JOHN R.S. FRASER
Senior Vice President, Internal Audit, and former Chief Risk Officer, Hydro One Networks Inc.
Bim Consultants Inc. is a medium-sized consulting firm. It is a corporation with 30 partners who own most of the shares. It has 10 offices across Canada with 3,000 staff, and has been in business for 30 years. Senior staff also own shares and participate in an annual bonus scheme. Salaries are generally on the low side, but bonuses in good years can be quite high. The balance sheet is sound (see Exhibit 26.1).
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Bim Consultants Inc.
Summary Balance Sheet
As of December 31, 2014
Year ended December 31 (Canadian dollars in millions)
Cash and Short-Term Investments
Furniture and Equipment
Less Accumulated Depreciation & Amortization
Exhibit 26.1 Bim Consultants Balance Sheet
The company has always prided itself on its customer focus. “Customers are number one” has been the mantra from the chairman, Mr. Smooth, for many years. Recently, however, revenue has been stagnant, and the younger partners are getting restless, wondering if the older partners have lost their edge and whether changes are needed to return to the glory days of large bonuses.
At a recent strategic planning meeting of the major partners, the decision was made to continue focusing on customers as number one, but also to explore how to increase revenue from within the existing clientele and to explore what additional services could be provided to enrich the client experience (and revenues). It was agreed that the strength of the firm was in its blue-chip client base and that this high-quality reputation was worth preserving. Some discussions were also held around the idea of selling a minority share of the company at a large multiple, if such a deal was identified. Bim Consultants’ profit and loss and retained earnings are provided in Exhibit 26.2.
Bim Consultants Inc.
Summary Profit and Loss and Retained Earnings
For the Year Ended December 31, 2014
Year ended December 31 (Canadian dollars in millions)
Net Profit before Income Tax
Income Tax Provision
Net Income after Tax
Retained Earnings—Beginning of Year
Retained Earnings—End of Year
Exhibit 26.2 Bim Consultants Profit and Loss and Retained Earnings
Earlier this week, the chairman received a call from the president of the Canadian subsidiary of a U.S.–owned competitor, Bravado International, saying that Bravado was pulling out of Canada and would consider an offer to sell the subsidiary to Bim Consultants Inc. The Bravado subsidiary had 12 offices across Canada and just over 3,500 staff, but had often drawn on its U.S. resources when required for large engagements.
The chairman called an executive meeting and pointed out that making such a purchase would double sales, catapult Bim Consulting into the number one position in major markets in Canada, and provide a strong marketing thrust into previously untapped midtier markets. Based primarily on the persuasiveness of the chairman, the executive committee approved proceeding with the negotiations.
The president of the Bravado subsidiary cautioned Mr. Smooth that it was imperative not to have word of the negotiations leak out, as this could lead to a loss of key staff and possibly clients. Accordingly, he urged Mr. Smooth not to do the normal due diligence in the subsidiary’s offices but to review the necessary records and meet with select senior executives of Bravado at an off-site location. This process seemed to work well, and the Bravado executives were well prepared and very likable. All the information checked out, and the way seemed clear to do a deal.
1. What is your assessment of the situation?
2. What advice would you provide to the board of Bim Consultants?
3. What pitfalls should they be concerned with?
ABOUT THE CONTRIBUTOR
CHAPTER 27 Nerds Galore
ROB QUAIL, BASC
Director, Enterprise Risk Management, Hydro One Networks Inc.
Nerds Galore (NG) is a Canadian service company with 1,000 employees working out of offices in 12 Canadian cities; the head office is in Edmonton, Alberta. NG provides full-service information technology (IT) support to small and medium-sized Canadian businesses, including help desk, on-site troubleshooting, security, network setup and support, backup services, wireless networks, hardware and software procurement, and website design and hosting solutions.
Nerds Galore was formed in 2000 in the garage of its founder, Jeeves Stobes. NG has enjoyed strong growth in its segment and has an excellent reputation with its customers. In the beginning, NG focused on a particular customer subsegment, small start-up businesses, especially on low-tech businesses such as boutique services. Lately its strategy has shifted more to midsize customers (which have deeper pockets and less chance of going broke) with more sophisticated technology needs.
Recently there have been problems for NG.
There has been steady decline in customer satisfaction, as shown in Exhibit 27.1.
Exhibit 27.1 Nerds Galore Customer Satisfaction
Following a thorough investigation and follow-up with many of NG’s key customers, the Executive Team has concluded that the main cause of this has been high internal staff turnover, leading to gaps in customer services and service continuity.
Indeed, staff retention has been an issue, as shown in Exhibit 27.2.
Exhibit 27.2 Nerds Galore Employee Turnover
To continue to provide strong customer service, it is critical that team members are competent in the latest technology, and yet turnover has approached 20 percent in three recent years. This is a particular problem for NG because of its high focus on customer service; new staff receive extensive and costly training in NG’s customer service and cross-selling approaches. The company’s pay package is competitive but not at the very top; instead NG uses its reputation for excellent customer relationship and staff development to attract motivated staff. Note that it’s well known that one of NG’s competitors was recently raided by a large systems integration firm and lost most of its network management technical staff in a single quarter. NG has been having a particularly difficult time retaining staff in the larger urban centers and other technology hubs in Canada where there are more competitors and the competitors generally pay more.
Despite the fact that customer satisfaction has been declining, the Executive Team did note that revenue numbers have not suffered; in fact, they have continued to climb year over year, as shown in Exhibit 27.3. It was concluded that this lack of a drop in revenues is due to two factors:
1. Many current customers have multiyear contracts with Nerds Galore.
2. Very small businesses that have made up the bulk of NG’s customer base are generally tolerant of minor service hitches and less focused on optimal technology performance.
Exhibit 27.3 Nerds Galore Financial Performance
Recently, the company suffered a major shock when one of its employees was killed in a head-on car crash while rushing to a customer site during a snowstorm in Rimouski, Quebec. The employee who was killed was a well-known and much admired member of the team, and many staff thought at the time that NG’s Executive Team didn’t respond properly to this event. In fact, the Globe and Mail ran a story on workplace tragedy and its impact on morale and used Nerds Galore as a case study on how notto manage sudden trauma, and, while the company’s customers didn’t seem to notice, NG did experience a sudden jump in staff departures and some difficulty in recruiting replacements.
Also, there is a sense that staff efficiency is not what it should be; in particular, scheduling technicians for on-site technical work has been a problem. Small business customers tend to have diverse and unique technology needs, and finding specialists who can work in multiple areas such as network support and voice over Internet Protocol (VoIP) while working with a single customer is difficult; most of the propeller-heads (as NG affectionately terms its technicians) are specialists in a few areas, and the company has found that its specialists are spending a lot of time behind the wheel traveling from site to site dealing with point solutions to individual technical problems. NG’s founder and CEO, Jeeves Stobes, freely admits that the company’s own internal technology has not really kept pace with the growth of the company. NG lacks a customer/account management program and relies on whiteboards and e-mail managed by the company’s small core of four senior work schedulers (long-service employees who work out of a war room in Edmonton and know the company’s customers and staff well) to schedule employees to customer sites. In addition, while the company has placed a premium on developing staff, this has been through informal mentoring and apprenticeships rather than formal development based on identified customer needs, and this approach has been difficult to sustain given the scrambles created by sudden staff departures.
As shown in Exhibit 27.4, CEO Stobes has set targets of 15 percent revenue growth year over year (which is close to recent rates of growth) and a net income target of 15 percent of annual revenues, which will be a stretch (recent years have yielded margins of 8 to 10 percent). Stobes has set a target of 95 percent customer satisfaction going forward.
Revenues ($M) (target is 15% year-over-year growth)
Net Income ($M) (target is 15% of revenues)
Customer Satisfaction (% “very satisfied”) (target is 95%)
Exhibit 27.4 Strategic Targets
Gil Bates, NG’s vice president of human resources (HR), recently recruited from the competitor Propell-O-Rama, is concerned about not only the employee turnover rates but HR management in general. He has come forward with a five-point strategy for improved HR management, but has encountered stiff resistance from the rest of the Executive Team. The strategy is:
1. Attract the best talent. Do this by offering a positive and flexible work environment with flexible hours and a work-at-home culture.
2. Retain good people. Do this by offering employee recognition programs, providing multiskilling/cross-training (which will have the added benefit of greater customer satisfaction), and ensuring that compensation stays at or near the 75th percentile of competitors or comparators.
3. Manage talent. Put in place a formal talent management program so that high-potential employees are identified, developed, and mentored.
4. Optimize the use of people. Do this by purchasing and implementing a fully integrated customer management and workforce management tool, to allow greater scheduling and tracking of employee effort on customer accounts.
5. Rely on outsourcers to handle overflow of business requests that have highly volatile work volumes, or in areas where retaining internal capability and know-how is prohibitively expensive.
At a management discussion, it was agreed that the Executive Team would meet for a risk workshop to explore the following HR-related risks and to help the exectives evaluate the situation and decide on whether to invest in Bates’s strategy:
· Inability to recruit people with needed skills
· Loss of staff with key internal knowledge
· Uncompetitive labor productivity
· Increased departures of skilled technical staff
· Loss of key business know-how
1. The case study ends with the Executive Team agreeing to hold a risk workshop. When evaluating the risks, what risk sources might emerge repeatedly and how might this help in the risk assessment?
2. How would risk assessment aid in the decision on whether or not Nerds Galore should proceed with the new HR strategy?