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Double Duty

More and more companies are eliminating the chief operating officer position — and handing operating duties to the CFO.

21May
For McDonald’s, operational execution and efficiency are just as important as crisp French fries and thick milkshakes. The franchise giant sources, prepares, preserves, packages, and ships fast food to 35,000 restaurants in more than 100 countries, serving some 70 million customers a day. Surely McDonald’s needs a top-notch chief operating officer, yes?

Apparently not. Current COO Tim Fenton will step down as of October 1, for health reasons, and McDonald’s has no plans to replace him. In large part, operational oversight will fall to CFO Pete Bensen.

200247304-001It’s just the latest elimination of the COO role by a high-profile company. At the end of 2013, only 35% of companies in the Fortune 500 or S&P 500 had a chief operating officer, according to a recent analysis by recruiting firm Crist Kolder Associates. That’s down from 48% in 2000. Usually, when a COO leaves, the CFO assumes operational duties.

Some reactions to the announcement suggest that eliminating the COO position is still not something to take lightly. “The removal of this COO post is a bit unusual, given that the supply chain is an area that could be viewed as a weakness for [McDonald’s] the past two years,” says Morningstar analyst Ronald Hottovy. “I would have preferred to see the company maintain the COO role and fill it with someone with supply chain management expertise.”

But Hottovy also notes that Bensen is “a capable leader” who should be able to absorb his new responsibilities. (McDonald’s did not respond to requests for an interview with Bensen.)

Smaller companies, too, are calling on their CFOs to double up in operations. T-Systems, a $100 million (in revenues) provider of documentation solutions for medical emergency departments, parted ways with its COO at the end of 2013. “It was a layer of management that caused the CEO to be a step removed from the business at times,” explains finance chief Steve Armond. “It wasn’t necessarily healthy all the time.”

Since then Armond has been running a unit that generates about half of the company’s business. He’s still the CFO, but he has left many of the day-to-day finance and accounting chores to his direct reports, whom he calls “a strong supporting cast.”

The new role requires Armond to “focus on the most pressing strategic priorities that will create the greatest value opportunities for the business, and to spend less time in the minutia,” he says. He now devotes more time to customer-facing activities, even leading some deals, and is working on strategic partnerships and other third-party relationships in order to advance growth and create business efficiencies.

Splitting the Chores
Another finance chief who took on operational chores was Damian Finio, who was CFO of West-Ward Pharmaceuticals from 2011 to 2013. It wasn’t easy. For one thing, the chief operating officer, who left the $400 million company last year, had a full plate of responsibilities — manufacturing, supply chain, procurement, and IT, including an ongoing SAP implementation. For another, West-Ward had received a warning letter from the Food and Drug Administration in 2012, relating to violations at a manufacturing facility.

Finio and the CEO decided to split up the departing COO’s duties. The CEO took manufacturing and supply, since he was “more of a chemist and manufacturing guy by background,” says Finio, while the CFO took procurement and IT.

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“We felt we needed to be closer to the leaders of those four departments, and we decided the COO role had been a buffer against being hands-on with them,” he says. “We realized we would be better off hiring stronger leaders for those areas and have them report directly to us.”

Finio had never had a job where IT reported to him, so he had some conversations about whether it was possible to lead the function effectively without any experience. What he found was that the same project-management skills he used for finance applied equally to IT. “I was able to lay out the priorities, how many people were needed, due dates, who’s responsible,” he says. “It brought organization to an IT department that was a bit overwhelmed having to handle both the SAP implementation and the day-to-day.”

Finio left West-Ward last year, to start a consultancy focused on turning finance departments into strategic business partners.

14May_HumanCap_p24_v2When the COO Moves Up
In many cases the COO title disappears because the person who holds it is promoted to CEO. That’s what happened in 2007 at Lazydays, a $500 million recreational-vehicle dealership with operations in Florida and Arizona. CFO Randall Lay, who is still with the company, says he gradually assumed responsibility for areas that “didn’t have another natural home,” including administrative services, human resources, process-improvement efforts, procurement, and inventory management.

Today, Lay says he’s responsible for “anything that impinges on financial performance or the deployment of assets. If we don’t have the right inventory and our sales suffer for it, I don’t have somebody on the operating side I can go to and say, ‘This is your problem,’ because it is my problem.”

According to Crist Kolder’s analysis, 40% of current CEOs among Fortune 500 and S&P 500 companies came directly from a chief operating officer chair. That means the COO is unlikely to vanish completely from the corporate landscape, says Crist Kolder president Tom Kolder. Kolder notes that frequently, an executive being groomed for the top job may lead operations for a while, and when he or she is promoted, the operational vacancy isn’t filled.

Still, another reason for the disappearance of the COO is that CFOs are now also considered prime candidates to become chief executives. While only 6% of the large companies’ sitting chief executives came directly from a CFO post, change is in the air. Today about 9 out of 10 CFO searches carry a requirement that candidates have the potential to lead the company, says Kolder.

Indeed, if anything, finance chiefs may have a leg up on COOs. “If a CFO and COO have the same or similar operating capabilities, the CFO has an advantage from playing the point on a lot of external relationships, like with investors and the banking community,” says Kolder. “No one is going to become CEO based on external skills alone, but when you layer those on top of a strategic mind-set and an operating DNA, you’ve got a really formidable set of skills with which to compete against other candidates.”

He adds, “Given their increasing focus on operations, CFOs in today’s environment are capable of doing a good bit of what COOs have historically done. The COO becomes duplicative.”

Others think the COO’s role is redundant with the CEO’s. Jonathan Schiff, a professor at Fairleigh Dickinson University and an adviser to large corporations, prefers the leadership model where one person is both CEO and president. “In that situation there is one focus of responsibility and accountability,” he says. “When there’s a COO, there is often a question of who’s responsible for strategy.”

That’s not to say Schiff leaves finance chiefs out of the strategic and operational domain. At many companies he works with, the CFO is responsible not only for finance but also for the part of the company that’s growing the fastest or presents the greatest risk. “CEOs understand that the overall risk to the company will be diminished if the CFO has some direct involvement,” he says.

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