Case WorldCom: What went wrong?
Making an assessment of what went wrong at WorldCom is not only about pointing out some individual culprits, it is as well about how the dangerous mix of a changing industry environment, a lack of strategic sense of direction, a hodgepodge of internal corporate cultures and a totally malformed organization has led to one of the world’s greatest accounting scandals. To do so, we make a distinction between the external causes and the internal ones. The external causes we focus on are the evolution within the business and its technology, the legislation and authorities and the companies auditor, Arthur Andersen. The internal causes on the other hand are WorldCom’s general strategy, focusing on its M&A policy and the lack of integration between the acquired companies, its executives, its Board of Directors, the internal procedures and control and the corporate culture and organization as a whole. Afterwards we will formulate recommendations that could have prevented this scandal.
Assessment: what went wrong?
To start with, it is always preferable to sketch the industry WorldCom was operating in and how its evolution had an impact on WorldCom’s functioning. We do so by analyzing the strategy WorldCom pursued within this business as well. WorldCom (LDDS to be correct) started as a small regional company in the telecom sector. By focusing on internal growth and consequently economies of scale (critical in a crowded reselling market), it acquired many small long-distance companies and expanded globally to Europe and Latin America. In the 1990’s the telecom industry evolved quickly due to the new technology of fiber-optic cables. WorldCom responded to this changed industry environment by expanding even further. It made multibillion dollar deals in the quest of a larger presence in all sorts of telecom segments. Another reason why to pursue this strategy was the introduction of a new piece of legislation, in particular the Telecommunications Act (1996) which enabled telecom companies to provide all kinds of services in packages. Not only the legislation can thus be considered as part of the company’s strategy and risk management, the regulatory bodies are as well. While attempting to acquire Sprint, one of WorldCom’s main competitors, the US Justice Department refused to allow the merger. Especially since WorldCom employees were stating that its CEO Ebbers lacked strategic sense afterwards, the importance of regulation is in this case not to be underestimated. After the booming 1990’s industry conditions began to deteriorate in 2000 due to heightened competition, overcapacity and a reduced demand for telecom services. These were strategic risks WorldCom did not foresee. Not only the economic downturn caused by the dotcom bubble put severe pressure on WorldCom’s profitability, the downward pressure on prices due to new entrants in the industry did as well. Next to that, WorldCom suffered from a major “hazard risk” as a consequence of the lowered activity. In the greedy search for revenue growth instead of capturing market share, WorldCom entered into long-term fixed rate leases for network capacity. Since these leases contained punitive termination provisions, they got stuck with expensive overcapacity. When assessing the situation at WorldCom, the overall culture of the firm played a significant role in explaining what happened. There was a broad breakdown of the system of internal controls, corporate governance and individual responsibility. As a result, a culture was created in which few persons took responsibility until it was too late and with poor ethical standards at the top. Moreover, the strategy of the company consisted of executing M&A’s in order to satisfy the need for growth. This worked well for some time, bringing the company to a position a market leader in a couple of years. However, these series of...
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