Case Study: Building Community at Terra Nova Consulting

Ken Ogata GarySpraakman York University

Three months after his appointment as president of Terra Nova Consulting, Terry O'Reilly faced his partners at their biennial conference over a weekend in February 2008. After the events of the past year, everyone at the partners' conference had anxiously awaited hearing his plans to turn Terra Nova Consulting around. With that in mind, he had begun to describe his plan to the partners:

Over the past forty years, Terra Nova has grown into a global firm, an elite firm within our industry, with offices on five continents. It's a firm each of you has had a hand in building, and it's a firm we can all be proud of. We've been successful, and we're respected for our technical excellence and innovative approaches, but now it's time for a change to meet the challenges of the future.

It's time to present a new image to our clients and employees. Something that recognizes our past excellence, while positioning Terra Nova Consulting for the future. It's time for a new name that will be recognizable internationally. While we are proud of our Canadian heritage and the Terra Nova name, I believe it is time to move forward under a new name that can transcend borders.

From now on, Terra Nova Consulting will be known as TNC. And to go with that new name, I propose a new slogan. One that reflects our experience and expertise in both geotechnical engineering and the environmental sciences. One that assures our clients that they have hired the very best. TNC will now be known for having "The greatest minds on earth."

And then Terry experienced the longest two seconds of his life. All he could feel from the podium was stunned silence. Then the room erupted. "Change our name? What the hell do you mean you want to change our name? We've put a lot of work into being recognized as Terra Nova Consulting! We're proud of our heritage!" And the slogan? Even though Terra Nova had won numerous accolades for its prowess in geotechnical (earth) engineering, the company portrayed a quiet confidence. "You can't say that we have the greatest minds on earth! How arrogant! We let our work speak for itself!" The partners as a group had let him know in no uncertain terms that this was too bold, too brash for their Terra Nova.

After that opening, his other ideas for change were summarily dismissed by the partners. Terry had based his ideas for change around rebranding the firm through a new name, logo, and slogan. He wanted Terra Nova to be regarded like McKinsey and Company, as the very best in the consulting industry. He had also hoped that rebranding the firm by shortening its name to an acronym (like IBMInternational Business Machines) would present a fresh face to its clients and instill a new attitude among employees. Finally, he hoped that the rebranding initiative would help create a new sense of shared values and identity at Terra Nova, one that would rebuild the former collegial atmosphere.

What Terry didn't get a chance to tell the partners, but which the board of directors and his executive team knew, was that Terra Nova still faced significant financial challenges. Although interim presidentMatt Ferguson had been able to stabilize the slide in profitability, several projects were still suffering cost overruns and write-offs. An even greater risk involved the lack of investment in company shares. Too many of the junior professionals did not see a long-term future with Terra Nova, and had avoided making the financial commitment of buying shares. Other senior partners had sent a message to the executive team about their dissatisfaction with the company's direction by refusing to increase their stakes. The lack of new equity and working capital had been offset through more expensive bank financing, which had negatively affected profitability. But technical excellence and working harder were no longer enough for success.

While several partners had privately acknowledged to him that change was needed, and the board had chosen Terry as president because of his fresh perspective, his proposals were too much, too fast for the partners. Terry had unknowingly stepped upon a few organizational political land mines. Longtime partner and vice-president Doug Hunter pulled him aside later in the hospitality suite to remind him that this was not how things were done at Terra Nova.

You've got to start with the top senior people and work your way down through the organization. Any major initiative needs consensus among the shareholders, and particularly the senior shareholders. But consensus isn't simply a majority, it has to be a lot broader than that. You can probably get 50 percent of the people on board in relatively short order, and then 25 percent more sometime after that, and then the next 15 percent to get to around 90 percent, but it takes time, a long time. The process is time consuming. But you can't force change from the top down. The partners won't stand for that.

Doug reminded Terry that consultation was key to decision making at Terra Nova. While administrative matters were usually made in consultation with the senior executive and/or office manager teams, larger strategic decisions needed buy-in and support from the partners. Former interim president Matt Ferguson later echoed Doug's advice:

Terry, you can't change Terra Nova through an authoritarian top-down style. The senior guys will just ignore your ideas if they don't like them. You need to sell your ideas gradually among the most powerful and influential partners. But you can't force them. It's like herding cats. They will fight you every step of the way if they're so inclined. They need to be convinced to go along like it was their idea all along. Sometimes the best you can hope for is that they won't stand in the way.

While Terry's ideas had not received a positive initial reaction, Matt had reminded him that part of Terra Nova's culture involved challenging new ideas to see if they could pass the test.

You've got to remember, Terry, that a lot of them come from very critical backgrounds in science and engineering.Sothe first thing whenever they see anything new, the first they look for is holes, and try to drive tanks through them. Part of that may be human nature, but I think it's stronger in our organization because of the nature of the staff that we've got.

Terra Nova ensured success by challenging new ideas. This was part of their quality assurance process. For Terry, surviving the initial challenge was only the first step. He needed to rework his ideas, and map out a plan, then convince the senior partners of the need for change.

Company History and Past Practices

Terra Nova, a premier engineering consulting firm, was founded in 1970 by a small group of ten engineers. The first office was located in asecond floorapartment on King Street in Toronto, Canada. Terra Nova founder AdamDanylukdescribed the firm as starting as a boutique operation that specialized in geotechnical (earth) engineering consulting related to civil engineering projects. The firm had benefited from a series of major highway projects that required specialized ground engineering technical studies on soil conditions and rock formations. Terra Nova had subsequently expanded by providing engineering design work for other public works projects including subways, bridges, and dams.

In the 1980s, Terra Nova provided geotechnical services to the mining industry, involving ground control issues. Expertise in groundwater and hydrogeology was added to address contaminated soils and site remediation problems. Technical excellence and innovative solutions on these projects led clients and industry partners to regard Terra Nova as an elite firm within the industry. The firm continued to diversify its portfolio of services, and ventured into the biosciences including wildlife habitat, air engineering and modeling, and archaeology, to address the environmental impacts associated with development projects. But Terra Nova's engineering heritage remained its core.

Longtime partners tended to describe the firm as a place where one worked with friends rather than coworkers. Although Terra Nova was regarded as an elite firm, its compensation was only comparable to the industry average. As noted by former Terra Nova junior professional engineer Mark Davis:

Terra Nova was a great place to work in almost every aspect except pay. I was getting paid well below average for engineers in my graduating year initially. But although Terra Nova paid below average, there are worse companies in this industry . . . While I have no complaints about the management of the company or how I was treated there, I felt that I had to leave Terra Nova. I could not support my family in the long term with my existing and projected future salary. However, I wish to clarify that for its field (geotechnical and environmental consulting) there is no better place to work. I don't think there's a better company in this industry than Terra Nova.

What attracted staff to Terra Nova was the opportunity to be involved in challenging, innovative projects, which generally were only awarded to technically superior firms. Junior professional staff were given much greater opportunities and responsibilities as members of Terra Nova than their former peers now employed by competitors were given. In addition, they were able to work alongside some of the best engineers in the industry. This allowed them to develop their technical skills and knowledge in ways not possible elsewhere.

Many mid-career staff were attracted by the opportunity to share in the firm's success as shareholders. Several had come from competitors, where only senior partners were allowed to buy shares, and advancement to partner was tightly restricted. Terra Nova afforded them with greater opportunity to not only become owners, but also to reach the partner level. Finally, Terra Nova provided them with the opportunity to become experts within their fields and applauded entrepreneurial initiative to develop new lines of business. Partner and office manager Henry Cooper had briefed Terry about the firm's past as follows:

When this firm started, it was built around strong personalities that were basically sole practitioners in a technical area in a particular geographic location.Sowhat happened was we moved into certain technical areas through the sheer power and motivation of individualssaying, "we're going to do that. I'm going to move into that area of business. I'm going to become the key guy in that area."Sowe got into rock mechanics through Josh Halladay in Vancouver. We got into the nuclear waste business through Jeremy Davis in Seattle. We got into the oil sands through Sid Anderson in Calgary. Just by the sheer weight and power of these individuals' personalities. It wasn't a group of people sitting around strategizing. There might have been an element of that, but it took one individual to actually be the champion and drive it.

The firm's growth strategy reflected its philosophy of seeking to meet clients' needs. Clients asked if Terra Nova could do related technical work (e.g., site remediation, environmental impact assessments). Not wanting to turn down additional work, Terra Nova project managers usually agreed, and then sought appropriate partner firms to subcontract the work. As demand in these areas grew, Terra Nova formalized these arrangements through mergers and acquisitions, bringing the relevant expertise in-house. This led the firm into a variety of new industries as different opportunities became available. As Terra Nova expanded and diversified its portfolio, it also employed an increasingly diverse mix of professionals and technical disciplines. Many members held graduate degrees within their respective disciplines (e.g., biology, geology, archeology, engineering), and the firm continued to seek out the top graduates.

Terra Nova's office locations varied considerably in size from under thirty to over 200 personnel, and were typically in suburban, corporate office buildings. Entrance area walls were adorned with firm awards such as best employer, technical excellence, community service, or pictures of the firm's founders. Offices were professional looking, yet modest, with a combination of formal offices and cubicles. Individual offices averaged about 120 square feet in size. There was limited variation in office size between professional staff and partners, such that even retired founder AdamDanylukdid not have a window/corner office, nor was there an executive office suite area at the firm's head office.

Terra Nova generated revenue by charging the working time of its professional staff to competitively acquired projects. Since office chargeability was highly correlated with profitability, chargeability became the key organizational objective and measure of performance. Chargeability targets ranged from 80 percent for partners, 85 percent for project managers, to 90 percent for professional staff. For example, professional staff whose days and weeks were 100 percent charged to revenue-generating projects were deemed to contribute more to Terra Nova than those who were only 90 percent charged out. At the partner level, contribution to the firm was also measured in terms of winning new client projects and developing new lines of business.

Organizational Structure and Management Style

When Terry had joined Terra Nova through a merger five years ago, he had asked some of the other partners for an organizational chart. He discovered that no formal organizational chart existed because according to the other partners, "Terra Nova has a flat organizational structure." Partners, project managers, and professional staff were all assigned to various project teams that sometimes spanned multiple offices.

Terry had found Terra Nova's structure confusing at first. Partner designation was not based upon tenure, but upon technical excellence and contribution to the firm. In addition, owners of acquired firms who decided to stay were often made partners. Partner turnover due to retirement was often uncertain, as many elected to stay on after reaching the age of sixty-five. Accordingly, partners ranged in age fromforty to seventy-two years old. Historically, Terra Nova's partnership numbers represented about 15 percent of total staff, while consultants represented about 80 percent of staff.

Partners served as project managers or office managers. Many partners avoided the office manager positions, preferring to be directly involved in project work. Thus, most but not all office managers were partners. Project teams could involve a mix of junior (less than fiveyears experience) and senior professionals, in addition to partners, depending upon the scale, scope, and technical requirements of the project. Finally, shareholders could be found at any level, ranging from receptionist to board member, as ownership was not restricted by position.

Informally, Terry saw five levels at Terra Nova, starting with the board and partners who provided general oversight, then the president, executive team, and office managers, followed by project managers, professional staff (junior and senior by tenure), and administrative support staff. Ultimately, the partners were in charge, as they elected the board of directors. The board in turn appointed the president, and approved the firm's overall strategic direction. The president was responsible for managing the firm's strategic direction with the support of his executive team, and the office managers were responsible for day-to-day operations. Project managers and partners were responsible for identifying, winning, and managing projects, and generating profits by staying within budget and avoiding overruns. Partners tended to be the project managers for larger projects. Professional staff were assigned to one or more projects, and were sometimes responsible for smaller projects. Despite this hierarchy, all members from the newest professional staff person to the most experienced partner participated equally in projects based on their knowledge and skills.

Combined with this flat organizational structure was a small corporate head office. The president's executive team consisted of two vice-presidents, the controller (CFO), and head of HR. Although head office designation was based upon the president's location, several executive team members were located in other offices as their appointments were deemed temporary.1

Several partners stated that they had avoided creating organizational charts due to their implicit aversion to bureaucracy and formal management controls. However, many of the junior professionals did not share this view. Geologist Chris Barker had described his office's (Vancouver) management style as follows:

In the past, we did it the way Bob [partner] said because Bob's king. And it worked. The firm hired excellent people whom people trusted, and they didn't have a problem following Bob. But now in an office [Vancouver] where there are ten Bobs [partners], and no one is quite sure which one to listen to, you need some protocols in management. Toronto though is a very managed group. They have a lot of training, a lot more corporate structure, so a lot of the junior professionals get a good feeling when they go to Toronto and work there. You know what it's going to take to move up, whereas here in Vancouver it's a bit of sink or swim, struggle to the top.

In contrast to many of the partners, several junior professionals had suggested the need for more structure, including the codification of policies and procedures regarding things like professional development, equipment requests, and international assignments.

Typically, Terra Nova's partners had earned their stripes first as professional staff, then as project managers, and were then promoted through a peer-review process. Some partners had gained advanced standing by virtue of their former positions as senior managers at other firms prior to joining Terra Nova via acquisition. Terry had come to Terra Nova this way. Terry's former partners at RMO Environmental wanted to retire, and had elected to "merge" their firm with Terra Nova. RMO had been a fairlyclose knitgroup of about forty biologists, scientists, and hydrologists that specialized in environmental impact assessment studies. The firm had been very much under the control of the founding partners, who typically saw things eye to eye. In contrast, Terra Nova's participatory democracy allowed partners to become involved in corporate level issues such as culture, strategy, and business planning whenever they disagreed. When and why they chose to exercise this prerogative, Terry had yet to fully understand.

Doug Hunter, partner and vice-president, had told Terry that the cornerstone of the firm's operating philosophy was to provide innovative, high-quality technical solutions on behalf of its clients. Each office operated independently, specializing in certain services in a particular geographic market. Offices were expected to remain profitable by generating their own project revenues and controlling costs. However, offices also operated collectively under the Terra Nova banner, pooling their capabilities and expertise to win and undertake large projects. In this way, Terra Nova leveraged the capabilities and expertise of all employees across the firm, thereby reducing individual office duplication, while facilitating technical specialization, and enabling efficient utilization of available resources across the firm. This collaborative approach also strengthened the ties across offices and promoted a collective mind-set. It was not unusual to have visiting staff dropping in to borrow offices and meeting rooms.

Ownership Structure

Terra Nova was a private, 100 percent employee-owned firm. Unlike traditional partnerships, share ownership was not restricted to partners, but rather was broadly distributed. There was a high level of participation, with over 40 percent of all employees owning shares, resulting in no one owning more than 2 percent of the shares. As such, no single individual or small group of staff could dictate firm direction through a majority position. In accordance with board policies, partners held about 80 percent of the shares available, while other employees held the remaining 20 percent. Although partners had to meet certain minimum share-holding requirements, many partners held more than the minimum as they deemed it to be a good investment, as well as a sign of their commitmentto the firm. As noted by two partners, this principle of employee ownership was a central tenet of the firm:

Employee ownership is number one. I think that if anyone tried to change the employee ownership structure of the firm, then the firm would die, because a lot of people are here for that very reason. It's something we use to attract people, and people come for that reason. If we changed that structure, we would lose a lot of good people. There were rumors floating around about two years ago that the President [Michael Erikson] was going to try and take the firm public, but the partners put a stop to any chance of that happening.

LuisCarbonell(partner)

There's an emotional attachment to this firm that to a large extent transcends monetary value. I've heard several of the old guys saying, "We didn't build the firm to sell it." I mean every timeanything other than employee ownership has been mentioned, nobody was interested in it. We wanted this firm to stay employee-owned.

Henry Cooper (partner and office manager)

Terra Nova employees were invited to purchase shares through an annual company-wide memorandum, which indicated the total number of shares available, the price per share (based on book value), and payment terms. The number of shares available in any given year varied, based upon how many treasury shares were available, and how many shares were being sold (due to retirement or termination of employment). Share allocations though, did not always match demand. First call on available shares was reserved for staff who had been promoted to partner but did not hold enough shares to meet their ownership requirement. The remaining shares were then prorated in response to requests. Financing for share purchases was not available from Terra Nova; nor was there a payroll deduction plan.

Several shareholders had expressed to Terry that employee ownership provided a sense of community, a common bond between employees as the firm expanded, and the basis for a philosophy of acting in the firm's best interest. It also allowed partners and others to "participate" in the firm's success through annual dividends. Finally, the acquisition of shares by staff helped finance the firm's operations, and reduced the need for more expensive external debt financing. However, many junior professionals had declined to commit financially to the firm, and even some of the partners were refusing to increase their stakes.

Without sufficient employee uptake, Terra Nova had to buy back and hold retiree shares, increasing the firm's debt financing requirements and reducing cash flow. The controller had suggested to Terry that the firm consider the idea of going public like other firms in the industry.²

Organizational Culture

Like many other professional service firms, management control was not exercised through traditional, top-down hierarchical command. Employees were expected to be self-managed and motivated, but to act in accordance with organizational values, norms, and objectives. Thus, communication, cooperation, socialization, and rigorous hiring practices took on added significance to ensure proper fit and alignment of employee actions with organizational goals.

Terra Nova had traditionally sought like-minded individuals through existing personal contacts, hiring friends, work acquaintances, and referrals from trusted colleagues. In particular, the firm actively sought the best students from top universities. But with growth came the need for recruitment of cold contacts where there was no prior relationship or referral. Even potential merger and acquisition candidateswere screened for cultural similarity. Partner and office manager Henry Cooper explained,

Oh, the fit's everything. Every merger and acquisition that we've undertaken, the cultural fit with us was absolutely paramount. I mean if there's no cultural fit then it's pointless even embarking on the process. Is this firm's value system the same as ours? Are they interested in doing quality work for quality clients? Do their people have an ownership mentality? Are they going to be comfortable with Terra Nova's fairly flat, non-hierarchical structure? Are they comfortable with a culture of employee ownership? All these things are key. If the cultural fit isn't there then it's pointless proceeding,'causeit won't work.

Terra Nova's official core values (seeExhibit 1), were described as reflective of the founders' personal values, and had been reinforced over time as part of "how we do business."

Exhibit 1Terra Nova Consulting Cultural Principles and Core Values

Principle	Core Value
Employee ownership	Responsible participation in business success and ownership. Sustainability of financial return to shareholders.
Collegiality and self-actualization	Supportive of personal growth, learning, and risk taking. Integrity in relationships, commitments, and service.
Technical excellence	Reliable, innovative, cost-effective solutions. Professional, cultural, and business diversity.

Source:Terra Nova Consulting

Notwithstanding this generally positive characterization of Terra Nova's culture, former president Matt Ferguson described Terra Nova's culture in the past as follows:

We used to joke that a new arrival was taken by the scruff of the neck and the seat of the pants and dropped into the deepest pool we could find while the senior people stood around and watched to see if he would sink or swim.

Corporate Financial Position

Terry thought back over the events of the past two years. It had begun in mid-2006 with Michael Erikson stepping down after ten years as president. Although the firm was still profitable, it had been suffering declining financial performance and reduced profitability. Traditionally, Terra Nova had enjoyed income before taxes as a percentage of fee revenue of 15 percent or more (seeExhibit 2). Even though fee revenues had continued to increase, project cost overruns, increased overhead, and billing and collection delays had negatively affected earnings. While the financials did not suggest that Terra Nova was in danger of bankruptcy (see Balance SheetExhibit 3), Terry was still concerned as he regarded the decline in financial performance as reflective of deeper organizational problems.

The decline in profitability was beginning to restrict Terra Nova's operations. Net profit needed to be about 7-10 percent of fee revenue to fund normal growth. More troubling for Terra Nova though was the lack of interest among employees in purchasing shares. Many of the junior professionals were not prepared to invest and commit to the firm, while older employees recognized that Terra Nova was unlikely to produce the strong dividend returns of the past. Moreover, older partners needed to divest their shares as they approached retirement, but could not if there were no buyers. Without new investment, it would be difficult for Terra Nova to remain employee owned. Vice-president Doug Hunter explained:

I think what triggered it was that the firm had been going through a period of malaise for about two or three years, a sense that we had lost our direction. There was a sense that something was not right. Shares weren't selling very well at all. The employees were sending a strong messagethat they weren't interested in making that financial or emotional commitment to the firm. The quantity of shares that we had in trust was becoming a reasonably significant potential financial liability. How long we could let that go on before we had to bring in outside investment was unclear. But that would result in a huge shift in culture.

Exhibit 2Terra Nova Consulting Income Statements ($000)

Source:Terra Nova Consulting

Note:TNC uses the following definitions:

Fee revenueactual revenue received from consulting projects. Direct laboractual labor costs charged to consulting projects. Allocated overheadcosts charged to projects. General overheadcost of operating groups, corporate office, and other costs. Chargebacksto clients (e.g., equipment rentals, printing).

Exhibit 3Terra Nova Consulting Balance Sheets ($000)

	2001	2002	2003	2004	2005	2006	2007 Prelim.
Assets
Current assets
Cash, investments	$5,663	5,865	6,001	6,291	6,647	7,575	6,962
Accounts receivable	13,629	14,038	15,020	15,922	19,628	19,217	21,685
Work in progress	11,582	15,105	20,070	22,883	25,070	24,745	23,294
Prepaid expenses	127	14	2	47	0	0	543
	31,001	35,022	41,093	45,143	51,345	51,537	52,484
Investments	41	44	46	50	904	1,699	3,099
Net fixed assets	6,002	6,336	6,652	6,985	7,218	7,584	7,720
Other assets	797	855	851	872	885	937	1,307
Total assets	$37,841	42,257	48,596	53,050	60,352	61,757	64,608
Liabilities and Shareholders' Equity
Current liabilities
Bank overdrafts	$140	92	447	563	980	2,329	1,287
Accounts payable	8,490	8,336	8,772	10,076	14,673	14,343	11,845
LT debt due	0	0	0	0	0	3	737
Deferred revenue	22	80	0	190	0	0	502
	8,652	8,508	9,219	10,829	15,653	16,675	14,371
Long-term debt	6,350	6,350	6,350	6,350	6,350	6,347	5,845
Shareholders' equity
Capital stock	3,837	3,837	4,337	4,337	5,219	6,001	7,360
Retained earnings	19,002	3,562	28,690	31,534	33,130	32,734	37,034
Total shareholders' equity	22,839	27,399	33,027	35,871	38,349	38,735	44,384
Total Liabilities and Equity	$37,841	42,257	48,596	53,050	60,352	61,757	64,608

Source:Terra Nova Consulting

The lack of employee investment through share purchases had resulted in a buildup of treasury shares. The reduction in shareholder capital had to be covered from other sources, including drawing upon a line of credit with the bank. Exacerbating the situation was the need to buy back shares from retiring partners, some of whom had amassed sizable holdings. These increased financing costs correspondingly resulted in a further drag on profits.

Organizational Assessment

Matt Ferguson had agreed to take over as president on an interim basis in November of 2006, and had managed to improve profitability by reducing project overruns and controlling expenses. Still, a growing number of partners had told Matt that they were concerned that something was still not right at Terra Nova. Several partners had heard from friends at competitors that some of the junior professionals had started exploring their options. Another noted that their academic contacts had become reluctant to recommend Terra Nova to their best graduating students, citing a negative work environment.

In the spring of 2007, Matt Ferguson asked OCI Consulting, an HR specialist firm, to conduct an organizational assessment. OCI Consulting administered an instrument they called an Organizational Cultural Inventory that assessed and mapped out Terra Nova's culture into twelve cultural styles, grouped into three orientations, Constructive, Passive/Defensive, andAggressive/Defensive.

Four monthsagoat a special meeting of selected Terra Nova partners, OCI Consulting had announced the results of its study (seeExhibits 4and5). Terry had been unable to attend as he was visiting clients in Australia, but had heard about what happened later from his colleagues:

Yeah, it was October 25 of 2007. Dr. Frank Chow, president of OCI Consulting. He was a very credible guy, he had an undergraduate degree in engineering, his PhD was in psychology. He spoke well, he was articulate, and he could really defend himself. You can imagine the subset of Terra Nova folk who are very technical, where they're going to question everything. But we believed what he told us, I think to a person believed it, and came away with a commitment to change.

There were two things that stood out that OCI Consulting told us. One was, the senior people in this firm were completely out of touch, we had developed some bad habits. And the other thinghe told us, actually he prefaced it. He said, "Some of what we're going to tell you is our opinion, and we'll tell you if it's our opinion, you can take it or leave it. Some is fact! It's a fact that if you don't change, you'll stop being an elite firm!" And that caught people's attention.

George Garcia (partner)

Oh yeah, those overheads that Chow produced show this dramatic disconnect between what the founders, what the partners and key shareholders of the firm thought and the rest of the firm. Those two overheads were shock therapy of the first order. Jacob [board member] often says, you know, it was OCI Consulting that held our face up to the mirror and made us look at what we were and we didn't like what we saw.

Henry Cooper (partner and office manager)

JeffTaverefrom OCI Consulting had described the meeting to Terry as follows:

At the meeting where the results were presented, there was an initial reaction of denialthe results couldn't possibly be right. Yet as the meeting unfolded, I think there was an awakening"We had better pay attention to this because this could be quite significant for our future." The meeting was quite animated to say the least in terms of people standing up and verbally throwing things.

OCI Consulting's brutal assessment echoed in Terry's head. Terra Nova would cease to be an elite firm within eighteen months if it did not address its dysfunctional culture, and could even fail! That was the unequivocal message from the HR experts. Nevertheless, he and several of the partners remained skeptical. Surely Terra Nova wasn't in that bad shape, especially since Matt Ferguson had started to turn things around financially. Revenues were up, costs down, and they had managed to retain their key clients. How could this cause the downfall of the entire firm? But he had to admit that the partners did not see eye-to-eye with the next generation of junior professionals regarding the firm's culture. And that was the message already being relayed by some partners to others in the firm.

As it was explained to the general audience in the Toronto office, the OCI Consulting people said, there's some things we're going to tell you that are fact. And if we say they're a fact, you can guarantee they're a fact based upon our however many years of experience and all the studies. Number one fact is, if you don't change, Terra Nova will cease to be an elite firm!

Naveen Jindal (project engineer)

The study had revealed a wide divergence between the actual and desired culture among members. More importantly, the survey revealed a wide gap between the perceptions of partners and others. JeffTaverefrom OCI Consulting explained:

The first thing was a striking disconnect between the senior team and the junior team. By that I mean the partners thought things were fine, everything was going well, while all the others had a very different experiencethey felt very disconnected from what was going on.

Sothe results matched the description that people were using of the environment as a "shark tank." The circumstances disengaged the junior professionals because they didn't know quite how to operate in that environment.

The tables Dr. Chow from OCI Consulting had shown the partners at the meeting were later circulated to the other partners, including Terry. The first table(Exhibit 4) showed the size of the gap between the ideal and actual cultures at Terra Nova for non-partners. The second table(Exhibit 5)indicated where there was agreement (or not) among Terra Nova staff. Weak agreement indicated a lack of consensus or divergent viewpoints, whereas strong agreement indicated what was preferred. Unfortunately, there was more divergence of opinion between the partners and non-partners ratings than there was convergence.

Partners tended to rate the firm's culture high on the Constructive orientation for both the actual and ideal culture. For them, Terra Nova was the ideal place to work. Non-partners including junior professional staff also ideally desired a work culture that was high on the Constructive orientation. However, in contrast to the partners' perception of the firm's espoused culture, non-partners tended to perceive an actual Aggressive/Defensive cultureone high on perfectionism, power, and critique (oppositional). As noted by one project manager:

But for the Calgary Office in 2004, the culture was still the old style for a lot of engineering or special services companiesa very, I don't know what the word is, aggressive or confrontational, almost, in some respects. It was not unusual to have partners of the firm standing out in the hallway pretty much screaming at each other, and then walk down the hallway and have a coffee with each other.

LuisCarbonell(partner)

Exhibit 4Summary of Terra Nova's OCI Results

Style	Actual	Ideal	Gap
Constructive	%	%
Humanistic/Encouraging	23	95	-72
Affiliative	13	80	-67
Achievement	41	94	-53
Self-Actualizing	29	95	-66
Passive/Defensive
Approval	37	16	21
Conventional	43	17	26
Dependent	40	7	33
Avoidance	58	21	37
Aggressive/Defensive
Oppositional	74	75	-1
Power	58	31	27
Competitive	65	40	25
Perfectionistic	61	42	19

Source:OCI Consulting

Note:Percentage represents those responding either "strongly agree" or "somewhat agree." Gap reflects the amount of divergence between the actual and ideal culture for that particular style.

Exhibit 5Summary of Intensity Variation (standard deviation)

	ACTUAL	IDEAL
Style	Std. Dev.	Intensity	Std. Dev.	Intensity
Constructive
Humanistic/Encouraging	6.27	Weak	3.87	Strong
Affiliative	6.23	Weak	3.97	Strong
Achievement	5.28	Average	3.54	Very strong
Self-Actualizing	5.21	Average	3.63	Strong
Passive/Defensive
Approval	5.16	Average	5.22	Average
Conventional	5.73	Average	4.57	Strong
Dependent	6.08	Weak	3.87	Strong
Avoidance	6.06	Weak	3.99	Strong
Aggressive/Defensive
Oppositional	4.39	Average	5.15	Weak
Power	6.29	Weak	5.60	Average
Competitive	5.80	Average	5.95	Average
Perfectionistic	4.79	Average	4.34	Strong

Source:OCI Consulting study

Note:The standard deviation (intensity) of respondent scores indicated the degree of consistency between respondents' opinions, ranging from weak (low) to very strong (high). High deviations indicate disagreement between members (weak intensity), and reflect the divergence between junior and senior member assessments, while low deviations indicate agreement between members (strong intensity).

Along with the survey, the OCI consultants had also conducted a series of focus group sessions. That exercise had laid bare some of Terra Nova's flaws.JaegwonKim, who had recently been appointed as a partner, summed it up as follows, "Over the years, Terra Nova has become a firm that appears to the younger professionals to be very dedicated to the partners, and not so much to the younger staff." Project manager CalvinMcClareyobserved, "You know, generally, the only management information we ever get as junior professionals is profit and chargeability." Marine biologist Anna Leung also noted the partners' lip service to espoused company core values,

The firm espouses core values such as sustainability and environmental responsibility, but does not actively demonstrate much commitment to those values if there is any economic or financial impact. The organization and its leadership do seem to mean well . . . [but] the unfortunate result within the Environmental Department is a feeling of slight environmental hypocrisy.

OCI consultants discovered through the focus groups that among the junior professionals there was a strong desire for greater work/life balance. Although hard work, extended out-of-town fieldwork and pressure to meet client deadlines were accepted as parts of the job, younger staff were not prepared to sacrifice their personal lives for the firm. There was alsothe perception that Terra Nova needed to provide more opportunities for the junior professional staff to develop their knowledge and skills. That combined with the authoritarian style of some older partners had left many junior professionals feelingmore like employees rather than colleagues. Moreover, it did not prepare them to take over in the future, a particular concern as the older partners retired or cut back their hours.

Subsequent internal employee satisfaction surveys revealed that whereas staff felt that their pay and benefits were only around the industry average, they were generally satisfied with their benefits (Exhibit 6). Many still expressed a desire to have a long-term career with Terra Nova, though admittedly few of the junior staff felt that way. However, there was also agreement that working at Terra Nova offered other important incentives:

Flexibility to work on a variety of projects, and thereby develop new knowledge and skillsAbility to work with acknowledged industry expertsA feeling of accomplishment and satisfaction in the work they didThe opportunity for career progression to partnerTerra Nova's reputation for excellence allowed professionals to work on interesting and challenging projects

In response to the surveys, most of the partners suggested that these incentives were still working as they had in the past. Other professional staff, however, perceived it to be very difficult to request projects for development and nearly impossible to get projects with other offices. Therefore, the junior professionals grew frustrated as they did not see any clear career progression.

The shockwave from OCI Consulting's report prompted the board in October of 2007 to seek a new president who could lead Terra Nova into the future. Although Matt Ferguson had done a commendable job addressing the firm's operational issues, even he admitted that he lacked the leadership skills and vision necessary to bridge the gap between the partners and others. Dr. Chow had suggested that a change in leadership might be needed to address Terra Nova's cultural deficiencies. The board initiated a search internally for someone with the necessary vision and innovative perspective to rebuild community within Terra Nova. It had been Terry's ideas about change and how to promote a more collegial environment that had convinced the board to select him as the new president. Bolstering Terry's case was the fact that he was the "youngest" available Terra Nova candidate, having joined through a merger only five years earlier. While he had been exposed to Terra Nova's culture and way of operating, he had not yet been "tainted" by the experience, and was able to bring a fresh perspective and new ideas to the table.

That had set the stage for the partners' conference in February of 2008, and the opportunity for Terry to lay out his plans for changing Terra Nova. But those plans had failed miserably, and now he needed a new approach.

Terry's Challenges

Terry realized that the proposed namechange, a new logo, and slogan would not solve Terra Nova's cultural divide. However, he had hoped that it would at least start to change the mind-set of the partners and foster a new attitude at the firm. Terry mulled over some of the challenges that lay ahead.

First, although Matt Ferguson had temporarily managed to rejuvenate Terra Nova's profitability, there was still the need to continue to improve project management procedures to avoid cost overruns and speed up collections in the future. Terry knew that the partners focused more on winning new projectsand technical excellence, rather than staying within budget on existing projects, or collecting payment once the projects had been completed.

Exhibit 6Employee Satisfaction Survey Results

	Tenure
Question	< 2 yrs.	2-5 yrs.	6-10 yrs.	11-15 yrs.	20+ yrs.
I hardly ever think about leaving this company to work somewhere else	81%	65%	67%	70%	92%
I think the way this company promotes people is fair	81%	62%	64%	49%	42%
Compared to other places I might work, I feel that I am fairly paid	76%	62%	76%	85%	67%
I feel I am fairly paid for the contribution I make to the company's success	79%	59%	67%	76%	75%
My performance has a significant impact on my pay increases	79%	60%	67%	64%	92%
If you have your way, how likely are you to be working at this organization
one year from now	95%	88%	93%	91%	92%
five years from now	81%	68%	87%	82%	67%
for the rest of your career	53%	54%	67%	73%	83%
Listed below are various factors that may be important to your overall satisfaction
advancement opportunity	82%	72%	78%	67%	92%
the "work" you do day-to-day	92%	85%	89%	85%	92%
your pay	71%	60%	67%	79%	75%
your benefits	92%	80%	84%	88%	100%
individual recognition (non-financial)	79%	62%	69%	58%	75%
% of Respondents	29%	30%	20%	15%	6%

Source:Terra Nova Consulting

Note:Original data "missing" 16-20 yr. category.

Second, Terra Nova faced a transition in leadership and experience at the partner/project manager level. Many partners were approaching retirement. They had built strong personal relationships with their clients, who would now be passed on to relatively unknown new partners. Moreover, these retiring partners had considerable technical knowledge and experience, expertise, and intellectual capital upon which Terra Nova had staked its reputation and business strategy. The firm's ability to manage the loss of this knowledge while developing new capabilities would have significant implications for its future success.

Third, many Terra Nova junior professionals had declined to commit financially to the firm. The lack of additional employee investment had increased Terra Nova's debt financing requirements, reducing cash flow and creating a drag on profitability. Although the controller had suggested taking the firm public as a way to lower financing costs, Terry had been cautioned by Doug and Matt against going that route.

Finally, there was the dilemma posed by the OCI Consulting study, and the cultural divide between the partners and junior professionals as a result of a highly negative organizational climate. The partners were reluctant to change, but they did not want to see the firm they had worked so hard to create collapse, or be sold to another firm. The junior professionals though were not committed to the firm, and it was uncertain whether Terra Nova's non-monetary incentives would continue to be sufficient to retain and motivate them.

Dr. Chow had suggested that a number of changes were necessary if Terra Nova was to survive as an elite firm. Among these was developing a more constructive culture, with greater respect for individuals that included work/life balance. Based upon Terry's conversations with founder AdamDanyluk, this had been the climate at Terra Nova when it was a much smaller firm. Dr. Chow had also suggested that Terra Nova move away from being a collection of individual practitioners, to becoming more of a team-oriented firm with shared corporate clients. This would shift the focus away from the older partners as they retired, and build the connection with clients to Terra Nova as a whole.

Terry thought he knew what was needed; what he didn't know was "how" and "when." He had hoped that the ideas he had presented to the partners would kick-start the process, but that now seemed like a non-starter. He knew he needed help with the "how," and hoped that Doug and Matt or some of the younger office managers might be able to help build the support needed for change. With that, he began to sketch out his new plan.

Notes

1.This structure is similar to that of other professional service firms (PSFs), where the majority of work occurs through project teams. (SeeAppendix Afor background note on professional service firms.)

2.PSFs may go public for various reasons including to finance expansion, and because of partner resource limitations.

Appendix A: Background Note on Professional Service Firms (Psf)

Professional Service Firms include 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 comprised groups of similarly educated and socialized professionals like lawyers, accountants, and doctors, who provide a specific type of service to a particular clientele. As such, single profession firms like law offices and accounting firms are likely to develop homogeneous organizational cultures and operating practices that are reflective of the values and norms of their particular profession.

PSFs have typically been structured as partnerships, where ownership is privately held by a small group of partners. In the case of law firms, this often resulted in naming the firm after the founding partners. Many PSFs typically provide standard or commoditized services like audits or training programs. Thus organizationally, many PSFs fall into the category of professional bureaucracies, where coordination occurs through similar training and certification (e.g., law school and bar exam), and socialization. However, the project-driven nature of consulting work often shifts the focus onto individual projects and temporary project teams, which is more typical of the adhocracy form of organization.

Adhocracies have highly organic structures, with little formalization of behavior. Job specialization is based on formal training. There is a tendency to group the specialists in functional units for housekeeping purposes, but to deploy them in small, market-based project teams for work purposes. There is reliance on liaison devices to encourage mutual adjustment (key coordinating mechanism), within and between these teams. Innovation means breaking away from established patterns, so adhocracies do not rely on standardization for coordination. Of the five configurations (simple structure, machine bureaucracy, professional bureaucracy,divisionalizedform, and adhocracy), adhocracies show the least reverence for the classical principles of management, especially unity of command. The adhocracy must hire and give power to expertsprofessionals whose knowledge and skills have been highly developed in training programs.

In contrast to professional bureaucracies, adhocracies are unable to rely on the standardized skills of experts to accomplish coordination, as that would result in standardization rather than innovation. Instead, adhocracies need to treat extant knowledge and skills as the starting point from which to build new knowledge and skills. In addition, new knowledge and skills presupposes the fusion of existing knowledge and skills. Thus, the specialization of the expert in professional bureaucracies is not appropriate for adhocracies, which must cross over the boundaries of conventional specialization and differentiation. In professional bureaucracies each professional can operate independently, but in adhocracies professionals must fuse their efforts into multi-disciplinary teams working on projects.

Over time though, as these firms engage in business relationships with increasingly larger and more complex multinational firms, the nature of client problems necessitates a corresponding expansion in the scale, scope, and diversity of skills available within a single firm. This in turn leads to an increasingmix of professionals with different technical backgrounds, professional norms, and codes of conduct (heterogeneous culture). It also prompts some firms to go public to acquire the financing needed to expand their operations.

Client engagements (i.e., consulting projects) come in a variety of forms. Consulting firms may be awarded projects as thelow costbidders, particularly where a competitive tendering process (request for proposal) is involved. Firmsmay also be approached directly by clients where particular expertise is required. Other clients may seek elite firms to provide an element of legitimacy to the final report/recommendations. In addition, client engagements may vary from one-off projects to standing relationships where firms maintain an ongoing relationship. Success on one-off projects may develop into additional contracts or even standing relationships, particularly where favorable working relationships are developed between project managers and their clients. Projects are typically negotiated by partners with prospective clients, and so positive client relations are often critical to firm success. Positive prior working relationships often translate into less complicated negotiations (faster approvals, less rigorous review of proposal, higher mark-ups) as clients are already aware of the firm's ability to meet their needs. This also results in significant cost avoidance as there are no proposals and less legal work involved.

All staff bill clients for their time at their charge-out rates, which tend to be mark-ups of two to three times their actual hourly wages. Higher quality/prestige firms are typically able to command higher charge-out rates. These charge-out rates need to cover direct costs such as staff salaries, firm overhead (administration), and profitability. Key to overall firm success is high chargeability (percentage of staff time available billed to projects) and charge-out rates (mark-up), with minimal write-downs of accounts receivables, staffing costs (optimal use of less costly junior staff), or project cost overruns (time and expenses). Timely billing and collection of receivables is important to maintain adequate cash flow and reduce firm working capital requirements.

Success requires delivering projects within budget and on time to earn a profit. This includes sound budget projections, proper staffing (number and mix), timely completion of work, and favorable mark-ups. Strong project management is thus critical for success. Typically, project management is handled by partners, while project managers and professionals provide much of the "grunt work," including fieldwork as necessary. Many partners though have achieved their positions through technical excellence within their discipline, and often developed management skills by doing rather than formal training. As such, many partners and project managers often lack knowledge of formal project management approaches, cost or financial accounting, or modern human resource management techniques.

Note

1.This background note is based upon Mintzberg's (1981, 1983) work on organizational structures, where he defines five key configurations: simple structure, machine bureaucracy, professional bureaucracy,divisionalized, and adhocracy.

1. Based on your analysis, report to Terry O'Reilly in which you provide your analysis and recommendations. In this report, include the following:
   • Describe the environmental influences (e.g. the PESTEs) that appear to be affecting this organization.
   • Describe what has gone wrong over the last three months.
   • Diagnose what needs to be changed in the organization, including:
     • All relevant environmental drivers
     • The organization's history and strategy
     • The organization's input factors, strategy, and outputs
     • A detailed visual model of the organization
   • Draft a relevant change vision statement for the changes that will take place.
   • Create a plan of action for implementing the change. This plan of action should include:
     • Objectives
     • Actions to be taken
     • Sequence of actions
     • Milestones for completion
     • Resources needed to complete the plan
     • Potential issues that may arise during implementation
     • A plan for managing the recipients of change
   • Create a plan for measuring the change you are recommending, including:
     • Measures that are linked to the objectives of the change
     • A balanced scorecard outlining the measures
     • A description of how and when the measures will be implemented