Fred Bevins, the controller at Rendell Company, was increasingly worried about how his divisional controllers were positioned within the organization. For many years, including 1985, these controllers reported directly to the general managers of their divisions. Although this setup was common in many companies, Bevins wasn’t entirely comfortable with it. His interest in exploring a change was piqued after hearing about the organizational responsibilities at Martex Corporation from its controller.

Rendell Company boasted seven divisions, with annual sales ranging from $50 million to over $500 million. Each division managed both manufacturing and marketing for distinct product lines, though interdivisional transfers were minimal. The company had been profitable for over 50 years, but its growth had slowed in the late 1970s. To address this, James Hodgkin was hired as controller in 1980, eventually becoming president by 1984. Bevins joined as assistant controller in 1981 at age 33, becoming controller two years later.

Initially, the corporate control organization handled financial accounting, internal auditing, and capital budgeting analysis, with little involvement in budget preparation. Hodgkin, as controller, pushed for a more active role, personally reviewing budgets and performance reports. Bevins continued this approach, and by 1985, the corporate control organization was well-staffed and more involved in analyzing divisional submissions.

However, divisional controllers still reported to their general managers, with corporate input limited to appointments and salary increases. Bevins felt this setup hindered his ability to push for modern control techniques and left him uninformed about divisional activities. He suspected divisional controllers were more loyal to their general managers, potentially hiding inefficiencies in their reports.

Bevins found inspiration in Martex Corporation’s structure, as described by its controller, E.F. Ingraham. Intrigued, Bevins shared his thoughts with William Harrigan, his assistant controller, who had been with Rendell for 25 years and had experience as a divisional controller. Harrigan’s response was candid:

“I doubt the Martex plan would work for us. In my five years as a divisional controller, I was told to support the general manager in every way. My team prepared information for the divisional budget, but the final decisions were the general manager’s. At budget meetings, I was there to explain figures, but the general manager took the lead. When monthly reports were prepared, I reviewed them and discussed them with the general manager, who then took action.

Problems arose when corporate would ask questions directly to me, bypassing the general manager. While I often agreed with the data, there were times I had private doubts. This setup positions the divisional controller as a ‘spy’ rather than a trusted assistant, which could erode trust and effectiveness. If we followed the Martex model, general managers might isolate the controller, damaging the control function within divisions.”

Harrigan believed maintaining the current structure, despite its imperfections, was preferable. It allowed divisional controllers to remain integral to the management team, even if it meant dealing with some inefficiencies in budgeting and reporting.

What can we learn from Rendell Company?

The story of Rendell Company offers several valuable lessons about organizational structure, management, and the challenges of implementing change:

1. Balancing Accountability and Autonomy: The existing structure at Rendell, where divisional controllers reported to their general managers, highlights the balance between holding divisions accountable and allowing them autonomy. This balance can foster a sense of ownership and responsibility within divisions.
2. Challenges of Modernization: Fred Bevins’ push for modern control techniques underscores the difficulties organizations face when trying to modernize practices. Resistance can come from entrenched systems and personnel who are accustomed to the status quo.
3. Importance of Clear Reporting Lines: The tension between corporate control and divisional autonomy illustrates the importance of clear and effective reporting lines. When divisional controllers report to general managers, there’s a risk that corporate may not receive unbiased information.
4. Trust and Communication: The story emphasizes the critical role of trust and communication in organizational effectiveness. Divisional controllers need to be trusted assistants to general managers, not seen as corporate spies. This trust is essential for accurate reporting and effective management.
5. Value of Experience and Institutional Knowledge: William Harrigan’s perspective shows the importance of experience and deep institutional knowledge in decision-making. His insights, based on years of experience, provided a grounded view that complemented Bevins’ more ambitious plans.
6. Adapting Best Practices: Bevins’ interest in Martex Corporation’s structure demonstrates the value of learning from other organizations. However, it also shows that best practices are not one-size-fits-all. What works in one company might not be suitable for another due to different cultures, histories, and operational contexts.
7. Role of Leadership in Change Management: The transition of James Hodgkin from controller to president, and his active involvement in budget reviews, highlights the impact of leadership in driving change. Strong leadership can inspire and implement new practices, but it requires buy-in from the entire organization.
8. Potential Downsides of Centralized Control: Harrigan’s feedback warns of the potential downsides of overly centralized control. Isolating divisional controllers from their general managers could lead to inefficiencies and a lack of cooperation within divisions.

Rendell Company’s experience teaches us that organizational changes must be carefully considered and balanced with the existing culture and practices. Trust, communication, and adaptability are key to successfully implementing new structures and techniques.

What would be the best course of action to take between using the Martex Method and direct reporting to general manager?

Choosing between adopting the Martex method (where divisional controllers report directly to the corporate controller) and continuing with divisional controllers reporting to general managers involves weighing the pros and cons of each approach in the context of Rendell Company’s specific situation. Here are some considerations to help determine the best course of action:

Martex Method (Divisional Controllers Reporting to Corporate Controller)

Pros:

1. Unbiased Information: Direct reporting to the corporate controller ensures that divisional controllers provide more objective and unfiltered information, improving transparency and accuracy in reporting.
2. Standardization: It allows for more consistent implementation of modern control techniques and uniformity in accounting practices across divisions.
3. Enhanced Oversight: The corporate controller can have better oversight and a clearer picture of the company’s overall financial health and operational efficiency.

Cons:

1. Loss of Trust: Divisional controllers might be seen as spies by divisional managers, leading to a breakdown in trust and cooperation within divisions.
2. Isolation: Divisional controllers might become isolated from the day-to-day operations and strategic goals of their respective divisions, reducing their effectiveness as integral team members.
3. Resistance to Change: Long-standing relationships and loyalty within divisions might make it difficult to implement this new reporting structure smoothly.

Direct Reporting to General Managers

Pros:

1. Close Collaboration: Divisional controllers can work closely with general managers, contributing to strategic decision-making and operational efficiency.
2. Trust and Team Integration: Maintaining the current structure helps preserve the trust and collaborative spirit within each division, fostering a cohesive management team.
3. Institutional Knowledge: Divisional controllers, being more integrated into their divisions, have a better understanding of the specific challenges and opportunities within their divisions.

Cons:

1. Potential Bias: Reports from divisional controllers may be influenced by their loyalty to general managers, potentially leading to biased or incomplete information.
2. Inconsistent Practices: Different divisions may develop varied practices and control techniques, leading to inconsistencies and difficulties in implementing company-wide policies.
3. Limited Oversight: The corporate controller might have limited visibility and control over the divisions, making it harder to enforce standards and optimize overall performance.

Best Course of Action

To determine the best course of action, consider a hybrid approach that combines the strengths of both methods while mitigating their weaknesses:

1. Dual Reporting Structure: Implement a dual reporting system where divisional controllers report both to their general managers and to the corporate controller. This maintains their close relationship with divisional management while ensuring corporate oversight and consistency.
2. Clear Role Definition: Clearly define the roles and responsibilities of divisional controllers in relation to both the general managers and the corporate controller. Ensure they understand their duty to provide accurate and unbiased information to the corporate office while supporting their divisional managers.
3. Regular Communication and Training: Facilitate regular communication between the corporate controller and divisional controllers through meetings, training sessions, and workshops. This helps in fostering a unified approach to control techniques and accounting practices.
4. Performance Metrics and Accountability: Establish clear performance metrics and accountability standards for divisional controllers. Ensure that their performance evaluations involve input from both the general manager and the corporate controller.
5. Phased Implementation: If considering a shift towards the Martex method, implement it gradually in phases, starting with a few divisions. This allows the company to address any challenges and resistance while refining the approach.

By adopting a balanced approach that incorporates elements of both methods, Rendell Company can improve transparency and oversight while maintaining trust and collaboration within its divisions.