Jim McNerney's Time as Boeing's Pilot Is Over. Bring Back Alan Mulally

Boeing 747-8Boeing (BA) has announced yet another delay. This time it's for the 467-seat 747-8 (pictured). Today's news comes as Boeing's 787 Dreamliner has been delayed seven times and is nearly three years late. These delays are proving costly to Boeing shareholders for a new reason -- an accounting provision that will require Boeing, due to the lateness, to forgo reporting a profit on some of the aircraft that it ultimately delivers.

The question now for Boeing's board is whether the best way to move forward is to replace CEO Jim McNerney. The answer is yes, and the replacement ought to be Ford (F) CEO Alan Mulally.

Boeing's latest 747 woes are even harder to explain than those with its 787. As Bloomberg reports, Boeing's 747-8 's now facing a three- to 10-month delay, making it two years late and costing Boeing $100 million to $1 billion more than the $2.04 billion worth of charges that it's already taken due to delays. One reason for the delay is a redesign of the 747-8's "inboard aileron actuator, a system on the wings that helps the plane turn and had moved up and down unexpectedly on one of the jets," reports Bloomberg.

Mediocre at Best

This delay is historic for an unusual reason because of the accounting rule it triggers, which Boeing has been forced to apply only once before in its 94-year history. That's because at the end of 2008, the 747-8 was so unprofitable that Boeing was required to apply the so-called reach-forward loss position. This rule requires Boeing to record future plane deliveries "at no profit margin unless its profitability improves," according to Bloomberg.

Between the problems with the 747-8 and the 787, Boeing's board has to be wondering whether current CEO McNerney is the right man for the job. Based on the stock market's evaluation of his performance, McNerney is mediocre at best. When he became CEO in July 2005, Boeing traded at $66 -- right about where it trades now. The S&P 500 during that time fell 4%.

However, Boeing's financial performance under McNerney isn't that disappointing. Between 2005 and 2009, Boeing's sales have risen 27% to $68.3 billion, but its net income has plunged 50% to $1.3 billion. Its cash has grown 97% to $11.2 billion.

Three Likely Problems

The problem is McNerney lacks a key skill that Boeing needs:-- the ability to manage a portfolio of complex engineering projects. The delays Boeing is experiencing indicate there's a gap between what's happening on these development projects and what Boeing has been telling investors. And this suggests that McNerney isn't in control of Boeing's operations.

Based on the research for my book, You Can't Order Change, I'd guess that Boeing is suffering from three problems that are McNerney's responsibility. He may have assigned the wrong people to run these projects, those project managers aren't coordinating Boeing's efforts effectively among internal and external teams and the truth about the status of these projects isn't reaching McNerney. My reading is that people down the line aren't giving bad news to McNerney because they fear it will cost them their jobs. So the information is released only when absolutely necessary.

Fortunately, Boeing's board could potentially bring in the ideal person for the CEO slot. That person is currently CEO of Ford -- Alan Mulally (who had a long and successful career at Boeing before taking over at Ford).

The Key: Sharing Information


What's so great about him? Beyond keeping Ford out of bankruptcy, unlike its Detroit peers, Mulally is a great problem-solver. According to Stan Sorscher, a former Boeing employee and current union official I interviewed for an August 2009 story on DailyFinance, Mulally would invite people from all levels of the business to share information and work toward solutions that are in the best interests of Boeing.



Sorscher noted that Boeing's last successful new aircraft was the 777, which employed this problem-solving approach in 1995, when Frank Schrontz was CEO. Says Sorscher: "The 777 had the opposite corporate culture [of the 787], with a strong emphasis on early awareness of problems, close coordination of all stakeholders and global optimization on the overall program, instead of suboptimization on each organization's localized interests."

That sounds like just the thing Boeing needs right now. What's the board waiting for?

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bafuturestory

Mulally was in charge of Boeing Commercial Airplanes when all the bad decisions on the 787 were made. If you read the book on the 777 you will see where he was “promoted” out of the program. The same promotion that Mike Bair was given. The 777 had an open culture where problems were actually discussed. Mulally personally implemented “we have a plan, do the plan” on the 787. I personally heard him declare this. It was interpreted as “destroy anyone who does not do exactly as we tell you and don’t you dare question our decisions”. Almost all the problems that have shown up on the 787 had 3 to 5 years of early warning. They have not yet been exhausted. Those who made the mistake of bringing those issues to light are now gone from Boeing or had their careers destroyed. Mulally lucked out in going to a company that had been sent in a good direction before he arrived. He was instrumental in the idea of “core competencies” at Boeing. This was the start of the destruction of the in-house engineering culture because we could be “large scale integrators”. This means that the engineering is done outside of the company and you only put the Boeing sticker on it as it goes out the door. The first “large scale integration” program was the Space Shuttle management program that Boeing won. It was listed as the worst run government program for years. Boeing knew how to make large aluminum aircraft. When you outsource your engineering, you no longer generate people who could integrate anything. If you could learn to “do it” without “doing it” there would be university courses in it and the graduates would have taken over the world by now. Mulally was all for this stuff. All that being said, McNerney has to go. How many times do you get to watch a major promise be missed and not focus on the program like a laser beam. We sent warnings directly to McNerney and he ignored them. Is the 787 actually going to make any profit or is it really in a reach-forward loss position that is only camouflaged by the number of orders on the books and clever accounting tricks? Watch the partners. MHI has already decided that their home brew airliner will have aluminum wings. They build the composite wings for the 787. Alenia is a story that all can now see. And how many 787’s was Boeing going to sell to Alitalia anyway? Whoever might get stuck with the CEO job at Boeing might have a very sad task to complete.

October 10 2010 at 11:02 PM Report abuse rate up rate down Reply
Kent

If I remember correctly, the 787 project was greenlighted when Phil Condit was CEO. The plan to oursource more assembly work was devised, after Harry Stonecipher took over as CEO in the wake of Phil Condit's resignation. I don't think you can blame all of the delays on both the 787 and the 747-8 on McNerney. A good chunk of it has to go to Condit and Stonecipher for trying to change the way Boeing conducted its design and assembly of aircraft. That's not to say that Mulally shouldn't have gotten the job as Boeing CEO in late 2003 or mid 2005, when Condit and Stonecipher were shown the door. He definitely should have gotten it in '05. But, I'm not sure that Boeing can lure Mulally away from Ford. He's having a lot of fun running a company that focuses on the individual consumer and not large corporate consumers. Knowing what Ford is paying Mulally, I'm not sure that Boeing wants to pay severance to McNerney, than pay something above the Ford compensation to lure Mulally from Detroit to Chicago.

October 01 2010 at 5:07 PM Report abuse rate up rate down Reply
sckaymon

Is this a failure of the CEO or of the engineering process? Boeing used to be a crack systems integrator. Back in the mid to late 90's the government decided that aerospace companies were not competitive with commercial companies. As a result, the government decided to adopt commercial standards for developing systems. I believe the "unintended consequence" of adopting commercial standards was the decline of systems engineering and integration in the aerospace industry. Why? Aerospace companies no longer had to maintain a comprehensive systems engineering discipline -- they could rely on industry as a whole and maintain only functional level of expertise, thus reducing the cost of development. Unfortunately, functional engineering disciplines don't necessarily consider the impacts of their requirements on other areas of design. The Systems Engineers of the past are retiring. Engineering schools don't teach this valuable skill. So that leaves us with large, complex development programs that are wrecked with delay after delay and large overruns. So much for saving money.

October 01 2010 at 12:25 PM Report abuse rate up rate down Reply
Jim

You leave Mulally right where he is. Ford needs him, he has made an "OK" automotive company into a world leader

October 01 2010 at 9:08 AM Report abuse rate up rate down Reply
thrdtimesacharm

i guess someone knew of the merger that just happened thats why the are building bigger planes someone knew way before we did

October 01 2010 at 8:04 AM Report abuse rate up rate down Reply
Flukeman

After these kind of delays, I can only assume there is a lack of leadership from the top down! The man at the top needs to demand performance and if goals aren't met, steps need to be taken to find out why. These folks either need help or replace them with more driven people. It's still a team effort and you must be sure the team know they are accountable or!

October 01 2010 at 7:35 AM Report abuse rate up rate down Reply
pajznovici

Move out of the good old USA to save taxes... Most countries have a value added tax on everything. In the long run you pay more taxes than in the USA. By the time the executives realize it it's too expensive to move back. We have the most productive work force in the world why not use it. I always try to buy MADE IN USA products...

October 01 2010 at 3:19 AM Report abuse +1 rate up rate down Reply
dstevensesq

Mr. Cohen just guesses about what has been causing Boeing's delays and then he decides to sack the CEO. Mr. Cohen's shallow analysis has to be expected from someone who has written not less than nine books about business strategy without ever having significant bottom line responsibility. Besides that, Mr. Mullaly is doing a fine job at Ford. As a Ford stockholder and a recipient of one of its monthly retirement checks, I think My Mullaly should stay right where he is and reap the benefits of his success. Keep your hands off him, Mr. Cohen!

October 01 2010 at 3:11 AM Report abuse +1 rate up rate down Reply
Happy Face

Boeing has a history of pulling the rabbit out of the hat. I have no doubt that they will again.

October 01 2010 at 2:03 AM Report abuse +1 rate up rate down Reply
flacoin

USA needs to go back into space in a big way. Obama threw NASA to the side like a road apple. We can't have Americans being proud of anything now can we? Should have been colonizing the moon by now-creating tons and tons of high-tech jobs such as Boeing, as well as basic manufacturing. Make people dream a lttle for once......

October 01 2010 at 1:48 AM Report abuse +4 rate up rate down Reply