HARVARD |BUSINESS/SCHOOL 9-190-053 Automation Consulting Services As they had been doing twice a year for the past six years, the three founding partners of Automation Consulting Services (ACS) convened at Cliff Reed's summer home in Cape Cod in August 2012 to spend a weekend assessing the status of their consulting firm and planning its future. Not surprisingly, they each had come away from their recent tour of ACS’ four offices with a long list of questions, concerns, and ideas for change. Over the years, the semi-annual practice of visiting each office and holding formal meetings with its partners and principals had been an effective way for the three founding partners to identify major problems and new opportunities, This year, however, the three founders sensed that the magnitude Of the issues that needed their direct attention had grown out of control. They worried that we days of brainstorming would not be an adequate response to the current challenges and those projected for the next decade. Company Background Clifford Reed, Jack Leland, and Angela Goldberg had founded ACS in 2005 as a technical consulting firm specializing in factory automation for industrial manufacturing firms. ACS advised clients on the development of automation strategy and long-term facilities planning and also provided guidance in the design and implementation of specific automation projects. From its home base in Boston, ACS had expanded into three additional locations. Offices had been opened in Seattle and Philadelphia in 2007 and 2008, respectively, and ACS hacl acquired a local partnership in San Jose, California in 2010. By 2012, ACS had a professional staff of 83 consultants and revenues of $64 million. The ACS partnership had tentative plans to open an office in Asia in the near future. When Reed, Leland, and Goldberg had first formed their partnership in 2005, demand for automation expertise vas growing steadily and their market research indicated that the trend would continue. From the outset, the founders had agreed that revenue growth would be a top priority. They hac considered rapt growl an imperative for Unee mai reasons. First, most of theit clients and likely prospects were relatively large corporations, often with multiple manufacturing sites; these firms preferred hiring technical consulting firms that could provide the depth and breadth of expertise and geographical coverage to meet all their automation needs. Second, the founders wanted to establish as many client relationships as possible while the market was still young and fragmented in an attempt to build client exit barriers. Third, without a high growth rate, the partnership would biry A. Weston prepare his case under the superyson of Fotesior Kober Since The company’ menor the sk Hts HS cases ae develope sell as te basis fe clase Ucusion Capes arene intend to sere 98 enorsenants, sours wf PMN Ha hatation f elie orieetive management CCopycght © 189,199, 1991, 1949, 2000, 2010, 202, President and Fellows of Harvard Calle. To oder copies oF reuest prison to reprodice motels, call 18003157683," wate Herard Busines Sehoct Pubshing, Boston, MA O2GN. te gS ‘ver ep.hanvard.edu/educaees. Thi publiceton may not be digitize, photocopics, or athersite reproduce, pss, or wana ‘without the permusian 6 Horvat Bees Schoo190.053, ‘Automation Consulting Services not be able to attract, motivate, and retain ambitious junior consultants with the promise of a fast- paced promotion policy and potentially rapid career development. As of the summer of 2012, ACS management had surpassed its aggressive growth goals in each year of operation, and its founders. hhad no plans to let up the pressure for growth in the near future. ACS's phenomenal success was attributable, in part, to the mix of talent and experience embodied fn its founders, Cliff Reed was a 10-year veteran engineer from a “Big Three” auto manufacturer, where he had specialized in factory automation Jack Leland, also an engineer, was a graduate of MIT with eight years of practical experience in manufacturing operations at a high-tech firm before founding ACS. Angela Goldberg was a Harvard MBA, with ten years of experience marketing computers and related equipment to industrial clients, The three founders—who constituted the Executive Committee—were the only partners with firm-wide responsibilities; all other partners focused only on their own offices. Each of the four offices was headed by a managing partner who was responsible for his or her office's revenues, recruiting efforts, staffing, and client development. The offices varied substantially in size. Each office had 3 to 6 partners a well as ftom 8 lo 31 non-pailner professionals. (See Exhibit 1 for an organizational chart) In keeping with the Executive Committee's emphasis on revenue growth, each’ office was managed as a revenue center, with the partnership as a whole treated as the sole profit center. Each partner's compensation consisted of a share of the firm’s total profits in proportion to his share of total revenue generation. (The founders and other managing partners received an additional bonus tied to finm-wide and office-specific revenue growth, respectively.) Expenses were accumulated and monitored on a consolidated firm-wide basis. In addition, each ACS office monitored total hours billed and utilization’ as proxies for office profitability. Revenues, utilization, and other performance measures for 2011 are reported, by office, in Exhibit 2 August 2012: The Executive Committee Retreat Cliff, Jack, and Angela had not prepared a formal agenda in advance of theit two-day 1elreal. Instead, they began as they had in the past: by discussing their thoughts and concerns, one office at a time, based on their recent tour as well as their individual interactions with the consultants of each office. During this discussion, they kept a ruming list of priority problems and opportunities, which would serve as the agenda for the second day of their retreat. The following sections highlight the ‘major issues raised on Saturday, August 11. the San Jose Uffice ‘The Executive Committee was particularly concerned with the operations of the San Jose office, because it was the only office'they had acquired rather than built and molded themselves. ‘The acquisition had been completed less than a year ago. Consequently, the combining of management styles, practices, and personalities was still sorting itself out. To date, all three parlners were generally pleased with the acquired staff's skills, experience, and performance. A recent incident, however, seemed cause for concern. Angela had discovered that one of the San Jose partners, Douglas Crowley, had employed a client billing practice of which she did not approve. * Utilization refers to the percentage ofthe professional staff's compensated working time that is charged out to clients—ie,, time that is spenton reverue-generating activities. 2‘Automation Consulting Services 190.053 Crowley had just completed a project for PowerTechnologies Ine. (a pseudonym), a client that needed help in expancling and automating its production capabilities. The project had involved space and equipment planning, mechanical and electrical machine design, and the development of a master plan for increasing production of high-technology components. As was common in ACS’ work, Crowley's original proposal and the subsequent contract had stated a price range for the job with a guaranteed price ceiling, rather than a fixed price. As with all clients, Crowley billed FowerTechnologies monthly. Angela was outraged, however, when she learned from a principal on the project that Crowley had boosted his final bill to PowerTechnologies to “subsidize” another job that was running over budget. ‘The principal who informed Angela apparently did not consider Crowley's action a problem. In fact, before seeing Angela’s reaction, he told her that “cross-subsidizing” occurred regularly, with Managing Partner Kyle Ross’ approval, whenever the costs of a particular job were significantly below the contract price ceiling, “As long as a client's total bill is below the ceiling,” the principal claimed, “no one was exploited by cross-subsidizing, ancl ACS met its revenue target.” Angela saw things differently. She wanted to fire Crowley and any others who had engaged in cross-subsidizing. She was particularly angry because PowerTechnologies, tite overcharged client, was a subsidiary of one of her oldest Boston-based clients. Cliff and Jack agreed with Angela that Crowley's action was clearly not in line with their objective of building Jong-term client relationships. The founders, however, had never articulated guidelines for partners, in terms of either general business conduct or selling and billing practices. Every partner ‘managed his clients according to his own style and strategy and that of his managing partner. The Executive Committee had never before encountered a major conflict for two reasons: first, at least one of the three founders had been on the team of most of the projects, particularly in the early years; and second, nearly all of the partners except for the three in San Jose had risen through the ACS ranks, and tended to share the same billing practices and client philosophy used by the founders. The three realized that some type of explicit action or directive might be needed in order to prevent future departures from what they deemed acceptable billing practices. They did not, however, want to overreact and kill the entrepreneuirial spirit that had allowed the firm to flourish, An aggressive managing partner like Kyle Ross was the key to ACS’ revenue growth. The unwritten rule at ACS had always been local autonomy. The founders believed that this made good business sense, and their managing partners hac come to expect substantial independence, As a result of the California incident, however, Reed, Leland, and Goldberg now questioned the rmeril of their hands-off management style and wondered what sort of guidance they should provide for the partners and how they should communicate and enforce new policies. They worried that any action that appeared too authoritative could threaten the good working, relationships they had with all of the partners, Faslure to provide some guidance, however, nught expose the firm to serious risks as their operations expanded both in size and geographic reach. In addition to devising appropriate preventive measures, the founders had to decide what, if any, disciplinary action to take with the San Jose consultants directly and indirectly involved in cross-subsidizing, Finally, they also had to decide whether to reveal the billing error to PowerTechnologies (and other mischarged clients) and whether to return to them a portion of their fees. In principle, all three partners felt they should return the fees, but they did not yet know how many dollars would be involved and they were not sure what explanation to provide to the clients,1190-053, Automation Consulting Services The Seattle Office The Seattle office was in crisis. Within two months, fifty percent of its current client work would be completed and almost no new projects were clefinitively lined up to fill the void. Nearly half of the office's professional staff would have no billable work. Meanwhile, revenues, profits, and cash flow ‘would dwindle. ACS had never before faced such a situation because demand for their services had always exceeded supply. The Seattle office relied on a small number of large clients and lacked the client breadth that had developed at the larger, older offices. instead of compensating for this vulnerability with a business development plan, the Seattle partners had been focusing their attention almost exclusively on three very large existing projects. Two of the three were scheduled to end in the fall of 2012, The anticipated “Phase Two's” had not materialized on either project. While in the Seattle office the previous week, the Executive Committee had launched a three-point crisis plan: (1) They made arrangements for several Seattle consultants to be assigned temporarily to projects based at the other three offices; (2) they designed a marketing plan to solicit work from existing and new clients; and (8) they transferred a partner with particularly strong selling skills from Boston to Seattle. ‘The Executive Committee realized that their crisis plan was merely a band-aid. They discussed the client prospecting system that they had tried to install two years earlier. The system, which Angela had heard about from a business school friend in a large consulting firm, was designed to monitor Prospecting activity and the probable volume of upcoming work. The system worked as follows: Each managing partner would use a chart to Keep track of the staffing requirements of all existing and prospective projects. A six-month time line, starting with the current week, would run actoss the top. Down the left side the partner would list projects grouped into four categories: Ongoing, Sold-but-not-Started, Submitted Proposals, and Prospects. He would then fill in the boxes with the number of junior and senior consultants each project demanded or ‘would demand per week and then sum each column, For bids not yet won, the managing partner would calculate expected staff utilization by applying to each contract an estimated percentage probability of winning it. He could then monitor total projected utilization for each ‘week on the chart and use the chart to run weekly staffing meetings with the other pariners, ‘The chart would allow staff meetings to focus on how to hita particular utilization target and where the pressure poinls were for new client work, The chart could also provide useful information to top management on the activity at individual offices. Jn 2009, when the founders had explained the monitoring system to the rest of the partnership, most of Uhe partners had strongly opposed its adoption. The managing partners, whose acceptance was critical, were particularly negative. They had considered the proposed system a time-consuming, bureaucratic activity that would intrude on their freedom to manage their offices autonomously. ‘They had persuaded the founders to abancion the idea based on two arguments: 1. We have always been a decentralized partnership, in our philosophy and practices, there is no evidence in our financial performance that the current arrangements are inaclequate; and 2, There is no need for a detailed monitoring system to manage utilization levels since we already have the right financial incentive in place for all partners. Managing partners worry about prospecting and utilization daily—as do all partners—because the size of their paychecks depends on their annual revenue contibution,Automation Consulting Services 190.053 ‘The three founders now discussed how best to revisit the issue with the entire partnership: Cliff: This Seattle problem has convinced me that our financial incentives alone are not a foolproof way to control utilization. Jack: 1 agree. But you know that some partners will say the incentive system is just fine, as Jong as partners apply good judgment. Some of them will point the finger at Margolies [Seattle managing partner] and say he screwed up despite the incentive system. Angela: Let's try to put aside the issue of blame for now. We need to install some preventative measures so this doesn’t happen again. We have to persuade the managing partners to adopt some sort of monitoring system. We may have to agree to let them run it on a decentralized basis to get their cooperation, Cite But { think the system has to be centralized. Those staffing charts would provide extremely useful information to the three of us, We need to know what sort of prospecting activity is occurring at each office to help us with resource planning for the whole firm. Where should our next office be? What skills should we be recruiting? What sorts of bids are we losing out on? What are our competitors doing? A centralized view of the prospecting charts would also help us to better serve our large multi-site clients — the ones we work with, or could work with, out of more than one office. Jack You're right. But in my opinion, a more basic reason to insist that some form of the reports reaches our desks is that if we don’t insist, we have no way of ensuring that everyone is adhering to the system and updating their forecasts on a regular basis ‘The discussion then focused on problems of implementation. All three wondered where to begin and how to get the partners to use it How sophisticated should the tracking system be? Should the system be maintained by partners or should new staff specialists be hired to implement and run the system? How frequently should it be updated? How often should reports be sent to the Executive Committee? Finally, the discussion returned to whether centralized monitoring would really be necessary as long as they had good managers using the data in each office. Boston Like the two offices discussed above, the Boston office was also confronted by a dilemma that the Executive Committee believed could become a company-wide concern. Alan Shapiro, a Boston partner, had recently won a bid to oversee the automation of a university library cataloging and ordering system, ACS had never before served a client in a non-manufacturing business, and one month inte the project, ACS’ inoxperionce was revealing itself Not only was the project running over budget and behind schedule (that had happened before), but it looked like the project team would have to bring in an outside specialist in catabase management lo complete the work promised to the client, ACS had never before “subcontracted” work When the proposal for the job had initially been prepared, Angela and Cliff, who jointly managed the Boston office, had been wary about ACS’ ability to meet the prospective client's needs. They had decided, however, to let Shapiro make the decision himself as to whether to bid for the job. Angela identified two issues that the founders had to address—apart from dealing with the specific project. In her words, “First, we must figure out how to guide the firm's strategic direction and expertise so that we are nol working on an ad hoc basis, relying on individual partners’ clecisions190.053 ‘Automation Consulting Services to bid for one-time projects. Ancl second, if we are to articulate a strategic direction for the firm, we must determine what it should be with respect to manufacturing versus service sector clients. The service sector is growing rapidly and dramatically increasing its use of technology. But the most effective way to employ the firm’s existing skill base—given the sorts of people we have already hired and developed —is to focus on manufacturing,” In addressing the strategy-setting process, Jack commented, "The three of us have always considered ACS to be a consulting firm exclusively for manufacturers, and I think that we have assumed that the partnership both understands and agrees with this focus. Maybe we've been lucky that the firm has maintained its strategic focus as long as it has. It's time we bring the whole partnership together to discuss and draft a long-term plan. The partnership should develop a set of criteria that defines our strategic focus and then cach partner would be required to use the criteria as a check list in determining whether a prospective job fit within our core business. If it doesn’t, he walks away from the project.” Cliff and Angela agreed with Jack that it was time to think abouta longer-term strategy and put it down on paper, but they were wary about getting into formal planning and strategic checklists. Cliff also worried, “What if we cannot reach consensus, or if we do not agree with the general consensus among the rest of the partnership? A discussion among all partners could be very time-consuming, especially if we feel our strategy should be reviewed annually. 1 wonder if this decision as to our future strategy isn’t a call we should make ourselves and then just communicate to the other partners?” Philadetphie Jack Leland, who managed the Philadelphia office, sensed a problem at his office that he suspected ran through the whole firm. He was concerned that the focus on revenues, at the exclusion of expenses, had allowed! various expense categories at the office level to creep up and get out of control. (See Exhibit 3 for firm-wide income statement) Jack explained his concern: As revenue centers, the offices are not given explicit ine-by-line budgets for expenses. So, although the managing partners are given overall expense budgets, they do not really worry about the level of specific expense categories. The number of dollars being spent on recruiting events, office equipment, training, and other “supporting” activities has been creeping up, but ‘we don’t have the detailed expense information to react, The limited itemization of costs on the P&L may have been adequate a few years ago. but now there are a lot more things buried in that 15% to 20% called “Other Expenses” that we ought to be monitoring, The founders discussed the ramifications of converting each office to a profit center so that partners would have incentives to manage costs more closely. Despite the benefits of greater control over costs and profitability, they hacl concerns about converting ACS offices to profit centers. First, there were the challenges of implementation. They would have to negotiate profit targets with each managing partner. Would the local partners resent this interference with the way they ran their practices? And how much time would the process take? The switch to office profit centers would also require changes in their incentive plan, which currenily rewarded partners based primarily on firm-wide growth and profitability rather than office-specific profits. With compensation tied solely to individual office performance, would partners still be motivated to help other offices and maintain a unified, firm-wide image?Automation Consulting Ses 190-053, Lastly, as Cliff noted, “It is somewhat of a Catch-22. On the one hand, we don’t want to send out new signals that conflict with our basic goal of revenue growth; but on the other hand, as our growth rate inevitably slows down, cost control becomes increasingly important. It will become more difficult to absorb cost increases.” Day One Wrap-Up ‘On Saturday evening, the three founders spent an hour reviewing their notes and jointly summarizing the major issues raised during the day's discussions. Sunday would be spent attempting to develop solutions for these issues. Exhibit 4 reproduces the outline they developed Saturday evening,uo oe opm yunospeoy eIydlopuliud g roqp99 allay por paoy ID sm Peay] UoIsO4 » IL st 90S we HAS euorssajorg [OL r r a @ sapossy pue soreinossy rontag = ¥ ® $ g sqedyung ~ € € © 9 (sioujred SurSeueur Suipnpuy) some — yoxoquiny, poo ‘> $04 smjoBeyyg uve : sauna Ruvdeueyy soueg Busey, sougceg BarBeveye Gutaeal asol Nvs TLLLVas VIHd 130 V Hd NOLSO@ pea > pwr, Broqpiog 'y SELLLIWINOD FALL EXa, (tog un) sey uogezuefig seariag SunlnsueD HoMNeWOINY LEQ “8 E0061Automation Consulting Services r90053, Exhibit2 FY 2011 Summary Statisties—By Office Boston Philadelphia Seattle San Jose Revenues, $28,776,400 $15,602,278 $10,752,750 $9,270,000 Utiization® (annual average) 0% 78% 1% 82% No. of projects completed during FY 82 24 8 8 No. of cients served during FY 29 2 8 "1 "Utilization = (Professional hours bila to clients) + (Total available professional work hours).“snoaueyoosa pur sesyew ures; ‘uoddns Buyrupas “Aces saseqetep aur-0 suoR: ‘uoyestanUHe>s|61 UE ‘ssauied 6; youd jo vonna sp Sopn 2x9 yoy duwoxauey pu jeuossyord Jo) ee woe yee ner mee (xer91d) wiBsEW IYO eeo'eui'izs coe'isi'es. £20'L00'r § ose'ves' $ oiz'sav's $ (eraid) awoouy zeruze'ey 00 poz'aL's woo Aaeiss's 00 SL9'L20"s %00} ——08s'082"e eon, CTSLEL et rs oae Pr wz ovE mer BLE War vevOuve p!94I0, oau'hie'e OL zue'aee er sze'ene't yon eee Lb zeg'ace'e luauidinbe pue seliddns eze'our's wen 98e'saz mor zr'su9 01 z9e'2o4'b wet ezo'zee'z seman pus quay Zv0'990'EZ %Ls SLe'Ley'e WLS Ser'ere'e yes 299°280'9 40S 360'079'6 eslyeueg pur Auejes ssosuedx3, Ser'or'ves. ooo'ozz'es: oss'zsu'ors suz'zoosis cov'gez'aes ‘senuenoy wer ‘saOT HES aes Taper WIS, L wawtaieis 5507] puv ayoug Azeuung [10 LeaQ [Poste SaDLAISg SuN|NsuOD UOREMOINY — EaqnUNE “OF eso0st‘Automation Consulting Services 190.053 Exhibit4 Executive Committee Retreat AUTOMATION CONSULTING SERVICES AUGUST 11, 2012 DAY ONE SUMMARY--Prepared by Cliff Reed + ASOUR FIRM’S SIZE AND EXPERIENCE BASE CONTINUE TO GROW, THE SET OF OPPORTUNITIES THAT WE CAN PURSUE GROWS EXPONENTIALLY. WE NEED. MORE FORMAL MANAGEMENT SYSTEMS AND PROCEDURES THROUGHOUT ‘THE PRACTICE IN ORDER TO: 1) IDENTIFY AND MAINTAIN A UNIFIED COMPANY STRATEGY AND IMAGE. 2) MAINTAIN A HIGH AND PROFITABLE GROWTH RATE 3) COMMUNICATE GOALS AND RESPONSIBILITIES TO EMPLOYEES 4) EFFECTIVELY MOTIVATE AND MONITOR PERFORMANCE. 5) FACILITATE THE SHARING OF KNOWLEDGE AND IDEAS AMONG OFFICES: + THE EXECUTIVE COMMITTEE AND ACTIVE PARTNERS ALREADY HAVE MORE THAN ENOUGH RESPONSIBILITIES. WE MUST FIND A WAY TO LIMIT THE AMOUNT OF TIME THAT WE DEVOTE TO NEW MANAGEMENT SYSTEMS AND PROCEDURES. + ASPIRIT OF ENTREPRENEURSHIP AND CREATIVITY IS QUR STRENGTH AND WE MUST MAINTAIN THAT SPIRIT IN THE FUTURE, ANY NEW MANAGEMENT SYSTEMS MUST BE CONSISTENT WITH THE FIRM'S CULTURE AND OVERALL STRATEGY IN THE SIGNALS THEY SEND TO OUR EMPLOYEES. i