Handing Change at Ferguson: The Credit Function Executive Summary John Culbert is given the difficult task of selecting the best approach that will capitalize on opportunities to increase the performance efficiency of the credit function without disrupting its current customer-oriented culture. His main challenge is the lack of a comprehensive system to evaluate the gains from centralization and the problems it could potentially create vis-a-vis the current status quo. Hence, we suggest a basic framework for him to evaluate the costs and benefits associated with changing the structure of the credit function.
Given that the change is mandated by his managers, there are high potential cost-savings, and low risks associated with restructuring, we recommend the implementation of an adapted version of the Charlotte Pilot in other geographic markets. Furthermore, as a protective cost-saving measure in a declining economic environment, we recommend utilizing his informal performance ranking system to reduce redundant staff, particularly where multiple credit managers are assigned to the same branch office. Analysis “Why mess with something that works? There are no simple answers to deciding whether to restructure the credit function, and considerable judgment is required to weight the gains of centralization against the potential pain it could cause, especially as the credit function plays a key role in the continuing business growth of Ferguson and its hallmark superior client service. We believe there are three main criteria for choosing to go forward with the desired changes and implementing the Charlotte Pilot model. Firstly, the change is mandated by John’s manager, CFO Brad Miller.
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Ferguson had been a high-growth story and the decentralized model for the credit function supported such expansion strategy. However, the company’s model is not well suited for increased competition, which along with the imminent decline in construction, creates pressure on the company to identify cost savings on the supply side. Furthermore, the corporate parent, Wolseley, is striving to build economies of scale, further putting pressure on Ferguson’s executives to centralize and consolidate functions.
Thus, it is clear that there is a strong organizational push to redefine Ferguson’s strategy in lieu of the changing competitive landscape and adapt all main functions to better serve the new company objectives. Secondly, the centralization of the credit function will lead to several immediate benefits. Implementing the Charlotte model in other markets will put a proven credit manager to guide decisions of local credit managers of the different KOBs.
A local SMCM will also allow for greater information sharing between functions and branches in a given market, providing superior services as a centralized contact for large clients who buy from multiple KOBs. Furthermore, some redundancies could be eliminated. For example, if a branch has a few credit managers with overlapping coverage, the low-performing managers could be dismissed. The credit function appears to overlap across various business groups and there are clear synergies that could come from empowering few strong managers in a given geography with responsibilities for more than one business lines.
At the same time, having fewer direct reports will reduce the number of distractions and allow senior regional credit managers to focus on more effectively managing their geographical areas. There will be more time for regional credit manager to train and develop other high-potential local managers who can then in turn coordinate the function in their local market. The need for continued training has been clearly identified, and certainly constitutes a necessary requirement for creating a strong group of credit managers, which in turn will make the goal of centralizing credit around regions more attainable.
Further, credit is always evolving with economic activity and it is important to ensure effective information sharing among credit managers to ensure that knowledge and crucial lessons on successful managing of troubled credits are properly disseminated for everyone’s benefit. Thirdly, we estimate that the risks associated with implementing the restructuring plans, were they not to work as expected, are relatively low. For example, some credit managers might see centralization as counterproductive and this could lead to stifled motivation and lower performance.
Local credit managers tend to be highly driven, often competitive individuals, and some of them might view the extra layer between them and the regional managers as an nitiative that restrains their career development and leave the company. Furthermore, local branch general managers (GM) might view the SMCM as a threat to their direct authority over the branch credit manager. This is especially true if certain low-performance managers are laid-off as a result of reducing functional redundancies.
Branch GMs might find this particularly disruptive to their goals of increasing sales, as they lose relationships that they have found accommodating to their business goals thus far. Therefore, aside from creating some temporary distractions in the reporting lines and some potential attrition among employees, the proposed structural changes to the credit function are unlikely to create a large negative backlash for John Culbert and Ferguson in general.
It is important to explore alternative solutions to the problems identified by Culbert and his team. One of the overarching themes was that there was lack of coordination and information sharing among credit managers from different KOBs. Furthermore, there was general consensus that managers could benefit from more credit training. These challenges could be assuaged through the implementation of frequent workshops and training seminars for credit managers (CM) within same geography, which could increase team work and coordination across KOBs.
Further, the A-rated CMs could be incentivized or asked to train B-or-C-rated CMs, which will allow for the establishment of formal and informal mentorship structures and facilitate a culture of more open communication. Solutions and Action Plan It is safe to assume that organizational changes of the proposed caliber typically diverge from the known norms and behavioral patterns at the company, and are likely to have a high impact on the informal organization and culture.
Therefore, the employees should not be left to interpret the changes alone. It is crucial that serious consideration be given to the impact of changes on power relations among groups and how the existing people will fit into the new plan. As such, all changes will have to be carefully communicated to all affected constituents. The first step in the action plan will be to determine the availability of sufficient number of A-rated CMs in a given market before the implementation of the Charlotte Pilot model can occur.
It is evident that a highly-skilled CM ( A-player) is needed for the SMCM function to be successful. If no A-rated managers are readily available in the area, Ferguson will have to find A-rated managers from other markets who are willing to relocate. The second step is to explain the process to key branch managers in the market prior to implementing the new function. Ideally, the new SMCM will be introduced to all branch GMs as a resource and go-to person for more complex credit cases and a more senior point of contact with clients.
It is important to secure the buy-in from the branch GMs are they have direct authority over the branch CMs and as such are most likely to resist any changes. Some GMs have long-lasting relationships with their branch CMs and will be very hesitant to replace them. There is even some evidence as to CMs who are kept in their jobs, despite lacking the requisite qualifications, due solely to the branch GMs sponsorship. SMCMs will assume branch GMs that they have the same objectives of increasing sales growth, timely collections, and fostering client relationships.
The next step is to discuss the change with CMs directly. There is real potential for CMs to feel intimidated by the proposed changes. On the surface, the SMCM function could appear to add more oversight to local branch CMs, and to ambitious employees, a counterproductive, additional layer between them and the regional CM. However, the SMCM function needs to be rebranded as a mechanism that allows local CMs greater autonomy and independence, while allowing access to an experienced manager in the same market for faster problem resolution and professional advancement.
To evaluate the effectiveness of the plan, Ferguson can review how well the SMCM are coordinating CMs in the local market to counter the expected declines in the construction businesses. The SMCM should recognize that construction-focused KOBs will benefit from more attention to collection practices and workout, which could preserve value as the economic environment deteriorates. Further, Ferguson can re-evaluate the CM staff across the company and look for marked improvement in the quality of CMs due the knowledge sharing and training initiatives implemented by the SMCMs at the market level.