Accounting and capital-markets backgrounds sustain many a CFO. But for Doug Penner, who heads finance at ThyssenKrupp Aerospace, 16 years spent working for various operating units at Boeing instilled an operations orientation that he says continues to pay solid dividends in his current post.
Largely entrusting the accuracy of financial statements to others, Penner, who is not an accountant, spends the bulk of his time working with the general managers of ThyssenKrupp Aerospace’s business units. The private, U.S.-based company — a couple of levels down in the organizational structure of ThyssenKrupp AG, a publicly held German industrial conglomerate — distributes such raw materials as aluminum and titanium to aircraft manufacturers and provides supply-chain logistics management services.
Indeed, building close working relationships between finance and operations has been a central theme in the two years since Penner came to the company, after five years as CFO at Panasonic Avionics. He engineered a transfer of finance functions away from a shared-services operation run by the German conglomerate’s North American holding company so that processes could be tailored to his company’s specific operational needs. Now he’s looking to move finance personnel directly into field locations so they can be even closer to operations.
Penner — who says ThyssenKrupp Aerospace’s revenue is “more than $200 million” — recently spoke with CFO.com about those machinations, getting through the recession, the top challenges confronting him, and more. An edited transcript of the interview follows.
CFOs who came up through the CPA route often have to manage around the fact that they don’t have strong operations experience. For you it’s the reverse. What has that been like?
As I’ve moved around, I think it’s been an advantage to me that I’ve been more of an operating CFO. My relationships with the business units and the GMs have been pretty strong. I’m not talking debits and credits to them.
But I’ve worked in every facet of finance. I had a controller’s job where I was responsible for the financial statements. I’ve been in estimating, cost management, treasury, and other subfunctions. I’ve taken opportunities to do a lot of different things with subcontract management, which was my initial experience with Boeing — understanding costs and working out agreements with subcontractors. That involved auditing their financial and reporting systems, seeing how they put together bids and prices, and understanding how different companies recapture costs and price their products. That was really invaluable experience.
As I progressed and was given more responsibility, I leaned on the accountants to make sure the books were right. I spent most of my time working with the GMs, making sure I would help grow revenue and at the same time ensuring through proper pricing and cost allocations that we were growing the bottom line, too. I still do that today. As we bid contracts, I make sure we get it right up front and have an opportunity to make money.
What does “getting it right” involve?
It means understanding exactly how you plan to execute the work. You have to understand the incremental costs, what resources are required, and [have] an idea of what price the market will bear.
How do you figure out what price is right?
A lot of it comes from feedback from the general managers on their talks with customers about related services they’re paying for or contracts that they’re recompeting. You get some type of market intelligence — sometimes you don’t get a lot, but you take what you can get.
Some of the aircraft manufacturers have had high-profile delays in bringing out new models. Has that hurt your business in turn?
Overall, Boeing and Airbus have very strong production rates across most of their models. The order backlog has been quite strong. At the next level, where you’ve got Bombardier, which builds midsize regional jets, the backlog is pretty good as well. Some models, like the Airbus A380 and Boeing 787, are not quite up to the build rates that had been anticipated. Aerospace does go through its cycles. But with the more fuel-efficient aircraft models that both Airbus and Boeing are putting out, there’s a lot of old, inefficient models out there that the airlines will be trying to retire.
But did the economic downturn affect you?
We had identified that reductions in volumes were coming. So we created an action plan for what kind of labor and nonlabor costs we were going to have to reduce. We provided a lot of different scenarios for the business units, with different alternatives within each classification of cost. Then when the time came and [the recession] became reality, we were able to just execute. It greatly minimized the impact on our bottom line.
We did have to cut back on employees, and we really reduced our temp staff, which was quite large at the time. With nonlabor costs, we basically put everything nonessential on hold. We cut out all travel, except going out to bid on new pieces of work. We also reduced a lot of our nonlabor costs in the warehouse, which were quite variable. We took a big chunk out of our costs — about 30%.
What are your biggest challenges as CFO?
One is just the changing regulation and compliance requirements. We’re private, but we still go through the certifications just as if we were public. The auditors look at our books with the same scrutiny.
The difficulty is that every year the auditors want to change things. I’ve got a very strong controller with 20 to 25 years of experience, and then young auditors come in for two weeks and want to change the way you report your costs, or whatever. Sometimes you do, sometimes you don’t, but it never used to be that way before Sarbanes-Oxley. You could sit down with your external auditors and kick around ideas. Now they can’t give you advice. You have to go to another audit company for that, but none of them are going to give you different advice because they don’t want to get in conflict with one another. It makes the job not as much fun as it used to be.
Where do you find the fun?
It’s fun when you’re successful in growing the business and increasing profits, and it’s also fun to see the GMs working with the finance group so they can understand what’s going on in the business. My purpose for the finance organization is that it serves as their business partner and helps them understand and improve their business models. We’re really on the front line.
Can you give a specific example of an understanding of the business that you were able to impart on the general managers?
After I came on board, we wanted to really drive accountability at the business-unit level, where the revenue was actually being earned and decisions on costs were being made. So we established P&Ls and balance sheets for the business units, and when we did that we had to educate the general managers about finance. They understood how they made money, but they didn’t understand all the service revenue fees, or the opportunities for new service revenue fees. They didn’t understand the makeup of their costs, what was fixed and what was variable, and what the drivers were. They didn’t understand the cost of capital. We brought up their financial literacy and acumen.
What else is a challenge for you?
Ours is a very capital-intensive business segment. We spend a lot of money on capital equipment for precutting and preprocessing heavy pieces of aluminum and titanium. We also have to sometimes hold a lot of material that’s very expensive on our balance sheet. We have to be able to return enough to justify holding that capital and at the same time make a good profit.
What’s your source of capital?
Our parent company funds us. We have to justify a business case to get capital, and they’re strict. If we don’t make a very compelling case, we’re not going to get it.
What effect did the credit crisis have?
They’ve reduced the amount available, and they’ve raised the approvals to a higher level within the company, so it takes longer to get the approval. But because we’ve been successful the past two years and are growing the business, they have confidence in where we’re going. It’s not a slam dunk by any means, but we’ve been able to make the investments we needed to make.
Other than that, how autonomous is your finance operation?
We’ve actually gone through a kind of reverse osmosis. We were reporting to ThyssenKrupp Materials NA, the North America holding company for all of ThyssenKrupp, and they had a lot of shared services. They did all the general ledger, all the accounting, all the fixed assets. When I came on board, we had maybe four people in finance. Over the past two years, we have transitioned every shared-services financial operational task over here. It was like a start-up business — you had to staff it like you were brand new.
Was making that change dicey politically?
Somewhat. But when I came on board our growth had just started, and I was able to convince them that this was the path we needed to take. They could see that Aerospace was somewhat of a different operation than the rest of the businesses they were supporting, with more standing contracts and fixed-price contracts. So it was actually something that was mutually agreed on.
How have things changed since the transition?
Before, we had to rely on the shared-services center for information and reports to understand what was going on. When you do that, your ability to manage costs and predict results is very limited. Even invoices and expense reports were not sent to us. We’d get the result at the end of the month that would say here’s what you spent, but that was after the fact. We wanted to [see] things before they happened.
If you wanted to, say, get a new maintenance provider, you filled out a vendor request form to get them set up in the accounts-payable system. It was just a paper flow — I send in my form, they set up the vendor and sign off on the invoice. Now our business units send me the vendor request forms. And I say, why do you need a new vendor? Who’s doing it today? And you have a discussion — how much money are you going to spend? Do you have any competitive bids on that? It changed the whole dynamic between the on-site managers and finance about what they’re trying to do, and how.
We’ve been able to streamline the processes that we wanted to undertake, which has lowered our processing time. Our cost is less than the shared-services allocation we were getting.
Now we’re at the point where the growth of the business is such that I’m beginning to look at decentralizing my organization by having finance and accounting people at the business units. Right now we’re totally centralized.
What’s the advantage of that?
It’s being part of the discussions, being able to support the GMs in real time. A GM may call us and we’ll work together on issues, but it would be advantageous to him as well as us to have someone there on-site working with the team, with real-time access to the data and the ability to do analyses and review things. It would accelerate the information gathering, the decision making, and their grasp of the business issues.