accounting-A BALANCED SCORECARD FOR MAPLE LEAF

A BALANCED SCORECARD FOR MAPLE LEAF CONSULTING
You are a
consultant with Bearing Point and have just landed a client engagement with the
President of Maple Leaf Consulting (MLC), Ron Ellis, to assist with developing
a balanced scorecard for MLC to improve their strategic management system. You begin your assignment by reviewing
materials provided by the President about MLC and the consulting industry.
A Short History
MLC was an
international engineering and environmental services consulting firm that began
with a handful of employees in the 1970s.
Their first office was located in a small second floor apartment above a
bank on King Street
in Toronto. At that time, there was little indication
that this would one day become a multi-national professional service firm with over 3,000 employees worldwide. One of the founders of MLC described the firm
as a ‘boutique’ operation specializing in geotechnical (earth) engineering
consulting related to civil engineering projects.
MLC had benefited
from a series of major transportation infrastructure projects during the 1970s
that required specialized ground engineering (soil conditions) technical
studies. MLC subsequently expanded into
providing engineering design work for other public works projects including
subways, bridges and dams. In the 1980s,
MLC began providing geotechnical services to the mining industry involving
ground control issues and underground openings, leading to the addition of
expertise in hydrology and hydrogeology.
Projects dealing with contaminated groundwater from mining activities
led the firm into addressing contaminated lands and site remediation. MLC’s technical excellence and innovative
solutions on these projects earned it an elite status within the engineering
consulting industry. MLC continued to
follow an opportunistic or emergent growth strategy in the 1990s by venturing
into the biosciences including fisheries, air engineering and modelling, and
archaeology, to address the environmental impacts associated with
development. The firm has since expanded
into global information systems (GIS)
and data management during the 2000s as extensions of its existing knowledge
base. Although the resulting strategy
has not been highly focused, MLC’s engineering heritage, nevertheless, has remained its core.
These expansions
in technical skill bases were driven by client needs, particularly as the firm
began undertaking projects around the world on behalf of multinational
clients. In the process of undertaking a
variety of engineering and mining projects, many clients identified the need
for additional work such as site remediation and environmental impact
assessments. Initially, MLC handled
these requests through subcontractors, but as demand for such projects grew,
the firm began to acquire these sub-contractors to retain their expertise
in-house. Through this process, MLC
expanded and diversified its portfolio of technical capabilities. This also resulted in an increasingly diverse
mix of professionals and professional disciplines within MLC. MLC now featured a diversity of technical and
professional backgrounds (engineering, natural and social sciences, IT, and
business), combined with a variety of legacy corporate cultures (from mergers
and acquisitions).
The Industry
MLC operated in
the professional service firm (PSF) industry, providing clients with technical
assistance. The PSF industry includes a
variety of firms providing a wide range of services including legal,
accounting, engineering, medical and other services to both businesses and
individuals. Traditionally, PSFs have
been professional practices comprised of groups of similarly educated and
socialized professionals (e.g. lawyers, accountants, doctors) providing a
specific type of service to a particular clientele. PSFs were usually structured as partnerships,
where ownership was privately held by a small group of partners. Organizationally, they were often regarded as
professional bureaucracies, where coordination occurred through similar training
and socialization. Over time, as these
firms engaged in business relationships with increasingly larger and
multinational firms, the nature of client problems necessitated a corresponding
expansion in the scale, scope and diversity of skills available. This in turn led to an increasing mix of
professionals with different technical backgrounds, professional norms and
codes of conduct. It also prompted some
firms to go public to acquire the financing needed to expand their
operations. In general, MLC has followed
the trend of professional diversification, but has attempted to maintain a
non-bureaucratic partnership
structure.
Client engagements
(or consulting projects) come in a variety of forms. Consulting firms may be awarded projects as
the low cost bidders, particularly where a competitive tendering process was
involved (e.g., request for proposal).
Firms may also be approached directly by clients where particular
expertise (e.g., mining in Arctic terrain) was required. Other clients may seek elite firms to provide
an element of legitimacy to the final report.
In addition, client engagements may vary from one-off projects (e.g.,
design a bridge) to standing relationships (e.g., on retainer) where firms
maintained an ongoing relationship. Success
on one-off projects may develop into additional contracts or even standing
relationships, particularly where favourable working relationships developed
between project managers and their clients (known commodity).
Projects were
typically negotiated by senior partners with prospective clients (business and
government). Generally, clients were
attracted to MLC by the specific technical knowledge and skills it possessed,
or due to an ongoing relationship that individual senior MLC partners had cultivated
over time. Positive prior working
relationships often translated into less complicated negotiations (faster
approvals, less rigorous review of proposal, higher mark-ups) as clients were
confident in MLC’s ability to meet their needs.
This also resulted in significant cost avoidance (no proposal
preparation costs).
Success required
delivering projects within budget on time to earn a profit. This included sound budget projections,
proper staffing, timely completion of work, and favourable mark-ups. Strong project management was thus critical
for success. Traditionally, project
management was handled by partners (i.e., senior staff), while junior staff
typically handled much of the “grunt work,” including fieldwork as
necessary. Many senior staff though had
achieved their positions through technical excellence within their discipline,
and often developed management skills by doing rather than formal
training. As such, senior managers were
more likely to focus upon the tasks and technical issues involved in completing
a project. Many lacked knowledge of
formal project management approaches, cost or financial accounting, or modern
human resource management techniques.
All staff billed
for their actual hourly time at their charge-out rates, which tended to be mark
ups of two to three times actual hourly costs.
These charge-out rates were needed to cover direct costs (staff
salaries), firm overhead (e.g., administration) and profitability, with higher
prestige firms able to command greater mark-ups. Key to overall firm success was achieving
high chargeability (percentage of time available billed to projects) and charge
out rates (mark up), with minimal write-downs of accounts receivables, staffing
costs (optimal use of junior staff), or project cost overruns (time and
expenses). Timely billing and collection
of receivables was important to maintain adequate cash flow and reduce firm
working capital requirements.
The Organizational Structure
MLC managers
described the firm as having a flat management structure (few hierarchical
levels), with a small corporate head office and little central
administration. The “head office” was
where the president was located, while the senior management team was dispersed
geographically across Canada
and around the world. Management
occurred more at the group level, guided by senior partners who were
responsible for both project and group management. This flat management structure was similar to
that of many other PSFs, where most professionals were involved in client
service delivery rather than restricted to general management activities. Senior managers and office managers were all
partners in the firm; and virtually all promoted from within.
Companies in the
PSF industry are often structured as professional bureaucracies (Mintzberg,
1981), particularly those which provide a certain level of “standard”
professional services like auditing, medicine, enginnering. Professional bureaucracies are primarily
staffed by specialized, grouped professionals who have standardization of
skills as well as the same training and
indoctrination (often including certification – e.g., CPA, MD, P.Eng). Only duly trained and indoctrinated
professionals are hired by professional bureaucracies, where they are given
considerable control over their own work.
The key means of coordination is standardized skills within professional
bureaucracies, supplemented by a degree of bureaucratization. Titles and positions have permanency.
In contrast to a
professional bureaucracy, MLC, combined with minimal bureaucracy and flat
management structure, was more identifiable with an adhocracy organizational
structure. As with professional
bureaucracies, adhocracies are also dominated by specialized professionals, but
there is little formalization and although specialists are grouped in
functional units for convenience as with professional bureaucracies, they are
instead deployed in small market-based project teams to solve problems for
clients. Coordination is achieved
through mutual adjustment, and power to innovate resides with the experts in
adhocracies (meritocracy) rather than with the bureaucratic structure. Titles and positions do not have permanency.
The firm’s offices
have historically operated on a decentralized, semiautonomous basis, yet all
operate collectively under the MLC banner, regularly sharing corporate
knowledge, personnel, and resources.
This allowed the firm to access and employ technical expertise from
across the entire firm rather than attempting to build full complements of
expertise within each individual office.
This decentralized decision making structure was also reflected at the
group level. Many of the senior partners
had developed “individual” practices under the MLC banner, through strong
client relationships and/or acknowledged technical expertise within certain
fields (e.g., landfills, tunnelling).
Partners successful in developing strong “individual” practices had
accordingly gained greater power within the organization.
MLC staff
suggested that they had avoided creating organization charts due to their tacit
aversion to bureaucracy and formal management controls as expected of an
adhocracy. This however was changing as
younger MLC professionals were more accepting of modern management practices
and perceived the need for additional structure. Nevertheless, senior managers still referred
to the challenge of “herding cats” and general lack of control over member
activities (professional autonomy).
MLC’s partnership
system supplemented their flat management structure. The partnership group included both junior
and senior members (based upon level of shareholding and perceived contribution
and commitment to the firm). Thus,
partners had a combination of formal position and ownership power. Overlaying this formal structure was a
meritocracy based informal hierarchy (linked to perceived contribution and
technical expertise). This combined
structure facilitated collegial management through a participatory democracy
system, where all shareholders had a say in the management of the firm. However, most partners preferred being
actively engaged in project work, rather than being burdened with corporate
administrative tasks As noted by one
partner, “management was your 5 to 9
job, rather than your 9 to 5
job.”
The Accounting System
MLC’s accounting system was
structured around individual projects.
It provided detailed financial control over projects, which rolled up to
produce corporate level results. As
profitability declined in recent years, managers had placed additional emphasis
upon chargeability and revenue generation, resulting in a partial backlash
against this singular focus upon financial results. Senior managers had also expressed concerns about
the lack of guidance provided by the company’s financial statement. Too often it was not apparent why offices
were running over-budget, and by that time it was often too late to make
adjustments. Moreover, there was
significant variation in MLC’s short term financial results, frequently losing
money in the first quarter, then making it up in the third and final
quarters. Senior managers wondered
whether there was a way to address the drivers of longer-term financial
performance.
To remedy the problem,
the controller had introduced what she called non-financial
measures/controls. More specifically,
she had introduced non-financial performance measures pertaining to
organizational learning, client relations, timely project completions, and
sound business practices, based upon two well known frameworks, Ouchi (1980)
and Merchant (1982).
According to Kaplan and Norton
(1996), creators of the balanced scorecard, financial results are the
consequence of a series of sub-results on leading indicators. Proper investment in staff knowledge and
development, combined with sound business processes and actions, and strong
client relationship management were critical to future positive financial
performance. In contrast, by the time
quarterly and annual financial statements are prepared, there is nothing that
can be done to affect what has happened.
The idea behind leading non-financial measures is to provide managers
with information which they act upon while there is still time to positively
affect annual financial performance.

Private Ownership
MLC is a fully
private company, with over 40% of its employees (from all levels) owning
shares. Unlike traditional partnerships,
share ownership is not concentrated or restricted to partners, but rather is
broadly distributed, with no one owning more than two percent of outstanding
shares. As noted by one partner, the
principle of employee ownership was inviolate, “The ownership model is used to
attract people, and people come here for that reason. Changing that would
likely lead many employees to leave the firm.”
MLC had intentionally avoided becoming a publicly traded corporation as
employee ownership was a core value of the firm.
However, in recent
years, there had been a decline in employee interest in purchasing MLC
shares. Younger employees were not
buying in as they were unsure whether they wanted to commit to the firm, and
some of the senior members refused to purchase shares to express their
dissatisfaction with the direction taken by senior management.
Unique Culture
As a scientific
and technologically oriented firm, MLC was staffed primarily by highly
educated, technically skilled employees.
Most were professional engineers, scientists, or related professionals,
and many held advanced degrees (Masters and PhDs). Management control was exercised not through
traditional, top-down hierarchical command, but rather through building a clan
culture, based upon shared values, professional norms and trust among
employees. Employees were expected to be
self-managed, but act in-line with firm objectives.
Clan control was
suited to situations where ambiguity and uncertainty were high, such that rules
and regulations could not address all possible situations. Individual
flexibility and discretion was required, particularly where there was the
potential for conflict between professional and organizational values and
norms. Informal inter-office
communications, individual cooperation, cultural socialization, and rigorous
hiring practices took on added significance as screening and control
mechanisms.
To meet these
requirements, MLC had traditionally sought like-minded individuals through
existing contacts. Historically, MLC had
hired friends, referrals, and work acquaintances. Potential candidates included staff from
competing engineering consulting firms, related professional service firms, or
academia (students and professors). But
with its growth through mergers and acquisitions had come new members with
different corporate and cultural backgrounds (i.e. international
expansion). Some of these new employees
had difficulty transitioning into MLC’s organizational culture, even though MLC
sought firms that had similar norms and values. While technical capability was an important
consideration, cultural fit was valued just as highly. A number of questions were considered as part
of this screening process. Were its
employees interested in doing high quality work for clients? Would they be comfortable with MLC’s flat,
non-hierarchical management structure and style? Would they be comfortable with a culture of
employee ownership?
Organizational Challenges
MLC faced a series
of organizational transition challenges.
First, MLC had experienced several years of weak financial performance
(see Table 1 on next page).
Traditionally, MLC had enjoyed profitability levels of 15% or more, and
commanded above average chargeability rates due to its reputation for technical
excellence. Decreased profitability was
associated with poor project management including project cost overruns, billing
and collection delays.

Table 1 – MLC
Financial Summary

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Note – MLC uses the
following definitions:

Fee revenue = actual revenue received from
consulting projects
Direct labour = actual labour costs charged to
consulting projects
Allocated overhead = overhead costs charged to projects
General overhead = cost of operating groups, corporate
office, and other costs
Chargebacks = to clients (e.g., equipment
rentals, printing).
Second, the firm
was experiencing changes in its senior management. The former president George Armstrong had
agreed to step down in 2004 after almost a decade, but MLC lacked a clear
leadership succession process. His
interim replacement, Dave Keon, had managed to reverse MLC’s slide in
profitability, but the firm was seeking a longer term president able to address
other organizational problems and position the firm for the future. These factors had led to Ron Ellis’
appointment last year (2006).
Third, MLC was
also facing a transition in leadership and experience at the partner/project
manager level. Many of the older
partners and other long-tenured members who had built the firm were now
approaching retirement. These members had
built strong personal relationships with their clients; clients that would now
be passed on to relatively unknown junior staff. Moreover, these senior members had
considerable technical knowledge and experience, expertise that MLC had staked
its reputation and business strategy upon (i.e., intellectual capital). Managing the “loss” of this knowledge while
developing new capabilities would have significant implications for the firm’s
future success.
Fourth, MLC’s
private employee ownership model (100% employee owned) meant that senior staff
needed to sell their shares to the younger generation as they retired. MLC had a policy of orderly divestment as
members approached retirement age; however, many of the junior staff members
were not prepared to commit financially to MLC.
Without new employee investment, MLC would need to either convince
existing shareholders to increase their stake (which they were reluctant to
do), or replace equity with debt financing (thus increasing operating costs and
lowering returns to shareholders). A
final option was to sell the firm to one of their competitors, but this was
something senior partners were loath to do.

There were a
variety of reasons why junior employees were not prepared to buy shares, but
chief among these was a highly negative organizational climate. Many junior staff had expressed concerns
about work/life balance, stress and low morale.
MLC featured many of the attributes of a traditional engineering culture
(i.e., male dominated, discipline specific, task oriented, technically focused,
with a high level of professional autonomy).
Changes in societal expectations among junior staff, including a growing
cadre of female professionals and non-engineers (e.g. biologists,
archaeologists), combined with their desire for greater work/life balance,
meant that traditional approaches would not work. Although hard work, extended out-of-town
fieldwork and pressure to meet client deadlines were not unexpected within the
consulting industry, these had resulted in high stress levels and low
morale. Some junior staff also felt that
MLC did not provide them with sufficient opportunities to develop their
knowledge and skills, including innovative and challenging work, while others
felt uncomfortable with the authoritarian style of some of the senior
partners. As a result, junior staff felt
more like employees rather than colleagues.

Revised Strategy
MLC’s business
approach in the past had been built around its ability to provide innovative,
technically excellent work, combined with world-class, in-house technical
experts. Senior staff had not only
completed award winning engineering projects, but several were also accomplished
researchers, publishing articles in technical journals. As a result, the firm was able to recruit students
and academics from top universities. MLC
in turn promoted itself as global firm, where clients had access to all of
MLC’s technical expertise (not just the local office). That innovative work was to continue.
To accomplish that
innovation, MLC had employed an opportunistic emergent strategy, driven more by
clients needs than overt forward thinking and planning by senior managers. MLC acquired additional technical
competencies and ventured into new fields in response to clients requests for
additional technical assistance. MLC
also expanded as individuals within the firm identified new opportunities
(e.g., oil sands, nuclear waste) and sought to become the leaders within these
fields. This organic growth had resulted
in MLC being involved in a variety of industries (oil and gas, mining,
utilities, fisheries, infrastructure), providing a variety of services
(geotechnical, water and air quality, wildlife habitat).
Senior management
and current president Ron Ellis, recognized in 2007 that MLC had been lucky in the past and to
continue to prosper, it had to clarify and formalize its vision and
strategy. Instead of an emergent
strategy, MCL wanted to establish an explicitly stated strategy from which to
pursue planned opportunities planned growth and acquisitions. It had
tentatively developed the following vision going forward: “To be the most
respected ground engineering and environmental services group in the
world.” To accomplish that vision, the
strategy had been refined to include:
§ Client driven
§ Specialists in the earth’s development and preservation
§ Services: consulting, construction, engineering design, program
management, and engineering, procurement, and construction (EPC)
§ Operational excellence: the right people, the right tools and
systems, great clients, and sound financial management.
These strategies were to be captured
in their proposed new balanced scorecard.
Some strategic goals had more than one objective as noted below in Table
2.
Required:
Prepare
a balanced scorecard for MLC using the strategic goals and objectives
identified in Table 2- as the basis for developing relevant measures and
controls to accomplish its intended vision and strategy. In addition, you will need to address the
other organizational issues facing MLC, including its intellectual capital,
financing requirements, and cultural issues.

Table 2 – MLC Balanced
Scorecard

Strategic Goals

Objectives

Measures

Targets

Support personal development to foster involvement and commitment

Enhance employee satisfaction

Develop technical and management leaders at all levels

Invest in employee skills development training

Invest in people

Improve project delivery and maintain quality standards

Install project management protocols

Improve invoicing procedures

Leverage technical resources across firm through interoffice
cooperation and teamwork

Improve interoffice cooperation and team work

Extend services and exceed expectations of existing key clients

Build relationships and extend services to key clients

Better of our clients’ needs

Focused client development

Be selective in developing new clients

Sustainable growth and improved profitability

Improve profitability

Increase revenue from key clients

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