Case Studies ERM

CHAPTER 26

Bim Consultants Inc. 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 corporationwith 30 partners who own most of the shares. It has 10 offices across Canadawith 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).

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 get- ting 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.

Earlier this week, the chairman received a call from the president of the Cana- dian 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 sub- sidiary 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.

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Exhibit 26.1 Bim Consultants Balance Sheet

Bim Consultants Inc. Summary Balance Sheet As of December 31, 2014

2014 2013

Year ended December 31 (Canadian dollars in millions) $ $ Current Assets

Cash and Short-Term Investments 12 7 Accounts Receivable 175 168

187 175

Current Liabilities Accounts Payable 34 27 Short-Term Loans 100 110

134 137

Working Capital 53 38 Fixed Assets

Leasehold Improvements 196 178 Furniture and Equipment 100 94 Less Accumulated Depreciation & Amortization (153) (128)

143 144

Net Assets 196 181

Share Capital Common Shares 100 100 Retained Earnings 96 81

196 181

The chairman called an executive meeting and pointed out that making such a purchase would double sales, catapult Bim Consulting into the number one posi- tion in major markets in Canada, and provide a strong marketing thrust into pre- viously 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.

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Exhibit 26.2 Bim Consultants Profit and Loss and Retained Earnings

Bim Consultants Inc. Summary Profit and Loss and Retained Earnings For the Year Ended December 31, 2014

2014 2013 Year ended December 31 (Canadian dollars in

millions) $ $

Revenue 300 290

Expenses Salaries 220 207 Other 20 18

Net Profit before Income Tax 60 65 Income Tax Provision 27 29

Net Income after Tax 33 36

Retained Earnings—Beginning of Year 81 65

114 101 Dividends 18 20

Retained Earnings—End of Year 96 81

QUESTIONS 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 John R.S. Fraser is the Senior Vice President, Internal Audit, and former Chief Risk Officer of Hydro One Networks Inc., one of North America’s largest electricity transmission and distribution companies. He is a Fellow of the Ontario Institute of Chartered Accountants, a Fellow of the Association of Chartered Certified Accoun- tants (UK), a Certified Internal Auditor, and a Certified Information Systems Audi- tor. He has more than 30 years’ experience in the risk and control field, mostly in the financial services sector, including areas such as finance, fraud, derivatives, safety, environment, computers, and operations. In addition to this book, he also served as editor on Enterprise Risk Management: Today’s Leading Research and Best Practices for Tomorrow’s Executives (John Wiley & Sons, 2010).

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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 employeesworking out of offices in 12 Canadian cities; the head office is in Edmon-ton, Alberta. NG provides full-service information technology (IT) sup- port 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 ser- vices. 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. Following a thorough investigation and follow-up with many of NG’s key cus-

tomers, 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. To continue to provide strong customer service, it is critical that team mem-

bers 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 sys- tems 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 Execu- tive Team did note that revenue numbers have not suffered; in fact, they have

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96

94

92

90

88

% v

er y

sa tis

fie d

2008 2009 2010 2011 2012 2013

86

84

82

80

Exhibit 27.1 Nerds Galore Customer Satisfaction

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.

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 Exec- utive 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 not to manage sudden trauma, and, while the company’s cus- tomers 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 partic- ular, 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

25

20

15

10

5% o

f e m

pl oy

ee s

2008 2009 2010 2011 2012 2013 0

Exhibit 27.2 Nerds Galore Employee Turnover

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100

10 20 30 40

Revenues Net Income

50 60 70 80 90

$C D

N

20 04

20 05

20 06

20 07

20 08

20 09

20 10

20 11

20 12

20 13

0

Exhibit 27.3 Nerds Galore Financial Performance

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 individ- ual 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 dif- ficult 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.

Exhibit 27.4 Strategic Targets

Actual Targets

2013 2014 2015 2016 2017 2018

Revenues ($M) (target is 15% year-over-year growth) 100 115 132 152 175 201

Net Income ($M) (target is 15% of revenues) 10 17 20 23 26 30

Customer Satisfaction (% “very satisfied”) (target is 95%) 83 95 95 95 95 95

Staff levels 1,000 1,100 1,200 1,300 1,400 1,500

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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 envi- ronment with flexible hours and a work-at-home culture.

2. Retain good people. Do this by offering employee recognition programs, pro- viding 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

QUESTIONS 1. This is a relatively brief case study, yet the problems faced are quite complex. In your

workshop, how did you handle uncertainty in the information you have been given and how does this translate into real-world workshops where not all the answers can neces- sarily be given at the table?

2. What were some of the risk sources that emerged repeatedly in evaluating the risks? How is this helpful?

3. How would this risk assessment aid in the decision on whether or not to proceed with the new HR strategy?

ABOUT THE CONTRIBUTOR Rob Quail, BASc, is Director of Enterprise Risk Management at Hydro One Net- works Inc. Rob has had a leadership role in enterprise risk management (ERM)

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at Hydro One since 2000, and developed much of Hydro One’s pioneering ERM methodology. He has successfully applied ERM techniques to a diverse range of business problems and decisions, including annual business and investment plan- ning; major transformational, infrastructure, customer, and technology projects, as well as acquisitions, partnerships, divestitures, downsizing, and outsourcing. Rob was a contributing author to Enterprise Risk Management: Today’s Leading Research and Best Practices for Tomorrow’s Executives, edited by John Fraser and Betty J. Simkins (John Wiley & Sons, 2010), and is guest lecturer for the Schulich School of Business Masters Certificate in Business Performance and Risk Management pro- gram at York University, Toronto. He is a popular speaker at risk management conferences, and performs as a musician in clubs in the Toronto area in his spare time. He is an industrial engineering graduate of the University of Toronto.

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