Monitor Company Group LP

Why even Porters Five Forces failed to save Monitor ?

About Monitor Group

Considered the #4 firm behind McKinsey, Bain and BCG Founded in 1983 by six entrepreneurs with ties to the Harvard Business School, including legendary Michael Porter Specialized in providing strategy consultation services to the senior management of organizations and governments People declined MBB (McKinsey, Bain, BCG) offers to go work at Monitor

November 7, 2012 - Monitor's US subsidiary filed for Chapter 11 bankruptcy

January 11, 2013- Officially bought out by Deloitte

So what happened ? Why does a firm goes bankrupt ?

Two Reasons
Reason #1 : Not enough sales (or profit margin) Reason#2 : Excessive Sales

Reason#1: When Revenue < Costs, You cannot pay your Bills Reason#2
Let us talk about cash flow Cash inflow = Deposits to Bank A/C &

Cash Outflow = Withdrawals from Bank A/C

Reason2#Cash Flow
What is the difference between Revenues and cash inflow ? What is the difference between costs and cash outflow ? ANSWER TIMING General Rule Its advantageous to get paid by Customers early & deliberately pay your bills after 30/60/90 days Positive Cash Flow Cycle (Working Capital adequacy) Most Fortune 500 companies have the negotiating power to have a positive cash flow cycle
For example, if you want to sell your products in Wal-mart, they will place a $10 million order today, but pay you for that order in 4 - 6 months

Conversely, if you get paid for your products and services months after the sale, but you must pay your employees and suppliers immediately, this is a negative cash flow cycle

A small business that's trying to sell to a Fortune 500 customer, will often have a negative cash flow cycle

Negative Cash Flow & Bankruptcy

Quite Possible to go out of business by having TOO MUCH REVENUE Not Having Enough CASH to bear the expenses
Financing Cost Supplier Costs

Employee Cost
Infrastructure Cost

Flawed Assumptions in Original Analysis

Hidden Problems in project execution

Positive cash flow doesn't buy you happiness, but negative cash flow definitely gets you misery.

What happened to Monitors Cash Flow?

DENIAL (Impacted by global recession of 2008)
Underestimating the severity of the problem , Too little to address the problem

Magnitude of solution = Magnitude of PERCEIVED problem BUT

Magnitude of solution < Magnitude of ACTUAL problem Reduced workforce by 20% in 2008

BLOW TO REPUTATION
Muammar Gaddafi was a client that hired Monitor to improve his image in the Western media Working with the Libyan dictator with questionable ethics, helped writing the PhD dissertation of one of his sons for LSE

Despite additional funding of $ 50 mn, they were unable to generate revenue

THREE TAKEAWAYS
Execution is HARDER than it looks

ALWAYS Protect Your Reputation

As Warren Buffet says, it takes a lifetime to earn a good reputation. It takes a few days to lose it all Reputation comes in two flavours
Integrity of words and actions Reputation by association

PRIDE and EGO are the most expensive costs in a business

Rather than admitting a moderate defeat, Monitor would rather be in denial, pretend nothing was wrong until they accumulated a massive defeat in the form of a bankruptcy failure
Steve Jobs re-joined Apple as CEO, he took over Apple when the company had roughly 90 days of cash left in the bank. Jobs stopped the Apple from "bleeding" cash and did it in 90 days. In comparison, Monitor had closer to 1,400 days to do the same, but couldn't. Monitor just did not EXECUTE

References

http://www.monitor.com/
http://www.caseinterview.com/monitor-group-bankruptcy#comments http://en.wikipedia.org/wiki/Monitor_Group