Management planning concepts and practices

¶ … management planning: The failure of WorldCom

(A lack of) management planning: The failure of WorldCom

The former corporate behemoth 'WorldCom' has become such an infamous symbol of accounting fraud that it is easy to forget the company was once one of Wall Street's hottest commodities during the dot.com bubble. But its investors were not simply victims of the 'irrational exuberance' of the late 90s/early 21st century boom and bust. WorldCom's presentation of its financial status to its investors was a blatant fraud. Lackadaisical management of the increasingly unruly conglomerate, deregulation that permitted conflicts of interest between investment banking firms and the organization, and 'creative' accounting that inflated the corporation's net worth were all factors in the losses suffered by innocent investors and employees.

Management planning: Strategy

WorldCom, as well as the center of an accounting scandal, was also a case of "failed corporate governance" (Moberg & Romar 2008). Its CEO, Bernie Ebbers, was famous for challenging the supremacy of AT&T and leading WorldCom through what was later called a dangerously aggressive acquisition strategy. This strategy briefly brought WorldCom to the status of the second-largest long distance telephone company in the United States and one of the largest companies worldwide (Moberg & Romar 2008). "Aggressive" may be insufficiently strong a term: WorldCom spent over $60 billion in pursuit of 65 acquisitions from 1991 and 1997. The planning function of management is often said to be "looking ahead and chalking out future courses of action" by setting goals but Ebbers' goal mainly seemed to be designed to inflate the company's stock price by any means possible (Planning function, 2009, Management study guide). By 1997, WorldCom's stock had risen from pennies to over $60 a share and during the height of the Internet boom, it was a media darling. "As the stock value went up, it was easier for WorldCom to use stock as the vehicle to continue to purchase additional companies" (Moberg & Romar 2008).

WorldCom's strategy of 'acquire at all costs' was breathtakingly expansive not just because of the number of businesses it acquired, but the range of services. According to its own website at the height of its popularity, WorldCom provided communications services for tens of thousands of businesses, carried more international voice traffic than any other company, a "significant amount" of the world's Internet traffic, and operated a global IP (Internet Protocol) connection in more than 2,600 cities and in more than 100 countries and 75 data centers on five continents (Moberg & Romar 2008).

Management planning: Operations

The rapid acquisition of all of these companies revealed the organizational weaknesses of Ebbers' strategy. Integrating businesses as large as MFS Communications and MCI Communications into WorldCom's fold proved an insurmountable challenge for Ebbers' slapdash management style. Customer service was one of the organization's greatest weaknesses, a critical flaw in a communication company, as millions of dollars can depend upon reliable communication between users: "One business customer's service was discontinued incorrectly, and when the customer contacted customer service, he was told he was not a customer. Ultimately, the WorldCom representative told him that if he was a customer, he had called the wrong office because the office he called only handled MCI accounts" (Moberg & Romar 2008). "Dozens of conflicting computer systems remained, local systems were repetitive and failed to work together properly, and billing systems were not coordinated (Moberg & Romar 2008).

Management planning: Tactics and corporate ethics

WorldCom's management style was sloppy -- and its accounting strategy was downright unethical. "In an effort to make it appear that profits were increasing, WorldCom would write down in one quarter millions of dollars in assets it acquired while, at the same time, it "included in this charge against earnings the cost of company expenses expected in the future. The result was bigger losses in the current quarter but smaller ones in future quarters, so that its profit picture would seem to be improving" (Moberg & Romar 2004). When forced to reduce the book value of MCI assets, WorldCom accountants used the vague accounting term 'good will' or intangible assets based upon MCI's well-regarded brand name to inflate its worth by the same amount. By "spreading these large expenses over decades rather than years," WorldCom's appeared to do the impossible: "cut annual expenses, acknowledge all MCI revenue, and boost profits from the acquisition" (Moberg & Romar 2008).

Who wouldn't want to invest in such a profitable company? Investors, mislead by such accounting data, flocked to buy the stock, Based upon analysts' recommendations, many people used the stock to bolster investment portfolios designated for retirement and college savings. While it is acknowledged that buying stocks always entails some risk, WorldCom's inaccurate financial reporting made an objective evaluation of its policy impossible. Upon acquiring companies, WorldCom management chose also chose to ignore credit department lists of customers who had not paid their bills for a long time, thus discounting the financial drain of non-collectable bills.

Management planning: Contingency planning and corporate social responsibility

The complete lack of contingency planning on the part of WorldCom management was revealed when the company was confronted with the unexpected -- an anti-trust ruling prevented its planned acquisition of Sprint. This put an end to WorldCom's "acquisition-without-consolidation strategy and left management a stark choice between focusing on creating value from the previous acquisitions with the possible loss of share value or trying to find other creative ways to sustain and increase the share price" (Moberg & Romar 2008).

When the company's stock price began to plummet after it became clear that the company was mismanaged and its value was on paper alone, investor's lives were shattered and lower-level employees lost savings and pensions as well as a steady source of income. Faith in the financial industry was shattered, and the entire stock market was impacted when the fraud was brought to light.

Conclusion: Legal issues

The WorldCom debacle was facilitated by the recent deregulation of the financial industry. The Glass-Steagall Act once separated investment and commercial banking activities, but after its repeal in 1999, banks such as Citibank could regularly dispense "cheap loans and lines of credit as a means of attracting and rewarding corporate clients for highly lucrative work in mergers and acquisitions" (Moberg & Romar 2008). WorldCom's addiction to mergers made its partnership with Citibank especially attractive.