Michelangelo Shoes was founded by Buonarroti Simoni in 1996 and has grown steadily over the years. Buonarroti Simoni now has 23 stores located throughout the Southern and Eastern parts of Australia. Buonarroti Simoni, born of migrant Italian parents, was an accounting major in college but loved high fashion shoes for men and women. He worked for a large regional CPA firm for 13 years prior to opening his first shoe store. He places a lot of value on internal controls. Further, he has always insisted on a state-of-the art accounting system that connects all of his stores’ financial transactions and reports. Buonarroti Simoni employs two internal auditors who monitor internal controls and also seek ways to improve operational effectiveness. As part of the monitoring process, the internal auditors take turns conducting periodic reviews of the accounting records. For instance, the company takes a physical inventory at all stores once each year, and an internal auditor oversees the process. Chris Chen, the most senior internal auditor, just completed a review of the accounting records and discovered several items of concern. These were: Physical inventory counts varied from inventory book amounts by more than 5% at two of the stores. In both cases, physical inventory was lower. Two of the stores seem to have an unusually high amount of sales returns for cash. In 10 of the stores gross profit has dropped significantly from the same time last year. At four of the stores, bank deposit slips did not match cash receipts. One of the stores had an unusual number of bounced cheques. It appeared that the same employee was responsible for approving each of the bounced cheques. In seven of the stores, the amount of petty cash on hand did not correspond to the amount in the petty cash account. Requirements For each of these concerns, identify a risk that may have created the problem. Recommend an internal control procedure to prevent the problem in the future. PLEASE PROVIDE ANSWER IN DETAIL AS IT IS REQUIRED FOR EXAM PREPARATION

INTRO

• NewForm IT is a seven-year-old IT consulting company founded in 2012 that provides services to small businesses in their local and regional area.
• NewForm employs 83 people, 61 of whom are IT professionals/ consultants.
• NewForm is struggling financially; it has not met its revenue projections in the last five quarters.
• NewForm has suffered excessive leadership turnover in the past three years.
  • The original founders sold NewForm in 2015; one of them, James Stanton, remained on as CHRO but sold his interest in the company.
  • Rodney Collier purchased the firm in 2015 and became CEO.
  • Stanton departed nine months ago.
  • Collier sold NewForm to Sheila Jones (new CEO) and Ronnie McMillan (new CHRO) three months ago.
  • Morale is suffering at NewForm.
• You and your team members formed a startup HRM consulting organization 15 months ago.
  • You are comprised of:
    • Recent HRM graduates from a local university, all undergraduate or graduate students, depending on the degree level attained. You are one of those recent graduates. All team members are SHRM certified and the more senior HRM team members serve or have served as mentors to the recent graduates.

Jones stormed into McMillan’s office. “I’ve had it! We’ve been here three months and nothing changes. Why aren’t they listening? Why do they keep leaving? What’s wrong?”

BACKGROUND

NewForm IT, founded in 2012 by four friends, provides IT consulting services to small businesses in the local and regional area. Three of the founders left the firm in 2014/2015, selling their interests at a handsome profit. The remaining founder and former CHRO, James Stanton, left nine months ago after clashing with the second owner, Rodney Collier, who purchased the company in 2015.

Sheila Jones and Ronnie McMillan recently purchased NewForm; Jones became its third CEO.

Three of the founders loved playing with computers and systems. While in college and in the early years of their careers, they created websites, developed computer games, played with mainframes, and made spare cash by solving individual and corporate IT problems. Systems and IT came easily for them, and they discovered that what other people feared were simple problems to them. They knew that they could make money by doing what they knew best. Their vision was to help small organizations solve their IT problems, and they discovered that they could charge exorbitant fees for doing so.

• The first founder to leave sold to her partners in 2014.

• Two founders—including the CEO—sold their shares to a group led by Collier in 2015 and left at that time.

• Stanton also sold his shares to Collier in 2015 but remained at his job.

• All four founders became multimillionaires when they sold the company.

• At the time of the 2015 sale, the company employed 53 IT consultants, most working 60-hour weeks and earning large bonuses.

Stanton and Collier had problems with each other from the outset. They differed on how to price consulting jobs, how to pay consultants, work hours, benefits (401k, leave policy, health insurance, etc.), among other things. Stanton saw little need to change what was successfully working; Collier wanted a fresh new corporate image. Corporate culture slowly began to move away from its original entrepreneurial style. Stanton and Collier continued to clash until nine months ago when Stanton walked away. Collier and his group sold NewForm six months later to a group led by Jones.

Jones is a senior executive with 23 years of industry experience, mostly with large, high- tech firms. When the founders formed the company they had asked her to join their team as a partner, but she declined. She had neither the time nor the inclination to do so. Today is different; she has made money in the industry, and her newly earned Ph.D. in leadership dynamics has given her the spirit and the insight to run the show. Because Collier wanted to sell and get out, Jones bought into NewForm at a discount and was ready to roll up her sleeves and get to work. McMillan, a long-term colleague, joined her as an equal partner and CHRO.

NewForm employs 83 people today, 61 of whom are IT consultants. These are highly skilled professionals, well paid and sought after in their field. While most have significant corporate experience, 49 have been with NewForm less than three years. Only four have been with NewForm for five years, and two have been with NewForm since its inception.

YOUR HRM CONSULTING FIRM

As a recent graduate, you have joined a 15-month-old startup HRM Consulting firm. You are excited about the opportunity this presents. Some of your team members are recent HRM graduates just like you, while others are SHRM-certified senior leaders who serve as mentors to the recent grads. The senior leaders, led by Patrick Conroy, have a financial stake in the firm and have established a plan that allows junior leaders to eventually earn the right to purchase a percentage of the firm and become a partner.

Early Monday mornings are set aside for virtual corporate meetings. This is when the partners and employees meet to focus on the firm no matter where they are in the world. These meetings are a combination of strategic think tanks, corporate planning sessions with problem analysis, mentoring, financial discussions, and discussions of any strategic decision that needs to be made. After 15 months, it is apparent that that these Monday meetings are the key that is leading to the team’s success.

This Monday morning is no different. Last week Conroy received a message from a company called NewForm IT and spent 30 minutes on the phone with McMillan, it’s CHRO. Conroy prepared an internal memo for the firm describing NewForm’s problems, and the group is prepared to discuss the issue at length.

As the conversation begins you consider your role in the firm. You know you try to do your best for your clients, yet one of your colleagues called you in for a brief but intense conversation about a recent client. Yes, you recognize that you may have missed a few social cues, might not have found the right words and advice for the client, and did not leave the client completely satisfied. But their challenge was particularly tough, and you probably should have had help from someone else in the firm. That job had been underbid, and the fee did not leave enough room for two consultants. You begin to wonder if this is the right career for you, or whether the senior team will ask you to leave. Your mind wanders.

While you muse on this, barely hearing the conversation in the room, Conroy looks directly at you and says, “You’ve worked with IT people, what do you think about the situation?” Panic sets in.

TODAY’S ISSUES AT NEWFORM

From 2012 until 2015, NewForm IT grew to 53 consultants. It had virtually no turnover during that time; two consultants were terminated for cause, one for discipline, and two left voluntarily when their spouses received out-of-state job offers. Stability was one of NewForm’s strengths; many consultants worked numerous jobs with one client, making it easier to produce quality results because they understood their clients’ needs and nuances; clients were satisfied. Employee compensation was higher than the market, and NewForm was making money for everyone.

The 2015 sale brought shock and change. As the only remaining founder, Stanton attempted to reassure everyone that nothing would change, but consultants identified subtle variations from the beginning. In the midst of changing internal rules, Stanton tried to maintain the status quo. Yet he had no real authority, and his suggestions fell on deaf ears. Early in 2018, he commissioned the Gallup Company to do its formal twelve question engagement survey. The results confirmed what he already knew: morale was suffering, and employees were no longer engaged. He wished he had done the survey and received baseline data 3-5 years ago.

Metrics are also down. Repeat clients, one of the company’s strengths, fell from a high of 57 percent (that is, 57 percent of clients engaged NewForm for a second job) in 2014 to 31 percent in 2017. Billable hours per consultant have also dropped, from 54 to 37 hours per week. 2018 numbers are not yet available but are trending a similar direction to 2017. NewForm is barely making a profit.

Stanton did what he knows best. With 17 years of HR experience, including 10 at the senior level, he thought he had seen it all. His techie friends had known that he was the perfect one to join them when they began the company, and no one was disappointed. In the early years at NewForm, he did everything that he wanted to do without anyone looking over his shoulder. Life changed when they sold the company, but he couldn’t imagine how wrong things would go or how fast. After commissioning the Gallup Survey, he believed he had the ammunition to return to the previous climate. But Collier had other ideas and a different perspective on how to view the survey results. Nine months ago Stanton decided to leave the firm.

Six months later, Collier, willing to take a small loss, decided to sell. Jones and McMillan, long-time friends of Stanton and the other founders, became willing buyers. They opened the books, spoke to Stanton, found a strong employee base, identified initial problems and saw nothing severe. This became their opportunity of a lifetime. Opportunity? Or endless problems?

THE MEETING

When Jones stormed into McMillian’s office, they had a long conversation about what was really going on. They decided to meet with Stanton to get his perspective. Stanton was more than happy to provide his views.

Stanton: Let me reiterate what I told you when you were deciding to purchase NewForm. This is a great company. When we founded it, we hired the best of the best. I used my contacts, years of experience and friends I knew in the recruitment field to hire great talent. The other owners did the same. We brought in people who loved the work, were independent and understood clients. When we gave them a job, we left them alone to do it. And they did it well.

Jones: How did the rest of the executive team fit in?

Stanton: We all (owners/executive team) bid on contracts, sometimes individually, sometimes in pairs. Since I was in charge of staffing, they looked to me both for scheduling needs and for identifying specific talent. Many of our clients had unique needs, and we sought to find that perfect match. Whoever the key bidder was oversaw our consultant and was ultimately responsible for results. After a while, each owner had built relationships with individual consultants; these relationships made reporting and bidding easier. While this may seem like an unrealistic utopia, it really worked here. Our productivity and turnover figures bear this out.

McMillan: What happened?

Stanton: My three very close friends decided to head for new challenges— it was as simple as that. It was cost prohibitive for me to buy them out, so I decided to sell at that point. The offer was great, I would be set for life, and although I would no longer have any controlling interest, I would retain my title and the ability to do my job. I loved…I STILL love…this company, and in 2015, I couldn’t see any other place to go. I was a little concerned about how I would get along with Rodney Collier, but we had a few good meetings, and I thought he would listen and was open to keeping the company as it was. Employees met him, we vetted him and his associates as carefully as we could, and we decided to do the deal. I knew that things would change, but we didn’t really see any red flags.

Jones: I know from my own experience that a lot can be hidden when you look to buy a company. What did……

Stanton: (Interrupting) I’ll say. He came in with two senior vice presidents and within a week everything was different. For the first time in my NewForm career, people came in to my office and closed the door; we NEVER had the need for a closed-door meeting. I can’t begin to describe the nature of the complaints; some were style, some were content; some were specific, some were general. I did my best to calm them down, give them platitudes of “things change, and we couldn’t have this forever,” or “we all have to get used to a new way of doing things,” and “I’ve spoken to Rodney and I can see that it’s already getting better.” Sometimes I found myself simply listening for half an hour.

And then the parade started. Slowly at first, but it was clear. Our best people started leaving. They would come into my office carrying a wrapped bottle of scotch for me. After a while they would just walk in, put my present on my desk, and sit down…. and tell me about their new opportunity. Some took pay cuts, some left the area, but it was clear. Their career here was no longer what they wanted it to be. I have a great collection of scotch…but I don’t want it.

McMillan: Is that when you went to Gallup?

Stanton: I had to do something. Collier wasn’t listening to me. He couldn’t HEAR me. When we would meet, he seemed to get angrier and angrier, wondering why I couldn’t do anything about the turnover, as if it were my fault. I know that he’s a data guy, so I thought that good information about the lack of engagement would help him see some of the issues. But by then it was too late. I didn’t want to be fired, so I left.

Jones: Thank you, this is very helpful. Ronnie and I already understood that employees suffered under the previous regime, but your insight helps clarify the situation. Ronnie, did we know what we were getting into? Maybe we want to sell it to you, James?

Stanton: Oh, I’ve moved on. But I love many of those people and can help wherever you need me.

Jones: You have already been more than kind. Ronnie, your thoughts?

McMillan: James, do you know that new HRM consulting firm across the river? They have a great group of senior and junior people. I’m thinking of contacting them. What do you think?

Stanton: Yes, I’ve known a few of them for years, and they’ve got some bright young kids working for them. I’m sure they’ll have some ideas for you.

ANSWER THE FOLLOWING:

1. Identify the underlying problems at NewForm. What are they key dimensions of the problem, what are the causes, and what other information do you need? Be certain to move beyond symptoms on the surface.
2. Describe the relationship among leadership changes, turnover, engagement and what you learned from the interview with Stanton. How does this impact overall problems?
3. Jones and McMillan need help now, with observable results within six months. Provide your recommendations for 30/90/180 days.

INTRO

• NewForm IT is a seven-year-old IT consulting company founded in 2012 that provides services to small businesses in their local and regional area.
• NewForm employs 83 people, 61 of whom are IT professionals/ consultants.
• NewForm is struggling financially; it has not met its revenue projections in the last five quarters.
• NewForm has suffered excessive leadership turnover in the past three years.
  • The original founders sold NewForm in 2015; one of them, James Stanton, remained on as CHRO but sold his interest in the company.
  • Rodney Collier purchased the firm in 2015 and became CEO.
  • Stanton departed nine months ago.
  • Collier sold NewForm to Sheila Jones (new CEO) and Ronnie McMillan (new CHRO) three months ago.
  • Morale is suffering at NewForm.
• You and your team members formed a startup HRM consulting organization 15 months ago.
  • You are comprised of:
    • Recent HRM graduates from a local university, all undergraduate or graduate students, depending on the degree level attained. You are one of those recent graduates. All team members are SHRM certified and the more senior HRM team members serve or have served as mentors to the recent graduates.

Jones stormed into McMillan’s office. “I’ve had it! We’ve been here three months and nothing changes. Why aren’t they listening? Why do they keep leaving? What’s wrong?”

BACKGROUND

NewForm IT, founded in 2012 by four friends, provides IT consulting services to small businesses in the local and regional area. Three of the founders left the firm in 2014/2015, selling their interests at a handsome profit. The remaining founder and former CHRO, James Stanton, left nine months ago after clashing with the second owner, Rodney Collier, who purchased the company in 2015.

Sheila Jones and Ronnie McMillan recently purchased NewForm; Jones became its third CEO.

Three of the founders loved playing with computers and systems. While in college and in the early years of their careers, they created websites, developed computer games, played with mainframes, and made spare cash by solving individual and corporate IT problems. Systems and IT came easily for them, and they discovered that what other people feared were simple problems to them. They knew that they could make money by doing what they knew best. Their vision was to help small organizations solve their IT problems, and they discovered that they could charge exorbitant fees for doing so.

• The first founder to leave sold to her partners in 2014.

• Two founders—including the CEO—sold their shares to a group led by Collier in 2015 and left at that time.

• Stanton also sold his shares to Collier in 2015 but remained at his job.

• All four founders became multimillionaires when they sold the company.

• At the time of the 2015 sale, the company employed 53 IT consultants, most working 60-hour weeks and earning large bonuses.

Stanton and Collier had problems with each other from the outset. They differed on how to price consulting jobs, how to pay consultants, work hours, benefits (401k, leave policy, health insurance, etc.), among other things. Stanton saw little need to change what was successfully working; Collier wanted a fresh new corporate image. Corporate culture slowly began to move away from its original entrepreneurial style. Stanton and Collier continued to clash until nine months ago when Stanton walked away. Collier and his group sold NewForm six months later to a group led by Jones.

Jones is a senior executive with 23 years of industry experience, mostly with large, high- tech firms. When the founders formed the company they had asked her to join their team as a partner, but she declined. She had neither the time nor the inclination to do so. Today is different; she has made money in the industry, and her newly earned Ph.D. in leadership dynamics has given her the spirit and the insight to run the show. Because Collier wanted to sell and get out, Jones bought into NewForm at a discount and was ready to roll up her sleeves and get to work. McMillan, a long-term colleague, joined her as an equal partner and CHRO.

NewForm employs 83 people today, 61 of whom are IT consultants. These are highly skilled professionals, well paid and sought after in their field. While most have significant corporate experience, 49 have been with NewForm less than three years. Only four have been with NewForm for five years, and two have been with NewForm since its inception.

YOUR HRM CONSULTING FIRM

As a recent graduate, you have joined a 15-month-old startup HRM Consulting firm. You are excited about the opportunity this presents. Some of your team members are recent HRM graduates just like you, while others are SHRM-certified senior leaders who serve as mentors to the recent grads. The senior leaders, led by Patrick Conroy, have a financial stake in the firm and have established a plan that allows junior leaders to eventually earn the right to purchase a percentage of the firm and become a partner.

Early Monday mornings are set aside for virtual corporate meetings. This is when the partners and employees meet to focus on the firm no matter where they are in the world. These meetings are a combination of strategic think tanks, corporate planning sessions with problem analysis, mentoring, financial discussions, and discussions of any strategic decision that needs to be made. After 15 months, it is apparent that that these Monday meetings are the key that is leading to the team’s success.

This Monday morning is no different. Last week Conroy received a message from a company called NewForm IT and spent 30 minutes on the phone with McMillan, it’s CHRO. Conroy prepared an internal memo for the firm describing NewForm’s problems, and the group is prepared to discuss the issue at length.

As the conversation begins you consider your role in the firm. You know you try to do your best for your clients, yet one of your colleagues called you in for a brief but intense conversation about a recent client. Yes, you recognize that you may have missed a few social cues, might not have found the right words and advice for the client, and did not leave the client completely satisfied. But their challenge was particularly tough, and you probably should have had help from someone else in the firm. That job had been underbid, and the fee did not leave enough room for two consultants. You begin to wonder if this is the right career for you, or whether the senior team will ask you to leave. Your mind wanders.

While you muse on this, barely hearing the conversation in the room, Conroy looks directly at you and says, “You’ve worked with IT people, what do you think about the situation?” Panic sets in.

TODAY’S ISSUES AT NEWFORM

From 2012 until 2015, NewForm IT grew to 53 consultants. It had virtually no turnover during that time; two consultants were terminated for cause, one for discipline, and two left voluntarily when their spouses received out-of-state job offers. Stability was one of NewForm’s strengths; many consultants worked numerous jobs with one client, making it easier to produce quality results because they understood their clients’ needs and nuances; clients were satisfied. Employee compensation was higher than the market, and NewForm was making money for everyone.

The 2015 sale brought shock and change. As the only remaining founder, Stanton attempted to reassure everyone that nothing would change, but consultants identified subtle variations from the beginning. In the midst of changing internal rules, Stanton tried to maintain the status quo. Yet he had no real authority, and his suggestions fell on deaf ears. Early in 2018, he commissioned the Gallup Company to do its formal twelve question engagement survey. The results confirmed what he already knew: morale was suffering, and employees were no longer engaged. He wished he had done the survey and received baseline data 3-5 years ago.

Metrics are also down. Repeat clients, one of the company’s strengths, fell from a high of 57 percent (that is, 57 percent of clients engaged NewForm for a second job) in 2014 to 31 percent in 2017. Billable hours per consultant have also dropped, from 54 to 37 hours per week. 2018 numbers are not yet available but are trending a similar direction to 2017. NewForm is barely making a profit.

Stanton did what he knows best. With 17 years of HR experience, including 10 at the senior level, he thought he had seen it all. His techie friends had known that he was the perfect one to join them when they began the company, and no one was disappointed. In the early years at NewForm, he did everything that he wanted to do without anyone looking over his shoulder. Life changed when they sold the company, but he couldn’t imagine how wrong things would go or how fast. After commissioning the Gallup Survey, he believed he had the ammunition to return to the previous climate. But Collier had other ideas and a different perspective on how to view the survey results. Nine months ago Stanton decided to leave the firm.

Six months later, Collier, willing to take a small loss, decided to sell. Jones and McMillan, long-time friends of Stanton and the other founders, became willing buyers. They opened the books, spoke to Stanton, found a strong employee base, identified initial problems and saw nothing severe. This became their opportunity of a lifetime. Opportunity? Or endless problems?

THE MEETING

When Jones stormed into McMillian’s office, they had a long conversation about what was really going on. They decided to meet with Stanton to get his perspective. Stanton was more than happy to provide his views.

Stanton: Let me reiterate what I told you when you were deciding to purchase NewForm. This is a great company. When we founded it, we hired the best of the best. I used my contacts, years of experience and friends I knew in the recruitment field to hire great talent. The other owners did the same. We brought in people who loved the work, were independent and understood clients. When we gave them a job, we left them alone to do it. And they did it well.

Jones: How did the rest of the executive team fit in?

Stanton: We all (owners/executive team) bid on contracts, sometimes individually, sometimes in pairs. Since I was in charge of staffing, they looked to me both for scheduling needs and for identifying specific talent. Many of our clients had unique needs, and we sought to find that perfect match. Whoever the key bidder was oversaw our consultant and was ultimately responsible for results. After a while, each owner had built relationships with individual consultants; these relationships made reporting and bidding easier. While this may seem like an unrealistic utopia, it really worked here. Our productivity and turnover figures bear this out.

McMillan: What happened?

Stanton: My three very close friends decided to head for new challenges— it was as simple as that. It was cost prohibitive for me to buy them out, so I decided to sell at that point. The offer was great, I would be set for life, and although I would no longer have any controlling interest, I would retain my title and the ability to do my job. I loved…I STILL love…this company, and in 2015, I couldn’t see any other place to go. I was a little concerned about how I would get along with Rodney Collier, but we had a few good meetings, and I thought he would listen and was open to keeping the company as it was. Employees met him, we vetted him and his associates as carefully as we could, and we decided to do the deal. I knew that things would change, but we didn’t really see any red flags.

Jones: I know from my own experience that a lot can be hidden when you look to buy a company. What did……

Stanton: (Interrupting) I’ll say. He came in with two senior vice presidents and within a week everything was different. For the first time in my NewForm career, people came in to my office and closed the door; we NEVER had the need for a closed-door meeting. I can’t begin to describe the nature of the complaints; some were style, some were content; some were specific, some were general. I did my best to calm them down, give them platitudes of “things change, and we couldn’t have this forever,” or “we all have to get used to a new way of doing things,” and “I’ve spoken to Rodney and I can see that it’s already getting better.” Sometimes I found myself simply listening for half an hour.

And then the parade started. Slowly at first, but it was clear. Our best people started leaving. They would come into my office carrying a wrapped bottle of scotch for me. After a while they would just walk in, put my present on my desk, and sit down…. and tell me about their new opportunity. Some took pay cuts, some left the area, but it was clear. Their career here was no longer what they wanted it to be. I have a great collection of scotch…but I don’t want it.

McMillan: Is that when you went to Gallup?

Stanton: I had to do something. Collier wasn’t listening to me. He couldn’t HEAR me. When we would meet, he seemed to get angrier and angrier, wondering why I couldn’t do anything about the turnover, as if it were my fault. I know that he’s a data guy, so I thought that good information about the lack of engagement would help him see some of the issues. But by then it was too late. I didn’t want to be fired, so I left.

Jones: Thank you, this is very helpful. Ronnie and I already understood that employees suffered under the previous regime, but your insight helps clarify the situation. Ronnie, did we know what we were getting into? Maybe we want to sell it to you, James?

Stanton: Oh, I’ve moved on. But I love many of those people and can help wherever you need me.

Jones: You have already been more than kind. Ronnie, your thoughts?

McMillan: James, do you know that new HRM consulting firm across the river? They have a great group of senior and junior people. I’m thinking of contacting them. What do you think?

Stanton: Yes, I’ve known a few of them for years, and they’ve got some bright young kids working for them. I’m sure they’ll have some ideas for you.

ANSWER THE FOLLOWING:

1. Identify the underlying problems at NewForm. What are they key dimensions of the problem, what are the causes, and what other information do you need? Be certain to move beyond symptoms on the surface.
2. Describe the relationship among leadership changes, turnover, engagement and what you learned from the interview with Stanton. How does this impact overall problems?
3. Jones and McMillan need help now, with observable results within six months. Provide your recommendations for 30/90/180 days.

INTRO

• NewForm IT is a seven-year-old IT consulting company founded in 2012 that provides services to small businesses in their local and regional area.
• NewForm employs 83 people, 61 of whom are IT professionals/ consultants.
• NewForm is struggling financially; it has not met its revenue projections in the last five quarters.
• NewForm has suffered excessive leadership turnover in the past three years.
  • The original founders sold NewForm in 2015; one of them, James Stanton, remained on as CHRO but sold his interest in the company.
  • Rodney Collier purchased the firm in 2015 and became CEO.
  • Stanton departed nine months ago.
  • Collier sold NewForm to Sheila Jones (new CEO) and Ronnie McMillan (new CHRO) three months ago.
  • Morale is suffering at NewForm.
• You and your team members formed a startup HRM consulting organization 15 months ago.
  • You are comprised of:
    • Recent HRM graduates from a local university, all undergraduate or graduate students, depending on the degree level attained. You are one of those recent graduates. All team members are SHRM certified and the more senior HRM team members serve or have served as mentors to the recent graduates.

Jones stormed into McMillan’s office. “I’ve had it! We’ve been here three months and nothing changes. Why aren’t they listening? Why do they keep leaving? What’s wrong?”

BACKGROUND

NewForm IT, founded in 2012 by four friends, provides IT consulting services to small businesses in the local and regional area. Three of the founders left the firm in 2014/2015, selling their interests at a handsome profit. The remaining founder and former CHRO, James Stanton, left nine months ago after clashing with the second owner, Rodney Collier, who purchased the company in 2015.

Sheila Jones and Ronnie McMillan recently purchased NewForm; Jones became its third CEO.

Three of the founders loved playing with computers and systems. While in college and in the early years of their careers, they created websites, developed computer games, played with mainframes, and made spare cash by solving individual and corporate IT problems. Systems and IT came easily for them, and they discovered that what other people feared were simple problems to them. They knew that they could make money by doing what they knew best. Their vision was to help small organizations solve their IT problems, and they discovered that they could charge exorbitant fees for doing so.

• The first founder to leave sold to her partners in 2014.

• Two founders—including the CEO—sold their shares to a group led by Collier in 2015 and left at that time.

• Stanton also sold his shares to Collier in 2015 but remained at his job.

• All four founders became multimillionaires when they sold the company.

• At the time of the 2015 sale, the company employed 53 IT consultants, most working 60-hour weeks and earning large bonuses.

Stanton and Collier had problems with each other from the outset. They differed on how to price consulting jobs, how to pay consultants, work hours, benefits (401k, leave policy, health insurance, etc.), among other things. Stanton saw little need to change what was successfully working; Collier wanted a fresh new corporate image. Corporate culture slowly began to move away from its original entrepreneurial style. Stanton and Collier continued to clash until nine months ago when Stanton walked away. Collier and his group sold NewForm six months later to a group led by Jones.

Jones is a senior executive with 23 years of industry experience, mostly with large, high- tech firms. When the founders formed the company they had asked her to join their team as a partner, but she declined. She had neither the time nor the inclination to do so. Today is different; she has made money in the industry, and her newly earned Ph.D. in leadership dynamics has given her the spirit and the insight to run the show. Because Collier wanted to sell and get out, Jones bought into NewForm at a discount and was ready to roll up her sleeves and get to work. McMillan, a long-term colleague, joined her as an equal partner and CHRO.

NewForm employs 83 people today, 61 of whom are IT consultants. These are highly skilled professionals, well paid and sought after in their field. While most have significant corporate experience, 49 have been with NewForm less than three years. Only four have been with NewForm for five years, and two have been with NewForm since its inception.

YOUR HRM CONSULTING FIRM

As a recent graduate, you have joined a 15-month-old startup HRM Consulting firm. You are excited about the opportunity this presents. Some of your team members are recent HRM graduates just like you, while others are SHRM-certified senior leaders who serve as mentors to the recent grads. The senior leaders, led by Patrick Conroy, have a financial stake in the firm and have established a plan that allows junior leaders to eventually earn the right to purchase a percentage of the firm and become a partner.

Early Monday mornings are set aside for virtual corporate meetings. This is when the partners and employees meet to focus on the firm no matter where they are in the world. These meetings are a combination of strategic think tanks, corporate planning sessions with problem analysis, mentoring, financial discussions, and discussions of any strategic decision that needs to be made. After 15 months, it is apparent that that these Monday meetings are the key that is leading to the team’s success.

This Monday morning is no different. Last week Conroy received a message from a company called NewForm IT and spent 30 minutes on the phone with McMillan, it’s CHRO. Conroy prepared an internal memo for the firm describing NewForm’s problems, and the group is prepared to discuss the issue at length.

As the conversation begins you consider your role in the firm. You know you try to do your best for your clients, yet one of your colleagues called you in for a brief but intense conversation about a recent client. Yes, you recognize that you may have missed a few social cues, might not have found the right words and advice for the client, and did not leave the client completely satisfied. But their challenge was particularly tough, and you probably should have had help from someone else in the firm. That job had been underbid, and the fee did not leave enough room for two consultants. You begin to wonder if this is the right career for you, or whether the senior team will ask you to leave. Your mind wanders.

While you muse on this, barely hearing the conversation in the room, Conroy looks directly at you and says, “You’ve worked with IT people, what do you think about the situation?” Panic sets in.

TODAY’S ISSUES AT NEWFORM

From 2012 until 2015, NewForm IT grew to 53 consultants. It had virtually no turnover during that time; two consultants were terminated for cause, one for discipline, and two left voluntarily when their spouses received out-of-state job offers. Stability was one of NewForm’s strengths; many consultants worked numerous jobs with one client, making it easier to produce quality results because they understood their clients’ needs and nuances; clients were satisfied. Employee compensation was higher than the market, and NewForm was making money for everyone.

The 2015 sale brought shock and change. As the only remaining founder, Stanton attempted to reassure everyone that nothing would change, but consultants identified subtle variations from the beginning. In the midst of changing internal rules, Stanton tried to maintain the status quo. Yet he had no real authority, and his suggestions fell on deaf ears. Early in 2018, he commissioned the Gallup Company to do its formal twelve question engagement survey. The results confirmed what he already knew: morale was suffering, and employees were no longer engaged. He wished he had done the survey and received baseline data 3-5 years ago.

Metrics are also down. Repeat clients, one of the company’s strengths, fell from a high of 57 percent (that is, 57 percent of clients engaged NewForm for a second job) in 2014 to 31 percent in 2017. Billable hours per consultant have also dropped, from 54 to 37 hours per week. 2018 numbers are not yet available but are trending a similar direction to 2017. NewForm is barely making a profit.

Stanton did what he knows best. With 17 years of HR experience, including 10 at the senior level, he thought he had seen it all. His techie friends had known that he was the perfect one to join them when they began the company, and no one was disappointed. In the early years at NewForm, he did everything that he wanted to do without anyone looking over his shoulder. Life changed when they sold the company, but he couldn’t imagine how wrong things would go or how fast. After commissioning the Gallup Survey, he believed he had the ammunition to return to the previous climate. But Collier had other ideas and a different perspective on how to view the survey results. Nine months ago Stanton decided to leave the firm.

Six months later, Collier, willing to take a small loss, decided to sell. Jones and McMillan, long-time friends of Stanton and the other founders, became willing buyers. They opened the books, spoke to Stanton, found a strong employee base, identified initial problems and saw nothing severe. This became their opportunity of a lifetime. Opportunity? Or endless problems?

THE MEETING

When Jones stormed into McMillian’s office, they had a long conversation about what was really going on. They decided to meet with Stanton to get his perspective. Stanton was more than happy to provide his views.

Stanton: Let me reiterate what I told you when you were deciding to purchase NewForm. This is a great company. When we founded it, we hired the best of the best. I used my contacts, years of experience and friends I knew in the recruitment field to hire great talent. The other owners did the same. We brought in people who loved the work, were independent and understood clients. When we gave them a job, we left them alone to do it. And they did it well.

Jones: How did the rest of the executive team fit in?

Stanton: We all (owners/executive team) bid on contracts, sometimes individually, sometimes in pairs. Since I was in charge of staffing, they looked to me both for scheduling needs and for identifying specific talent. Many of our clients had unique needs, and we sought to find that perfect match. Whoever the key bidder was oversaw our consultant and was ultimately responsible for results. After a while, each owner had built relationships with individual consultants; these relationships made reporting and bidding easier. While this may seem like an unrealistic utopia, it really worked here. Our productivity and turnover figures bear this out.

McMillan: What happened?

Stanton: My three very close friends decided to head for new challenges— it was as simple as that. It was cost prohibitive for me to buy them out, so I decided to sell at that point. The offer was great, I would be set for life, and although I would no longer have any controlling interest, I would retain my title and the ability to do my job. I loved…I STILL love…this company, and in 2015, I couldn’t see any other place to go. I was a little concerned about how I would get along with Rodney Collier, but we had a few good meetings, and I thought he would listen and was open to keeping the company as it was. Employees met him, we vetted him and his associates as carefully as we could, and we decided to do the deal. I knew that things would change, but we didn’t really see any red flags.

Jones: I know from my own experience that a lot can be hidden when you look to buy a company. What did……

Stanton: (Interrupting) I’ll say. He came in with two senior vice presidents and within a week everything was different. For the first time in my NewForm career, people came in to my office and closed the door; we NEVER had the need for a closed-door meeting. I can’t begin to describe the nature of the complaints; some were style, some were content; some were specific, some were general. I did my best to calm them down, give them platitudes of “things change, and we couldn’t have this forever,” or “we all have to get used to a new way of doing things,” and “I’ve spoken to Rodney and I can see that it’s already getting better.” Sometimes I found myself simply listening for half an hour.

And then the parade started. Slowly at first, but it was clear. Our best people started leaving. They would come into my office carrying a wrapped bottle of scotch for me. After a while they would just walk in, put my present on my desk, and sit down…. and tell me about their new opportunity. Some took pay cuts, some left the area, but it was clear. Their career here was no longer what they wanted it to be. I have a great collection of scotch…but I don’t want it.

McMillan: Is that when you went to Gallup?

Stanton: I had to do something. Collier wasn’t listening to me. He couldn’t HEAR me. When we would meet, he seemed to get angrier and angrier, wondering why I couldn’t do anything about the turnover, as if it were my fault. I know that he’s a data guy, so I thought that good information about the lack of engagement would help him see some of the issues. But by then it was too late. I didn’t want to be fired, so I left.

Jones: Thank you, this is very helpful. Ronnie and I already understood that employees suffered under the previous regime, but your insight helps clarify the situation. Ronnie, did we know what we were getting into? Maybe we want to sell it to you, James?

Stanton: Oh, I’ve moved on. But I love many of those people and can help wherever you need me.

Jones: You have already been more than kind. Ronnie, your thoughts?

McMillan: James, do you know that new HRM consulting firm across the river? They have a great group of senior and junior people. I’m thinking of contacting them. What do you think?

Stanton: Yes, I’ve known a few of them for years, and they’ve got some bright young kids working for them. I’m sure they’ll have some ideas for you.

ANSWER THE FOLLOWING:

1. Jones and McMillan need help now, with observable results within six months. Provide your detailed recommendations for 30/90/180 days.

Depreciation and advance prepayments

Pan Asia Airlines was founded in 1980. Headquartered in Hong Kong, the publicly traded company has routes throughout Asia and to major airports throughout Europe and North America. While Pan Asia charges a premium of 10 to 20% over its competitors, customers have not been deterred from using the airline because of the high quality of service.

A key reason for this reputation for high quality is the company's relatively young fleet of aircraft, with an average age of five years and no plane older than eight years. To maintain a young fleet, Pan Asia replaces its planes regularly to ensure that the planes are equipped with the latest technology and operate efficiently. Other airlines typically have fleets with an average age of 10 years, while discount airlines have even older fleets, with an average age of 15 years. A well-maintained aircraft can last for 20 to 25 years, or even more in some cases.

Each of five regional managers has responsibility for all investment and operating decisions for his/her region. The company evaluates each region as a profit centre. The decentralized structure allows each region to respond quickly to changes in its market.

Financially, the company has been consistently profitable in recent years. Stock analysts have projected a target price that is 20% higher than the current price of $32.50 per share, based on their projections of earnings before interest, taxes, depreciation, amortization (EBITDA). Because of its solid financial performance, Pan Asia has earned a high credit rating, allowing it to borrow at a rate of 6%. Debt currently comprises about 40% of assets, while liquid assets amount to about 10% of assets, which total approximately $2 billion.

It is now February 2012. A new chief executive officer (CEO), William Chan, has been appointed following the retirement of the founding CEO. Chan has a background in mechanical engineering and previously served as Pan Asia's chief operating officer for the past 15 years. While Chan has a thorough understanding of the company's central operations, he is less familiar with other aspects of the company. Consequently, he has spent the last three months reviewing the company's marketing program, human resources, information systems, treasury, as well as accounting.

During this review, Chan has identified a few issues that he would like you, the chief financial officer, to explain to him.

1. The CEO noted that Pan Asia uses the declining-balance method of depreciation. He also noted that many (though not all) competitors use the straight-line method. He wonders whether Pan Asia should consider conforming to the majority in the industry.

2. One of Pan Asia’s manufacturers has recently started a promotion that offers a significant discount to airlines that make advance payments on their aircraft orders. The discount amounts to 15% of the regular price. To obtain the discount, Pan Asia would need to pay in full when it orders a plane, rather than when the manufacturer delivers it. Typically, the amount of time between order and delivery is two years. Chan is unsure whether he should encourage the regional managers to take up this offer. He is also wondering what the effects might be for the financial statements.

Required: Draft a memo to the CEO that addresses the issues raised.

Read the following scenario:

Webmasters was an Internet start-up company founded in 2016. One of the largest problems for Webmasters was developing the technological systems necessary to support its rapidly expanding user base. Furthermore, due to the rapid expansion in recent years, many of its systems had been added hastily, resulting in poor integration and questionable data integrity. As a result, the CEO of Webmasters announced an initiative to integrate all systems and increase the quality of internal data. In compliance with this initiative, Webmasters purchased an expensive and complex billing system called BillPro, which would automate the billing for thousands of Internet accounts via credit cards.

During the integration, BillPro, in collaboration with Visa, created a phony credit card number that could be used by developers and programmers to test the functionality and integration of the BillPro system. Moreover, this credit card number was fully functional in “live” environments, so testers and developers could ensure functionality without being required to use actual personal or company credit card numbers. The activity on this card was not monitored. The integration went smoothly; however, it created thousands of corrupt accounts that required fixing.

Tyler, the manager of the Operations Department, was responsible for the resolution of all data integrity issues. His team was tasked with fixing all corrupt accounts created by the launch and integration of the BillPro system. As a result, Tyler was given the phony credit card number, which was kept on a Post-it Note in his drawer.

One of the top performers on the Operations team was a 29-year-old male named Ethan. Ethan had worked in Operations for more than a year and was making $15 per hour, the same salary as when he was hired. He was an introvert working to support a family and put himself through school. Ethan was the most technologically savvy individual on the team, and his overall systems knowledge exceeded that of his manager, Tyler. Ethan was brilliant in creating more efficient tools and methods to repair corrupted accounts. Therefore, Ethan was tasked with conducting training for new employees and updating team members on new processes and tools that he had created. As a result, he quickly became a trusted and valuable team member. Tyler gave him, and the other team members, the phony credit card number to increase the productivity of the team.

However, after six months of working at Webmasters, Ethan received an official reprimand from the company for using the company system to access websites containing pirated software and music. The FBI attended the investigation and determined that Ethan had not been a major player in the piracy. Therefore, Ethan was quietly warned and placed on a short-term probation. Tyler was asked to write a warning letter for the action; however, after a brief conversation with Ethan, Tyler determined that Ethan’s intentions were good and Tyler never officially submitted the letter because Ethan was a trusted employee and elevated the overall performance of the team.

A few months after the piracy incident, Tyler noticed some changes in Ethan’s behavior:

• Ethan’s computer monitor was repositioned so that his screen was not visible to coworkers.
• Ethan had the latest technological innovations including a new smartphone, an MP3 player, a Play Station, a new laptop, a tablet and a new car stereo system.
• Ethan was going out to lunch more frequently.
• Ethan frequently used multiple fake usernames and passwords for testing purposes.

Prepare a detailed analysis of the scenario by incorporating your responses to the following in well-developed paragraphs (do not use a question-answer format):

• Analyze the case using the three elements of the fraud triangle.
• Discuss some of the red flags that might indicate that fraud exists in the scenario.
• Discuss some things that Tyler could have done to eliminate some, or all, of the opportunities for fraud.

Jeffery Smith founded Smith’s technology in 1994 in Melbourne, Australia, with $10,000 and a unique
vision of how technology should be designed, manufactured and sold. More than 5 million customers later
and with an annual IT budget of approximately $500 million per year, Smith has made an indelible mark
on the computer industry—and the world. The enterprise sells more than 1,000 apps every day to
customers in 120 countries and employs 40,000 people worldwide.

Covid has had a significant impact on the organisation where they have realise that a lot of their systems
across Australia (i.e. Sydney, Perth and Melbourne) are not integrated and therefore it is very difficult for
them to reconcile their accounts and inventory stocks using their Enterprise Resource Planning system
(ERP) and Supply Chain Management (SCM) at the end of the every financial year. This year was worse
because their chief accountant could not travel to the other centres because of the Covid restrictions. As
the Chief Enterprise Architect, you have been hired to help their IT Strategy and Technology Department
to design a solution that would enable real-time updating of information across the three locations. You
would therefore have to map out future directions for the IT company, with a three-year roadmap which
involves investments in the tens of millions of dollars such as SAP ERP, Microsoft Dynamics CRM, Data
Warehouse Systems and Business Intelligence Reporting Systems.

Discuss the business problems faced by Smith’s technology and is it a problem associated
with the lack of good enterprise architecture practice?

The Midland Corporation (MC) was established in 1994. Glenn Jones founded the corporation, which was privately owned at the time.

MC was originally formed to provide ship repair services and quickly earned a Department of Defense (DOD) certified Alteration Boat Repair (ABR) designation. Among its specialties were structural welding, piping system installation and repairs, electrical, painting, rigging, machinery and dry-lock work, as well as custom sheet metal fabrication. Other divisions of MC included Habitability Installation, Industrial Contracting, and Alteration/Installation Teams (AIT).

In 1998, the company went public and its initial public offering was very successful. The stock price had risen from its initial value of $10 to its current level of $30 per share. There were currently five million shares outstanding. In 1999, the company issued 30-year annual bonds at par, with a face value of $1,000 and a coupon rate of 10% per year, and managed to raise $40 million for expansion. Currently the AA-rated bonds had 25 years left until maturity and were being quoted at 92.5% of par.

Over the past year, MC utilized a new method for fabricating composite materials that the firm’s engineers had developed. In June of last year, management established the Advanced Materials Group (AM Group), which was dedicated to pursuing this technology. The firm recruited Barry Rock, a senior engineer, to head the AM Group. Barry also had an MBA from a prestigious university under his belt.

Upon joining MC, Barry realized that most projects were being approved on a “gut feel” approach. There were no formal acceptance criteria in place. Up until then, the company had been lucky in that most of its projects had been well selected and it had benefited from good relationships with clients and suppliers.

Barry stopped into your cubicle and said, “This has to change. We can’t possibly be this lucky forever. We need to calculate the firm’s hurdle rate.” Having recently joined the company after graduating from Northwood University, you jump at the opportunity to assist. “Great, we are receiving bids for a new project in two weeks, have a report on my desk by then” Barry said.

You begin your project by researching and gathering your data. You contact the Finance Department and they indicate the company has maintained its bond rating since it issued debt and ironically the yield on new debt the same as it was then. The Finance Department also tells you that the 1-year Treasury bill yield is 4%, the expected return on the market is 10%, and MC’s beta is 1.5. You then contact the Accounting Department and they tell you that MC’s corporate tax rate is 34% and that they don’t see any reason dividends won’t continue to grow at the same rate they have the past six to seven years. They also provide you with the copy of the most recent balance sheet and a summary of the company’s sales, EPS, and DPS for the last seven years (see Table 1& 2). You decide to use the existing capital structure using market values instead of book values (do not include current liabilities in this calculation).

Table 1

Table 2

Once you got back to your desk you had an email from Barry asking you several questions to make sure are covered in your report:

1. Why do you think we need to estimate the firm’s hurdle rate and how can we use it to our advantage? Is it justifiable to use the firm’s weighted average cost of capital as the divisional cost of capital? Be sure to provide a thorough explanation.
2. What did you determine the firm’s cost of debt to be? Can you walk me through how you calculated it?
3. Will you explain to me why there is a cost associated with our retained earnings? Isn’t this our money?
4. I’m not sure which approach we should use to calculate the firm’s cost of retained earnings, will you use two of them (hint: CAPM and DCF) and take the average of them? Can you explain to me how you determined each of these? Do we need to make an adjustment for taxes?
5. I heard Jim Cramer talk about “Flotation Costs”, what are they? How are they going to impact our analysis?
6. What did you determine our WACC to be? Will you explain to me the steps so I can present it to our Board?
7. Can we safely assume that the hurdle rate will remain constant? Please explain and if not, how often should we adjust our analysis?

Federal Express (FedEx) was founded about 50 years ago. It handles on an average of 3 million package-tracking requests on a daily basis. To remain ahead of its competitors, FedEx strives on customer service by keeping a comprehensive website, FedEx.com. It increases customer service and reduces costs. For example, each request for information which can be retrieved from the website rather than by the call centre help FedEx to save an estimated $1.87. The costs for FedEx have been reduced from more than $1.36 billion per year to $21.6 million per year by customers using the website instead of the call centre calculating each package-tracking request costs Federal Express 3 cents.

Another know-how that improved its customer service is Ship Manager, an application installed on customers’ sites so users can determine shipping charges, weigh packages, and print shipping labels. Customers can also tie their invoices, billing, accounting and inventory systems to the application, Ship Manager.

Nevertheless, Federal Express still spend almost $326 million annually on its call centre to reduce customers’ annoyance when the website is down or when customers have difficulty using it. It uses CRM software called Clarify in its call centres to ensure customer service representatives’ job easier and to speed up response time.

Answer the following questions:

a)     What is the importance of technology to ensure high-quality customer service?

b)    Can you estimate Federal Express’ annual savings from using information technology?

c)     Can you give a few examples of information technologies used by Federal Express?

d)    What is the role of the application ‘Ship Manager’?

e)    Your overall observations and learning from the above case study.