Talking risk with the CFO, Treasurer and Risk Manager at Rockwell Collins;
Rockwell Collins is a pioneer in the design, production and support of innovative products in aerospace and defence, with expertise in flight-deck avionics, cabin electronics, mission communications, information management, and simulation and training. With 20,000 employees and a reach spanning 150 countries, Rockwell Collins produces aviation electronics systems installed in the flight decks of nearly every air transport aircraft in the world, and their systems transmit close to 70 percent of U.S. and allied military airborne communications. Clearly, they are in the business of high reliability, high assurance and high expectations.
If their business is underlined by tenets like precision and responsibility, so too is their philosophy and approach to risk. Rockwell Collins’s risk management department has consistently delivered results and the company’s [practical, pragmatic and conservative principles surrounding risk is well-known. Reason magazine ventured to find out what they do and how they do it – and the beliefs that form the basis of their guiding principles.
Dick Siefers, Doug Stenske and Patrick Allen – risk manager, treasurer and CFO, respectively – form the trio that serves as the nucleus of Rockwell Collins’s risk management success. It is easy to see, when talking with each of them, that their job descriptions interlock, like Olympic rings, as each one has significant independent oversight but also dependencies on the others. It is also clear that they have the utmost confidence in each other that their connection to each other is strengthened by that confidence, and, well, the results speak for themselves.
Dick Siefers: Risk Manager, Rockwell Collins
Rockwell Collins has to be the most trusted source of aviation and high integrity solutions ot its customers. How do you develop trust?
You develop trust by consistently doing the things you say you’ll do and by taking ownership of not only the things that go well which you are responsible for, but also those matters in which you have failed. That means I have to deliver my product within the expectations and the needs of my customer and, if I don’t deliver within the expectations, take ownership of that failure and how it will be resolved. As a risk manager, my responsibilities include not only identifying a risk, but also identifying a solution to mitigate the risk. A good example of this involves the disruption of our manufacturing operations from a catastrophic event. Are there actions we can take to prevent an event from even occurring? If an event does occur, are there actions we can take to mitigate the event to prevent it from becoming catastrophic? And if a catastrophic event occurs, are there response actions we can take to limit the damage or the period of recovery?
When I joined Rockwell Collins, it did not have a business continuity plan. So I sought buy-in to develop a program from my leader, the company’s CFO, and the senior operations leader. Their primary concern was that my concept was too big to implement companywide. They wished to try it on a smaller scale – in Melbourne Florida.
The defining moment came six months after we completed the development and testing of the Melbourne business continuity plan. In 2004 Melbourne business continuity plan. IN 2004, Melbourne experienced a series of hurricanes – not one, not two, but three within a six-week period. Our recovery from the third one, thanks to our business continuity plan was remarkable. We were back up and operating within three days, while a competitor down the street was offline for 30 days.
What is the nature of the communication between you and Patrick, or you and other senior executives?
It’s very good. I don’t have an issue with reaching out to other leaders in this company to make my voice and concerns heard. If there’s an issue, I try to seek an audience to see if I’m on the right track.
It seems you’ve found a solid framework for your position and your responsibilities; that’s the place you function best.
If there is one constant in life it’s change. You’re never done. There’s constant change in leadership, personnel, market dynamics and the risks. In fact, some perils turn out to be more significant than you originally believe due to other contributing feactors. Because of the area in which Rockwell Collins operates and the number of suppliers it takes in order to operate, supply chain risk management is a continuing concern. Are we susceptible to geographic risks because of an over-concentration of suppliers in certain areas? Do we have alternative suppliers identified or qualified in the event a primary supplier is unable to support our operations? In our line of business, that may not always be the case. If we don’t have alternative suppliers, do we have a reasonable level of inventory on hand that buys us time to qualify an alternate source? In today’s world of publicly traded companies big inventory is not a good thing. It ties up working capital. You don’t want working capital tied up. Balancing these competing objectives is always a challenge.
Why does all of this work so well? It seems there is an implicit understanding between FM Global and your function here. Is that true? If not, how can it be improved?
That’s a good question. Nothing comes to mind in terms of how it can be improved. There’s always going to be friction. It’s not a perfect world. The fact is, I have a voice that’s heard, a good working relationship with the right people, and there’s a clear understanding between us. As leaders, we all have the same goal – that is well-defined in our vision and mission statements. Reaching this goal, while addressing our critical needs, can only be accomplished if we are creative and flexible.
Relationships seems to be at the very heart of it, personal relationships.
That’s true. In fact, everything I do involves personal relationships. When I speak about providing a high level of customer service, that’s developing that personal relationship. For the last 20 years, I’ve bought all my clothing from the same place. This store has great customer service and a good selection of clothing for a big and tall person. I may pay a bit more than at another store, but I love the service I get. It’s the same way in this role. It is developing that network of relationships and then providing good customer service. Similarly, at FM Global, we receive good customer service from everyone we work with, whether it is from the account manager, account engineer or site engineers. It’s developing a relationship you can work with, with people you can talk to, where you can be yourself and appreciate the other at the same time.
Doug Stenske: Treasurer, Rockwell Collins
Can you explain a little about how you arrived at where you are today?
In 2001, the decision was made to spin off Rockwell Collins as an independent, publicly traded company, from Rockwell International. Patrick Allen, current CFO, then-treasurer of Rockwell International, decided he was going to work for the spin-off company as its corporate treasurer and controller. So he asked me and a few others to come with him, to essentially start up the corporate finance functions that would be needed for the new, stand-alone company. As much as I hated to leave my hometown of Milwaukee (Wisconsin, USA) at the time, the opportunity was too good to pass up. Patrick offered me the opportunity to not only establish the corporate risk management and insurance function for Rockwell Collins, but also manage our pension and savings plan assets and our currency risk management and hedging program.
When Patrick moved on to a new role with one of our business units, I was appointed as treasurer of Rockwell Collins. With that role came not only the responsibilities I had before, but also the core treasury activities, including global cash management, capital market transactions and bank relationship management. I did take an interesting side step in my career at one point when I agree to lead the company’s internal audient department, serving as general auditor. In the treasurer role, you have a lot of external-facing responsibilities such as working with insurance companies and brokers, pension asset angers, bankers and other financial service providers but in internal audit, you really turn your attention to internal processes. That was a good development opportunity for me, because it allowed me to focus on internal financial and operational processes and enhance my internal network. The internal audit role also allowed me to apply my risk management acumen to a different risk universe – as you’re reviewing risks typically around internal controls over financial reporting, compliance and operational processes that support business objectives. In my treasury role I had always taken a broad view of risk and led the development of the company’s enterprise risk management (ERM) process. I retained responsibility for the ERM process when I became the general auditor because that process identifies risk areas that broaden our audit risk universe and enhance the value of our audit projects.
Tell me about your view of risk, then. Where do you see risk in the framework of your job?
In terms of the risk and insurance function, I think mostly about the traditional property and liability exposures. Clearly our manufacturing facilities are expose to natural perils. If you have locations in Melbourne, on the east coast of Florida, as we do, you’ve got hurricane exposure. We have facilities in Mexicali, Mexico, and Portland, Oregon, so there’s also earth movement exposure there. Then there’s always the possibility of a fire at any of our manufacturing or engineering facilities.
I am less concerned about physical damage to property than I am about any resulting disruption of our operations. If we’re shut down because of a major event, particularly a fire, and our customers are not going to be all that forgiving. There are things we can do to reduce the likelihood and severity of a loss, beginning with loss prevention. We try to construct and upgrade our facilities appropriately for the perils they are exposed to, such as reinforcing a roof or installing sway bars in buildings with earth movement exposure. While we can’t always prevent incidents from occurring, we can take steps to mitigate the customer impact by reducing downtime. We attempt to accomplish this through our business continuity management program.
The first phase of a business continuity plan is emergency response, making sure your people are protected, your property is protected from further damage, and there are no environmental issues. Focus then shifts to a triage and recovery exercise. It’s very important for facility leaders to pre-plan what they need to do quickly after an event occurs, so they’re not caught flat-footed. The risk management and insurance team facilitates the development of business continuity plans for each of our critical facilities. Our objective is to shorten the amount of time we’re shut down by preplanning and assigning responsibilities to team members who will take the lead in initiating local recover actions
What sort to frisk do you encounter? Can you give an example?
The business might come to us and say, ‘We’ve got a currency risk. We’re entering into a contract and we have sales that are going to be derived in, say, Euros, but our costs will be incurred in US Dollars. What are the risks and what can we do to manage them? I may give them a high-level description of how we can manage the risk, then the treasury team will work with the business and provide specific recommendations on how to manage the risk, either contractually or through hedging strategies. Contract issues come up a lot – an area where Dick and his team get involved. We review contracts with both customers and suppliers. It seems that contracting parties are always trying to flow liabilities down to the next guy, and the next guy is trying to push them back up. Dick and his team do a good job protecting Rockwell Collins’s interests and holding the line when indemnification and hold-harmless language is unreasonably onerous. Occasionally, contract issues are escalated to me. When this happens, my job is to take a step back and ask ‘What are the financial returns associated with accepting those risks?’ If it’s a significant return, I will say ‘Well, for this opportunity, we’re being adequately compensated for the incremental level of risk we’re assuming.’
The whole idea of the larger view of risk at Rockwell Collins seems to fall on you.
I am asked occasionally whether the ERM process is what drove our focus on business continuity management. The answer is no. In fact, it was just the opposite. When I first joined Rockwell Collins I didn’t feel that our facilities were properly prepared to recover quickly from a large property damage event. Accordingly, we went through a process of identifying, at the local level, the primary hazards, the key pieces of equipment that would need to be restored quickly and the recovery activities that we would be required to reduce the impact of an event. This was the rollout of our business continuity management process.
We then applied this approach across the enterprise to identify key risk areas for all of our business units and shared service functions like finance, operations, human resources, legal, engineering and IT, and the mitigation activities in place to address those risks. If we believe there are improvements that should be made to our mitigation actions, we deploy the resources necessary to mitigate risks to a tolerable level. We took the facility business continuity management concept as microcosm and expanded it into an enterprise-level risk and mitigation review process.
How much of what you’re describing is the role of a classic or typical treasurer, and how much of this is you putting your own stamp on this particular function?
There are not a lot of treasurers out there who have much background in risk management and insurance. If you ask Dick, that could be a good or a bad thing, from his perspective! I know enough to ask a lot of good questions, but I don’t run Dick’s function. He runs it. If he needs help, he comes to me as a sounding board and I provide my perspectives based on my overall experience both as a finance professional and a risk manager. I think many treasurers are wholly dependent on their director of risk management and insurance to make good insurance coverage and placement decisions. I like to think that I can add some value in those areas.
In partnering with Dick, we have come up with some creative ideas around our risk financing and risk management processes. I view the risk management and insurance role as a natural fit within the treasury organisation, because so much of what we do is risk-related – always considering the what-ifs. What if the capital markets close for business for a period of time? How would we fund working capital needs? How much liquidity do we need? With regard to foreign currency, we want to make sure we’ve hedged appropriately so that we don’t incur lost profitability on a program generating cash flow in a foreign currency. From my perspective, it’s a very clean fit, treasury and risk insurance.
The risk management aspect of the role often involves more operational components than many treasurers would typically get involved with. For example, if we have an important FM Global property loss control recommendation that Dick has been unsuccessful in getting the business to act on at his level, he’ll escalate it to me, and I’ll do what I can. If it still isn’t moving, we’ll get Patrick involved, as well as our senior vice president of operations, and we’ll figure out the best approach to address the recommendation. The answer we end up with is not always going to be full implementation of the FM Global recommendation but it will address the issue, so we’re both satisfied with the outcome.
Patrick Allen: CFO, Rockwell Collins
What are you most concerned about in terms of risk management? How do you view the concept of risk management?
There are a couple of components. You obviously have to look at both the cost and the benefit of risk management. From a cost perspective, I look at not only what an event might cost but also the reputational damage. Rockwell Collins, being who we are, is so critical to the supply chain of the aerospace industry that we can’t really afford to have significant downtime. We need to have a robust process in place to manage the risk associated with any potential disruption in our ability to supply our customers.
Then it must be important for you to take a proactive view on risk management, just to protect and defend what you’ve created.
We have a very interactive dialogue, with Dick, Doug and our operations group. We constantly talk about where our most significant risks are, what the cost is to mitigate those risks, and are those costs worthwhile? It is an iterative process and something that we do regularly throughout the year.
Explain what value an insurance company brings to Rockwell Collins?
Before we got into the FM Global relationship, insurance was pretty transactional. ‘Here’s your total insured value. Here’s the cost of the insurance. Thank you very much. Send me your cheque’. If we had a lo0ss, we’d have a claim. With FM Global, it goes far beyond that. It’s one of these things where they partner and work to prevent the losses from actually occurring.
I think that loss prevention provides an enormous amount of benefit for both Rockwell Collins and for FM Global because the lower the risk, the fewer the claims. Plus, this is an insurance company run by engineers. Usually, they are run by finance guys.
You can tell that because what they’re doing is trying to engineer out the risk and ultimately lower the claims, which then provides benefit to both Rockwell Collins, the client, as well as FM Global, the insurer. I think it’s a very symbiotic relationship.
How do you integrate risk management, finance and insurance? It seems to be key in the way Rockwell Collins operate.
Obviously we don’t want to pay a lot for insurance. But if we don’t have a risk mitigation mind-set, if we don’t have a risk management mind-set, then I think the relationship doesn’t work. Everything I’ve heard from all the discussions FM Global has had with Dick, Doug and our operations group is that we do have compatible views about how to manage risk. The other thing I’d mention is, and I didn’t appreciate this until just recently, but FM Global not only deals with our existing facilities, but we get them involved in the construction of new facilities.
What are some of the other things that weigh heavily on you as CFO of a major organisation?
It’s interesting. Some risks are difficult to insure or difficult to insure adequately. We talked about earthquake. Am I taking on more risk than I’d like to with respect to that particular risk? Yes, probably, but given the cost, you have to make that evaluation and that trade-off. The risk-reward trade-off is one I think about a lot as I consider insurance.
One thing I don’t worry very much about is the counter-party risk associated with FM Global because, sitting on their advisory board, I recognise what a strong company it is. My view is that their risk management philosophy is not going to let them get into a situation where they’re over-exposed to any one particular risk
How do the conversations go in terms of where Rockwell Collins is budgeting its risk mitigation funds?
You can almost think of it as categories, as priorities. I break it into three priorities. One is you’ve just got to do it. The risk is too high. You’ve got to figure it out and figure it out quickly. The second is, yes, we want to do it. We have to plan for it. It doesn’t necessarily have to happen in the next three months, the next six months, but we need to make sure it’s incorporated into the plan.
Then there’s what I’ll call the nice to-dos. That’s ‘Okay, if there are available funds, we’ll figure out a way to get it in there’. I think Dick, with the help of FM Global, does a really good job of categorising these priorities for me, so I know how much we need to plan for immediately, how much we need to plan for the longer term, and what’s the ‘Boy, wouldn’t this be nice to have’.
This article first appeared in Reason Magazine 2016. To download Reason 2016 click here