bulk of the resources was located at the sites, which were located in the
United States, Canada, Asia, and Europe. The sites were comprised of a local general manager, a site
finance leader, a site human resource leader, a site operations leader, and direct labor to provide the
service activity. The AERO Aftermarket units organizational structure was a divisional structure with
minimal functional connections to the headquarters (Exhibit 4). Bob Knowswell served as the Operat-
ing President for the AERO Aftermarket unit, and relied heavily on the distributed business structure to
meet customer needs in the local markets they served. He felt passionately that having a strong business
presence locally delivered superior service and led the business to expanded growth. Bob placed tremen-
dous power in the hands of the local sites to win and keep business, while also driving financial perfor-
mance. Bob delegated a significant amount of decision-making to the individual sites, and looked for
headquarters to minimize the oversight function so as to not diminish the competitiveness of the busi-
ness. The AERO Aftermarket units competitive advantage rested on its ability to quickly address cus-
tomer issues, providing low price and highly reliable service such that operators could minimize the
amount of time an aircraft was grounded. Bob felt that too much headquarters oversight would slow the
process down, thus rendering AEROs Aftermarket unit noncompetitive.
The Finance Organization
The finance organization was comprised of 90 professionals who had varying levels of experience. The
finance organization reflected the focus utilized by the organization, where the headquarters staff was
tightly controlled and managed, and the sites were loosely tied into the organization. Each site had a
controller who was responsible for ensuring that all accounting was done accurately and timely. The
controller was also responsible for the financial planning and analysis for the site, ensuring that opera-
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2 A15-04-0008
tions, sales, and functions were all integrated and aligned to the site goals. The site controller typically
had a staff of support accountants and financial analysts, ranging from two to six members, depending
on the size of the business. When Mick joined the organization, the controller linkage to the finance
organization was a fragmented relationship. Specifically, the goals and objectives for the controllers and
their 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 to
determine 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 achieved
between the sites and HQ with regards to finance activity. The recruiting and hiring processes were also
disconnected from the headquarters team. The local management filled controller positions with no
involvement from the headquarters staff. The competencies of the controllers hired at the local sites
were 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 that
signaled a deep organizational problem.
Early in the year, Sven, the new controller of the German site, highlighted suspicious financials for
the 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 issue
festered 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 the
resulting 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 process
between headquarters and the site had ceased. After a month of intensive reviews, Mick determined that
the problem was real and needed to be dealt with immediately. In early September 2002, Mick left for
Germany along with the CFO of AERO Group, to do an intensive review and determine the next
course 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 an
ill-defined alliance with The Logistics Group to provide logistical services for aircraft. The business had
been established and very little finance support provided. When researching to find out who approved
the 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 because
he 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 in
a 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, he
was presented with a $5,000,000 unexplained accrual on the balance sheet. He felt a sinking feeling in
his stomach. As the financial manager tasked with investigating the issue continued to explain, the stark
realization of the situation hit him hard.
As if things could not get worse, he was confronted with an unauthorized consulting agreement
that 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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A15-04-0008 3
payment. The consulting agreement had not been run through proper channels and was essentially an
unauthorized agreement. Mick knew that the CEO of AERO Group must first approve any consulting
agreements, and the limitations on the arrangements were immense to ensure there were no conflicts of
interest. When Mick confronted the manager and the sales representative about the issue, the response
was a flippant, It is always better to ask for forgiveness than to ask for permission! Mick felt that the
business 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 completely
disregarded 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 are
absent, troubles will occur. The role he had walked into was a test case for this. The finance organization
had little or no connectivity, the reporting relationship had not been defined, and, as such, an informal
network had arisen. This informal network was one where the finance leaders looked to their business
first and finance second, essentially discounting the controllership role that is paramount to finances
success. Making the numbers was the number one goal of the business, with no clarification of making
the 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, and
an ambivalence to the rules that should govern the business.
The connectivity and consistency of the finance function had been compromised. The finance
function had been staffed at the local level, resulting in varying levels of skills and abilities. When
addressed in aggregate, there were pockets of strengths and weaknesses, and no continuity in hiring
criteria, skills and abilities, pay, and organizational fit. The horizontal finance function within the
AERO 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 they
driving for consistent goals.
The end result of the lack of discipline and functional connectivity was that the controls within
the business had suffered tremendous damage. Business leaders were not held accountable for their
performance 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 the
year. 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. The
lack of trust and confidence in the business had dealt a significant blow, not only to the financial
performance 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 AERO
Aftermarket 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 occurring
again?What changes were required to change the pattern of behavior?How could more control be
placed on the business without hampering competitive advantage in local markets?Mick knew he had
but one chance to address these issues. The companys tolerance for this situation was minimal, and in
light of the recent Enron and WorldCom scandals, the sensitivity to these issues was tremendous. As the
Christmas 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-week
winter break. As he watched darkness set and the airplane traffic enter and exit the airport, he pondered
how he would address the problems in front of him. The pressure was on; he knew that effectively
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4 A15-04-0008
addressing the issues would certainly bode well for the companys confidence in the business, thus
freeing up critical investment. On the flip side, failure to act aggressively and effectively would certainly
be negative for the competitiveness of his business unit. As he left the building, the front lobby guard
wished him and his family the best for the holidays. Mick returned the salutation and jokingly added
that he hoped they could have the same discussion the same time next year.
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