Describe the rise of FinTech

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Case study outline:

  • Executive Summary
  • Section A. Introduction and Overview of the Situation
  • Section B. Assumptions and Methods
  • Section C. Business Impacts
  • Section D. Descriptions of Sensitivity, Risks, Successes, Failures, Contingencies and Strategies
  • Section E. Conclusions and Recommendations

 

Questions – it is not enough to answer these questions. The answers should be embedded in the Case Report.

  1. Describe the rise of FinTech
  2. Describe the differences between FinTech and Banking
  3. Discuss R3 and the DLT Mission
  4. Discuss the applications of Corda and Strategies going forward include the potential for successes and potential risks.  Could Corda improve consistency?
  5. Discuss the emergence of FinTech in emerging markets and other industries
  6. What are the most important institutional features of the financial services industry and are these features consistent with recent developments in blockchain-type of fintech?
  7. Could such innovations help emerging markets to develop their financial institutions?

    IN1544

    R3:

    Putting the ‘Fin’ Back in FinTech

    01/2019-6451

    This case was written by Anne Yang, Research Associate at INSEAD, Xuexin Gao, Research Associate at PBC School of Finance (PBCSF), Tsinghua University, Hong Zhang, visiting fellow at INSEAD Emerging Markets Institute and Phoenix Chair Professor of Finance at PBCSF, and Massimo Massa, the Rothschild Chaired Professor of Banking at INSEAD. It was developed jointly by INSEAD’s Emerging Markets Institute and China Finance Case Centre of PBC School of Finance. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

    Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at cases.insead.edu.

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    COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.

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    “While still in its infancy, the emergence of distributed ledger technology comes at a time when the financial services industry is poised to further embrace technological change and efficiencies.”

    C. Thomas Richardson, MD, Wells Fargo Securities1

    1. Introduction

    Financial technology, better known as fintech,2 has gained prominence in recent years with the rise of bitcoin and blockchain technology. After years of being a rebel, in May 2017 it gained mainstream acceptance with R3’s announcement that it had raised a record US$107 million. Over 40 investors including technology and finance heavyweights like Intel, Bank of America Merrill Lynch, UBS, HSBC, and the Singapore government joined forces with R3 to develop ‘block-chain- like’ technology to be used by major banks.3

    The investor consortium represented the largest group of global financial institutions working on commercial applications for the distributed ledger technology at the heart of blockchain. R3’s success in getting its existing members (clients) to invest in the company was unique – particularly in the finance industry. The fact that some of them were blue-chip technology firms positioned R3 firmly at the confluence of technology and finance. R3 took pains to emphasize that the underlying technology was ‘distributed ledger’ rather than blockchain. Tim Swanson, Director of Market Research, explained the difference: “In simplest terms, a blockchain involves stringing together a chain of containers called blocks, which bundle transactions together like batch processing, whereas a distributed ledger like Corda does not, and instead validates each transaction (or agreement) individually.”

    2. Rise of Fintech

    As the line between technology and finance became increasingly blurred, one area of fintech blockchain created a particular buzz, both for its scope and security. Martin Arnold wrote in the Financial Times: “Blockchains allow encrypted data on anything, from money to medical records, to be shared between many companies, people and institutions. This protects data from fraud while instantly updating all parties concerned.”

    Whenever blockchain was mentioned, the much-hyped bitcoin sprung to mind. The surge in bitcoin prices and the astronomical rise (and subsequent fall) in its value dominated media headlines.

    1 https://techcrunch.com/2017/05/23/blockchain-consortium-r3-raises-107-million/ 2 Fintech is broadly defined here as an industry composed of companies that use new technology and innovation

    to compete in the marketplace with traditional financial institutions and intermediaries in the delivery of financial services.

    3 http://www.cnbc.com/2017/05/23/r3-funding-blockchain-intel-bank-of-america-hsbc.html

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    2.1. Bitcoin

    Bitcoin, first referred to in a white paper of 2008 by ‘Satoshi Nakamoto’ (a pseudonym), was the first application of blockchain technology. Although blockchain could be applied to various industries, it came to be almost synonymous with bitcoin as part of an innovative peer-to-peer electronic cash system enabling online payments to be transferred without an intermediary, also referred to as ‘cryptocurrency’. It was basically a way to bypass government currency controls and third-party payment processing intermediaries. To secure the transactions, blockchain provided the underlying technology, recording them in a public distributed ledger and creating a peer-to-peer network that was open, albeit anonymous.

    2.2. Blockchain

    The astronomical rise of bitcoin and other cryptocurrencies in 2017 raised public awareness of blockchain, but with numerous other applications (in finance, business, government) it clearly had much greater potential. Hailed as “Web 3.0”, blockchain technology formed the backbone of a new type of internet that allowed digital information to be distributed but not copied, and gave users the ability to create value and authenticate digital information.

    The information in a blockchain is essentially a shared (and continually reconciled) database. Blockchain underpins a decentralized digital ledger – a secure, tamper-proof log of sensitive activity – where transactions are not stored in a single location but hosted by millions of computers simultaneously, accessible to anyone on the internet but safe from hackers.

    Blockchain applications in banking and finance span numerous functions including international payments, transactions in capital markets and trade finance, regulatory compliance and auditing, protection from money laundering, and insurance.

    2.3. Emergence of Fintech in Banking

    Over the past decade, as the banking landscape became more competitive, banks faced increasing cost pressure on their products and service offerings. Traditionally, banks had controlled most end- to-end processing in-house, but the model started to change in response to regulatory pressure and a growing strategic focus on core products/services, such as customer identity checks.

    Fintech entered a new phase, where incumbent financial institutions, start-ups and investors collaborated to address industry challenges and spearhead transformation. Banks and financial services firms turned to fintech as way to either continue a vertically-integrated model or move into a specialist role.

    A study by Accenture and McLagan in January 20174 reported that eight of the world’s ten biggest investment banks expected to implement blockchain, and estimated it could cut costs by up to 30%, saving between $8bn and $12bn. According to Richard Lumb, head of financial services at Accenture, “The first place we will see [blockchain] have an impact is clearing houses, such as

    https://themarketmogul.com/blockchain-rise-fintech/

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    Deutsche Börse…Today [clearing and settlement] is managed through a myriad of messages and manual reconciliation.” He estimated that by using blockchain technology to restructure clearing and settlement, the biggest investment banks could save US$10 billion.5

    By 2017, fintech companies generally fell into two categories: (i) competitors to financial services companies, (ii) collaborators that provided solutions to enhance the position of existing market players. The incumbents had ceased to regard fintech as a direct threat and began to see the value of collaborating with – and even investing in them. In the past, a bank’s back-office functions served primarily as ‘support functions’ – processing payments rather than generating revenue. Now, some banks were divesting their processing units to create independent for-profit businesses that competed head-on with the banks. Concurrently, tech-focused fintech companies sought to join with large financial institutions to expand into markets, gain industry and regulatory knowledge, or even cash out. They included public companies like IBM, Accenture and Visa, and start-ups like Digital Asset Holdings, Ripple, and R3 – forming a new fintech wave.

    3. R3 and its Mission in Distributed Ledger Technology

    3.1. A Brief History of R3

    R3 started out as a family office in 2014, investing in early-stage start-ups in the fintech space. When the term ‘cryptocurrency’ began to repeatedly crop up on the radar, the founders organized a series of industry roundtables, starting in September 2014, in New York City, where representatives of early fintech players (DRW, Align Commerce, Perkins Coie, Boost VC, and Fintech Collective) were invited to give a talk. Representatives from eight banks showed up to hear about cryptocurrency from the experts. A second round table, this time on the West Coast (Palo Alto), brought together Silicon Valley players like Stanford, Andreessen Horowitz, Xapo, BitGo, Chain, Ripple, and Mirror. Representatives from 11 banks showed up. Several speakers agreed to become advisors to R3. By the end of 2014, the family office had invested in several fintech start- ups including Align Commerce.

    In the first quarter of 2015, R3 launched LiquidityEdge, an electronic trading platform for the US Treasury, and it incorporated the Distributed Ledger Group (DLG) in Delaware. Henceforth it focused its efforts on these two. A final roundtable was held in May 2015, with presentations by Hyperledger (the company), Blockstack, Align Commerce and the Bank of England. This time, 15 bank representatives as well as a market infrastructure operator and a fintech VC firm joined in. DLG transitioned from a working group to a commercial entity and by the end of 2015 it had admitted 42 members and changed its name to R3.

    3.2. Putting the Fin back in Fintech

    Unlike other blockchains or distributed ledger technology (DLT), Corda was launched by R3 as a DLT platform specifically for the finance industry. It was geared towards reducing industry pain

    5 Ibid.

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    points at a time of increasingly complex transactions. Privacy (even secrecy) was critical; access to transaction data was restricted to a ‘need-to-know’ basis within the network. The consortium’s efforts led to the creation of an open-source distributed ledger platform with the following characteristics:

    1. Engineered for business: R3 wanted Corda to be a leading distributed ledger platform, designed by the world’s largest financial institutions to manage legal agreements on an automatable and enforceable basis.

    2. Restricted data sharing: Corda only shared data with those with a need to view or validate it; there was no global broadcasting of data across the network.

    3. Easy integration: Corda was designed to make integration and interoperability easy. Users could query the ledger with SQL, join external databases, perform bulk imports, and code contracts in a range of standard languages.

    4. Pluggable consensus: Corda was the only distributed ledger platform to support multiple consensus providers employing different algorithms on the same network, enabling compliance with local regulations.

    R3’s CTO Richard Brown insisted: “We are not building a blockchain. Unlike other designs in this space, our starting point is individual agreements between firms (‘state objects’ governed by ‘contract code’ and associated ‘legal prose’). We reject the notion that all data should be copied to all participants, even if it is encrypted.”

    R3 believed that distributed ledger technology had the potential to transform the financial services industry. It envisioned a future in which financial agreements were recorded and automatically managed without error and contracts were transacted seamlessly. It strove to eliminate existing problems like duplication, reconciliation, failed matches and breaks.

    Unlike other fintech firms, R3 did not originate from a financial services nor a technology firm. It saw itself as a perfect hybrid – a firm that created technology solutions focused on finance, which resolved confidentiality and other issues of existing blockchain technologies. It built a new operating system (Corda) from scratch, geared to financial markets using a blockchain-based distributed ledger platform that met the stringent standards of the financial industry and could be tailored to any commercial scenario.

    The concept of a decentralized database sought to overcome the shortcomings of shared and distributed databases. The novel features provided by the Corda platform included new transaction types, execution of transactions in parallel, direct peer–to-peer communication between nodes in the network, the presence of multiple notaries employing various consensus algorithms, elimination of global broadcast, and the sharing of data on a need-to-know basis.6

    http://micobo.com/main-insights-to-r3s-corda-dlt-platform/

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    3.3 Distributed Ledger Technology versus Traditional Banking Architecture

    Financial institutions were typically early adopters of technology and, for the most part, their physical and manual processes had been digitalized and automated. However, opportunities remained to improve costs and efficiency by redesigning the systems architecture. For example, each bank maintained its own ledgers, which formed the basis of its view of agreements and positions with respect to its customer set and its counterparts. This resulted in duplication of records (by other banks) and inevitably inconsistencies and errors, that required reconciliation. It was these inefficiencies that enabled distributed ledger technology (DLT) to gain traction in the industry. DLT was made possible by three innovations: peer-to-peer networks, public key cryptography, and consensus algorithms.7

    A distributed ledger was basically an asset database that could be shared across a network of multiple sites, geographies and institutions. All participants (‘nodes’) within the network had an identical copy of the ledger; entries could be updated by one, some or all participants according to agreed rules. Updates were visible on all copies within minutes (in some cases seconds). To ensure the accuracy and security of the assets in the ledger, entries were encrypted through the use of ‘keys’ and signatures to control ‘who could do what’.

    Cutting across functions/processes such as trade finance, cross-border payments, re-insurance, clearing and settlement – was an evolution of other peer-to-peer concepts. It gave Corda’s blockchain platform increased flexibility and offered the following advantages:

    Operational simplification – eliminating the need to perform reconciliation manually and resolve ‘disputes’

    Regulatory efficiency – enabling real-time monitoring of financial activity between regulators and regulated entities

    Risk reduction – counterparts no longer had to be trusted to fulfil their obligations as agreements were codified in a shared, immutable environment

    Reduction in clearing/settlement time

    Improvement in liquidity/capital

    Minimization of fraud

    An important distinction lay in the fact that in other DLT data was distributed to all participants, whereas in Corda data was shared only between the two parties involved in the transaction. While

    7 According to Deloitte, three innovations laid the groundwork for the invention of DLT. Peer-to-peer networks: In this model, every peer is a server and client, both supplying and consuming resources. This can

    facilitate the creation of a currency without a privileged third party, among other types of decentralised financial interactions.

    Public key cryptography: used for verifying digital identity with a high degree of confidence. Cryptography enables individual identification and exchange of bitcoin among users.

    Consensus algorithms: ensure agreement between parties on a network, validate the data’s authenticity as well as transactions, and control when it can be written into the system. This prevents double spending by ensuring chorological recording of data.

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    a centralized ledger was controlled by a single entity, participants in a distributed ledger had shared control of the data’s evolution (see Figure 1).

    Figure 1: Other Distributed Ledger Technology vs. Corda

    Source: R3

    In short, Corda created a private or ‘permissioned blockchain’ – that was expected to eventually dominate the majority of commercial applications, particularly in the capital markets. Permissioned variations added a layer of privileging to determine who could participate in the chain. Goldman Sachs anticipated that the majority of commercial applications would use some form of permissioned model8 based on the principle that the only parties with access to the details of a financial transaction should be the parties themselves and others with a legitimate ‘need to know’.

    In most blockchains, all participants had to reach consensus over the order of the transactions that had taken place, irrespective of whether they had taken part in a particular transaction or not. The order of the transactions was crucial for the consistency of the ledger. If a definitive order could not be established, there was a risk of double-spending – i.e., that two parallel transactions transferred the same coin to different recipients, thus making money out of thin air. As the network might involve mutually untrustworthy or anonymous parties, a consensus mechanism was required to protect it from fraudulent participants attempting double-spending. Typically, this mechanism was established by data mining based on proof-of-work (PoW). All participants had to agree upon

    The Goldman Sachs Group, Inc., ‘Profiles in Innovation Blockchain – Putting Theory into Practice’, May 24, 2016

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    a common ledger and had access to all entries ever recorded. However, PoW unfavourably affected transactions processing performance; albeit anonymized, they were nevertheless accessible to all participants, which was problematic for applications that required a higher degree of privacy.

    In contrast, Corda’s interpretation of consensus was more refined – based neither on PoW nor data mining. Operating in permission mode, Corda provided more fine-grained access to records, enhanced privacy and consensus at the transaction level by involving only relevant parties. It used special notary nodes to solve transaction races (i.e. reach consensus) – and different consensus algorithms could be used on the same network – by offering a transaction ordering and timestamping service. Notaries were identified/signed with composite public keys made up of multiple mutually distrusting parties who used standard consensus algorithms such as BFT and Raft (depending on the scenario). Notaries accepted a transaction by returning a signature over the transaction, or returned a rejection error. Notarization was triggered after all signatures were obtained and the transaction was stored in the database once the finality flow was complete. Consensus was needed only for notaries 9 (Byzantine Fault Tolerant or Raft algorithms). 10 Consensus on transaction validity was performed only by those who were a party to it, hence data was only shared with those required to see it.

    Transactions – one of the basic data structures on the Corda platform – could be passed around to be signed and verified by third parties. They were constructed on the assumption that a transaction formed an entity with input and output states, commands and attachments. Sensitive data was not revealed to other nodes that took part in the transaction on the validation level (as illustrated by the Oracle which validated only embedded commands).

    Corda used a well-known cryptographic schema to convince the other party that the data sent for signing was a part of the transaction by providing proof of inclusion and data inclusion using Merkle trees – as used in peer-to-peer networks, blockchain systems and Git – whereby transactions were split into leaves, each containing either input, output, command or attachment. Other fields like timestamp or signers were not used in the calculation.11

    3.4 Applications of Corda

    Corda’s architecture was heavily influenced by the three most common use-cases, each conceived of by R3 as a financial agreement:

    A cash balance (e.g., “The following bank and I agree that they owe me $1 million”)

    9 Notaries serve to witness/certify the validity of signatures on documents, as well as certify the document’s authenticity. Storing information on a blockchain provides (1) A timestamp or digital fingerprint proving that a document (containing an idea, for example) was created at that point in time. Data on the blockchain (in geek speak) is immutable – cannot be changed – as it is locked within the blockchain forever. (2) Ownership: with public/private key technology you can prove that you were the person that put the document there. (3) Independent verification: a third party can verify that the document was placed there by the person who holds the private key.

    10 https://medium.com/chain-cloud-company-blog/a-first-look-at-r3-corda-released-yesterday-7a62a298c43f 11 https://docs.corda.net/releases/release-M8.2/merkle-trees.html

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    A security under custody (e.g., “The following custody bank and I agree that I own 1000 shares of the following corporation”)

    A bilateral derivative agreement (e.g., “Banks A and B agree that they are parties to the following Interest Rate Swap (IRS), which means they agree to exchange the following cashflows (netted) at predetermined scheduled times with an agreed payoff formula”)

    Taking the first of these examples, Corda’s cash design explicitly modelled the notion there was no such thing as ‘money in the bank’ – only a cash claim by an owner with respect to a named institution. Corda’s core cash contract was extremely simple but powerful: it recorded the legal identity of the cash issuer, the currency, amount, owner (and information about the nature of the claim, with an explicit link to the legal prose governing the agreement setting out resolution procedures in the event of dispute), and used that identity to build up all other cash-related concepts (payments, netting, and so forth).

    In August 2017, 11 eleven global banks announced a major milestone in the digitization of documentary trade finance: joint development of a prototype application on R3’s Corda with the potential to significantly reduce inefficiencies and costs by streamlining the processing of letters of credit. They included Bangkok Bank, BBVA, BNP Paribas, HSBC, ING, Intesa Sanpaolo, Mizuho, RBS, Scotiabank, SEB and U.S. Bank. IT consultancy CGI also took part.

    In May 2018, a soybean trade between two arms of Cargill using letters of credit from HSBC and ING showed the R3 Corda platform was finally set to scale up. Acting on behalf of Cargill, the two banks successfully executed a live trade-finance transaction for international food and agriculture conglomerate Cargill using R3’s Corda blockchain platform. This was for a bulk shipment of soybeans from Argentina, through Cargill’s Geneva trading arm, to Malaysia, with Cargill’s Singapore subsidiary as the purchaser through a letter of credit (LC) issued using Corda by HSBC to ING.

    4. R3’s Strategy Going Forward

    R3 differentiated itself in the fintech industry with three unique features: (1) Having customers as its investors (2) Expanding the usage of DLT as crucial technology to synchronize ‘Fin and Tech’ (3) An open source platform to allow growth.

    4.1 Customers as Investors

    Since the launch of its DLT initiative in September 2015, R3 had grown from a staff of eight finance and technology veterans with nine bank members to a global team of over 110 professionals serving over 80 global financial institutions and regulators on six continents. Over 2,000 technology, financial, and legal experts drawn from its global member base supported the company’s work. That base included banks, clearing houses, exchanges, market infrastructure providers, asset managers, central banks, conduct regulators, trade associations, professional services firms and technology companies.

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    R3 embarked on its fundraising journey in a unique fashion, limiting the first two tranches of Series A to R3 members, and opening the third (and final) tranche to non-R3 investors. In May 2017, it announced raising a record $107 million, the largest single investment in a blockchain company to date, that included 40 of its members. Investors represented an equal geographical split across Europe, Asia-Pacific and the Americas from over 15 countries (see Appendix I). In an industry where competition was often cut-throat and rivalries intense, R3 CEO David Rutter observed:

 
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Project Management

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Rachel, the project manager of a large information systems project, arrives at her office early to get caught up with work before her co-workers and project team arrive. However, as she enters the office she meets Neil, one of her fellow project managers, who also wants to get an early start on the day. Neil has just completed a project overseas. They spend 10 minutes socializing and catching up on personal news.

 

It takes Rachel 10 minutes to get to her office and settle in. She then checks her voice mail and turns on her computer. She was at her client’s site the day before until 7:30 p.m. and has not checked her e-mail or voice mail since 3:30 p.m. the previous day. There are 7 phone messages, 16 e-mails, and 4 notes left on her desk. She spends 15 minutes reviewing her schedule and “to do” lists for the day before responding to messages that require immediate attention.

 

Rachel spends the next 25 minutes going over project reports and preparing for the weekly status meeting. Her boss, who just arrived at the office, interrupts her. They spend 20 minutes discussing the project. He shares a rumor that a team member is using stimulants on the job. She tells him that she has not seen anything suspicious but will keep an eye on the team member.

 

The 9:00 a.m. project status meeting starts 15 minutes late because two of the team members have to finish a job for a client. Several people go to the cafeteria to get coffee and doughnuts while others discuss last night’s baseball game. The team members arrive, and the remaining 45 minutes of the progress review meeting surface project issues that have to be addressed and assigned for action.

 

After the meeting Rachel goes down the hallway to meet with Victoria, another IS project manager. They spend 30 minutes reviewing project assignments since the two of them share personnel. Victoria’s project is behind schedule and in need of help. They broker a deal that should get Victoria’s project back on track.

 

She returns to her office and makes several phone calls and returns several e-mails before walking downstairs to visit with members of her project team. Her intent is to follow up on an issue that had surfaced in the status report meeting. However, her simple, “Hi guys, how are things going?” elicits a stream of disgruntled responses from the “troops.” After listening patiently for over 20 minutes, she realizes that among other things several of the client’s managers are beginning to request features that were not in the original project scope statement. She tells her people that she will get on this right away.

 

Returning to her office she tries to call her counterpart John at the client firm but is told that he is not expected back from lunch for another hour. At this time, Eddie drops by and says, “How about lunch?” Eddie works in the finance office and they spend the next half hour in the company cafeteria gossiping about internal politics. She is surprised to hear that Jonah Johnson, the director of systems projects, may join another firm. Jonah has always been a powerful ally.

 

She returns to her office, answers a few more e-mails, and finally gets through to John. They spend 30 minutes going over the problem. The conversation ends with John promising to do some investigating and to get back to her as soon as possible.

 

Rachel puts a “Do not disturb” sign on her door, and lies down in her office. She listens to the third and fourth movement of Ravel’s string quartet in F on headphones.

 

Rachel then takes the elevator down to the third floor and talks to the purchasing agent assigned to her project. They spend the next 30 minutes exploring ways of getting necessary equipment to the project site earlier than planned. She finally authorizes express delivery.

 

When she returns to her office, her calendar reminds her that she is scheduled to participate in a conference call at 2:30. It takes 15 minutes for everyone to get online. During this time, Rachel catches up on some e-mail. The next hour is spent exchanging information about the technical requirements associated with a new version of a software package they are using on systems projects like hers.

Rachel decides to stretch her legs and goes on a walk down the hallway where she engages in brief conversations with various co-workers. She goes out of her way to thank Chandra for his thoughtful analysis at the status report meeting. She returns to find that John has left a message for her to call him back ASAP. She contacts John, who informs her that, according to his people, her firm’s marketing rep had made certain promises about specific features her system would provide. He doesn’t know how this communication breakdown occurred, but his people are pretty upset over the situation. Rachel thanks John for the information and immediately takes the stairs to where the marketing group resides.

She asks to see Mary, a senior marketing manager. She waits 10 minutes before being invited into her office. After a heated discussion, she leaves 40 minutes later with Mary agreeing to talk to her people about what was promised and what was not promised.

She goes downstairs to her people to give them an update on what is happening. They spend 30 minutes reviewing the impact the client’s requests could have on the project schedule. She also shares with them the schedule changes she and Victoria had agreed to. After she says good night to her team, she heads upstairs to her boss’s office and spends 20 minutes updating him on key events of the day. She returns to her office and spends 30 minutes reviewing e-mails and project documents. She logs on to the MS project schedule of her project and spends the next 30 minutes working with “what-if” scenarios. She reviews tomorrow’s schedule and writes some personal reminders before starting off on her 30-minute commute home.

· 1. How effectively do you think Rachel spent her day?

· 2. What does the case tell you about what it is like to be a project manager?

 

 

Bruce Palmer had worked for Moss and McAdams (M&M) for six years and was just promoted to account manager. His first assignment was to lead an audit of Johnsonville Trucks. He was quite pleased with the five accountants who had been assigned to his team, especially Zeke Olds. Olds was an Army vet who returned to school to get a double major in accounting and computer sciences. He was on top of the latest developments in financial information systems and had a reputation for coming up with innovative solutions to problems.

M&M was a well-established regional accounting firm with 160 employees located across six offices in Minnesota and Wisconsin. The main office, where Palmer worked, was in Green Bay, Wisconsin. In fact, one of the founding members, Seth Moss, played briefly for the hometown NFL Packers during the late 1950s. M&M’s primary services were corporate audits and tax preparation. Over the last two years the partners decided to move more aggressively into the consulting business. M&M projected that consulting would represent 40 percent of their growth over the next five years.

M&M operated within a matrix structure. As new clients were recruited, a manager was assigned to the account. A manager might be assigned to several accounts, depending on the size and scope of the work. This was especially true in the case of tax preparation projects, where it was not uncommon for a manager to be assigned to 8 to 12 clients. Likewise, senior and staff accountants were assigned to multiple account teams. Ruby Sands was the office manager responsible for assigning personnel to different accounts at the Green Bay office. She did her best to assign staff to multiple projects under the same manager. This wasn’t always possible, and sometimes accountants had to work on projects led by different managers.

M&M, like most accounting firms, had a tiered promotion system. New CPAs entered as junior or staff accountants. Within two years, their performance was reviewed and they were either asked to leave or promoted to senior accountant. Sometime during their fifth or sixth year, a decision was made to promote them to account manager. Finally, after 10 to 12 years with the firm, the manager was considered for promotion to partner. This was a very competitive position. During the last five years, only 20 percent of account managers at M&M had been promoted to partner. However, once a partner, they were virtually guaranteed the position for life and enjoyed significant increases in salary, benefits, and prestige. M&M had a reputation for being a results-driven organization; partner promotions were based on meeting deadlines, retaining clients, and generating revenue. The promotion team based its decision on the relative performance of the account manager in comparison to his or her cohorts.

One week into the Johnsonville audit, Palmer received a call from Sands to visit her office. There he was introduced to Ken Crosby, who recently joined M&M after working nine years for a Big 5 accounting firm. Crosby was recruited to manage special consulting projects. Sands reported that Crosby had just secured a major consulting project with Springfield Metals. This was a major coup for the firm: M&M had competed against two Big 5 accounting firms for the project. Sands went on to explain that she was working with Crosby to put together his team. Crosby insisted that Zeke Olds be assigned to his team. Sands told him that this would be impossible because Olds was already assigned to work on the Johnsonville audit. Crosby persisted, arguing that Olds’s expertise was essential to the Springfield project. Sands decided to work out a compromise and have Olds split time across both projects.

At this time Crosby turned to Palmer and said, “I believe in keeping things simple. Why don’t we agree that Olds works for me in the mornings and you in the afternoons. I’m sure we can work out any problems that come up. After all, we both work for the same firm.”

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SIX WEEKS LATER

Palmer could scream whenever he remembered Crosby’s words, “After all, we both work for the same firm.” The first sign of trouble came during the first week of the new arrangement when Crosby called, begging to have Olds work all of Thursday on his project. They were conducting an extensive client visit, and Olds was critical to the assessment. After Palmer reluctantly agreed, Crosby said he owed him one. The next week when Palmer called Crosby to request that he return the favor, Crosby flatly refused and said any other time but not this week. Palmer tried again a week later and got the same response.

At first Olds showed up promptly at 1:00 p.m. at Palmer’s office to work on the audit. Soon it became a habit to show up 30 to 60 minutes late. There was always a good reason. He was in a meeting in Springfield and couldn’t just leave, or an urgent task took longer than planned. One time it was because Crosby took his entire team out to lunch at the new Thai restaurant—Olds was over an hour late because of slow service. In the beginning Olds would usually make up the time by working after hours, but Palmer could tell from conversations he overheard that this was creating tension at home.

What probably bothered Palmer the most were the e-mails and telephone calls Olds received from Crosby and his team members during the afternoons when he was supposed to be working for Palmer. A couple of times Palmer could have sworn that Olds was working on Crosby’s project in his (Palmer’s) office.

Palmer met with Crosby to talk about the problem and voice his complaints. Crosby acted surprised and even a little bit hurt. He promised things would change, but the pattern continued.

Palmer was becoming paranoid about Crosby. He knew that Crosby played golf with Olds on the weekends and could just imagine him badmouthing the Johnsonville project and pointing out how boring auditing work was. The sad fact was that there probably was some truth to what he was saying. The Johnsonville project was getting bogged down, and the team was slipping behind schedule. One of the contributing factors was Olds’s performance. His work was not up to its usual standards. Palmer approached Olds about this, and Olds became defensive. Olds later apologized and confided that he found it difficult switching his thinking from consulting to auditing and then back to consulting. He promised to do better, and there was a slight improvement in his performance.

The last straw came when Olds asked to leave work early on Friday so that he could take his wife and kids to a Milwaukee Brewers baseball game. It turned out Springfield Metals had given Crosby their corporate tickets, and he decided to treat his team with box seats right behind the Brewers dugout. Palmer hated to do it, but he had to refuse the request. He felt guilty when he overheard Olds explaining to his son on the telephone why they couldn’t go to the game.

Palmer finally decided to pick up the phone and request an urgent meeting with Sands to resolve the problem. He got up enough nerve and put in the call only to be told that Sands wouldn’t be back in the office until next week. As he put the receiver down, he thought maybe things would get better.

TWO WEEKS LATER

Sands showed up unexpectedly at Palmer’s office and said they needed to talk about Olds. Palmer was delighted, thinking that now he could tell her what had been going on. But before he had a chance to speak, Sands told him that Olds had come to see her yesterday. She told him that Olds confessed that he was having a hard time working on both Crosby’s and Palmer’s projects. He was having difficulty concentrating on the auditing work in the afternoon because he was thinking about some of the consulting issues that had emerged during the morning. He was putting in extra hours to try to meet both of the projects’ deadlines, and this was creating problems at home. The bottom line was that he was stressed out and couldn’t deal with the situation. He asked that he be assigned full-time to Crosby’s project. Sands went on to say that Olds didn’t blame Palmer, in fact he had a lot of nice things to say about him. He just enjoyed the consulting work more and found it more challenging. Sands concluded by saying, “We talked some more and ultimately I agreed with him. I hate to do this to you, Bruce, but Olds is a valuable employee, and I think this is the best decision for the firm.”

· 1. If you were Palmer at the end of the case, how would you respond?

· 2. What, if anything, could Palmer have done to avoid losing Olds?

· 3. What advantages and disadvantages of a matrix type organization are apparent from this case?

· 4. What could the management at M&M do to more effectively manage situations like this?

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Project Part 3: Decision Making On Stocks-Read

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This assignment is completely based on the rubric. Below is the outline:

Final Project Part III

Part III Overview

To make corporate finance decisions, take an advanced finance course, or pursue a career in finance, you will need to understand basic concepts. This includes going beyond the number crunching and reading graphs in order to analyze various financial indicators. This analysis can lead to many important decisions in your financial career.

For this part of the final project, you will be given a scenario in which you are asked to illustrate your financial knowledge and analysis skills.

This part of the assessment addresses the following course outcomes:

 Analyze the roles and responsibilities of financial managers in confirming compliance with federal and shareholder requirements

 Differentiate between various financial markets and institutions by comparing and contrasting options when selecting appropriate private and corporate investments

 Compute financial ratios, time value, variables, and returns using industry standard tools for optimizing financial success.

Note: The multiple financial data for companies should in Apple, Amazon and other companies three year financial detail.

 Analyze corporate financial data for multiple companies in evaluating past and future financial performances Part III Prompt The results of both sections of your employment examination have finally been received, and you were offered the position. You have a few important decisions to make before you can formally accept or decline the position.

When composing your answers to these decisions, ensure that they are cohesive and read like a short essay. Your submission must address the following critical elements:

I. School Versus Work

A. The school you would like to attend costs $100,000. To help finance your education, you need to choose whether or not to sell your 1,000 shares of Apple stock, 1,000 EE Savings Bonds (with $100 denominations and 4.25% coupon rate) that are five years from their 30-year maturity date, or a combination of both.

Provide the appropriate data and calculations that you would perform to make this decision.

B. What are the advantages and disadvantages of selling a combination of stocks and bonds? Be sure to support your answers.

C. Suppose that you choose to sell your stocks, bonds, or a combination of both. What is your choice, and what is your financial reasoning behind this choice? Consider supporting your answer with quantitative data.

D. Suppose that you choose to accept the job. What is your financial reasoning behind this choice? Be sure to support your answer with quantitative data.

II. Bonus Versus Stock

A. The company has offered you a $5,000 bonus, which you may receive today, or 100 shares of the company’s stock, which has a current stock price of $50 per share. Mathematically, what is the best choice? Why?

B. What are the advantages and disadvantages of each option? Be sure to support your answers.

C. What would you ultimately choose to do? What is your financial reasoning behind this choice? Consider supporting your answer with quantitative data.

III. Compliance

A. While investigating the shares offered to you by your potential boss, you discover that the company you are considering working for is not registered as required under the Securities Act of 1933. How does this influence you as a potential employee and as a potential shareholder? Be sure to reference any applicable statutes or laws.

B. You know that accepting this job may eventually lead to a promotion into the role of the financial manager. As the potential financial manager, what federal and shareholder requirements would you need to be familiar with in order to ensure that you are being completely compliant?

Note: You need to use sample companies in USA and state the company size as when writing this project and provide relevant sources.

Final Project Part III

Part III Overview To make corporate finance decisions, take an advanced finance course, or pursue a career in finance, you will need to understand basic concepts. This includes going beyond the number crunching and reading graphs in order to analyze various financial indicators. This analysis can lead to many important decisions in your financial career. For this part of the final project, you will be given a scenario in which you are asked to illustrate your financial knowledge and analysis skills. This part of the assessment addresses the following course outcomes:

 Analyze the roles and responsibilities of financial managers in confirming compliance with federal and shareholder requirements

 Differentiate between various financial markets and institutions by comparing and contrasting options when selecting appropriate private and corporate investments

 Compute financial ratios, time value, variables, and returns using industry standard tools for optimizing financial success

 Analyze corporate financial data for multiple companies in evaluating past and future financial performances

Part III Prompt The results of both sections of your employment examination have finally been received, and you were offered the position. You have a few important decisions to make before you can formally accept or decline the position. When composing your answers to these decisions, ensure that they are cohesive and read like a short essay. Your submission must address the following critical elements:

I. School Versus Work A. The school you would like to attend costs $100,000. To help finance your education, you need to choose whether or not to sell your 1,000

shares of Apple stock, 1,000 EE Savings Bonds (with $100 denominations and 4.25% coupon rate) that are five years from their 30-year maturity date, or a combination of both. Provide the appropriate data and calculations that you would perform to make this decision.

B. What are the advantages and disadvantages of selling a combination of stocks and bonds? Be sure to support your answers. C. Suppose that you choose to sell your stocks, bonds, or a combination of both. What is your choice, and what is your financial reasoning behind

this choice? Consider supporting your answer with quantitative data. D. Suppose that you choose to accept the job. What is your financial reasoning behind this choice? Be sure to support your answer with

quantitative data.

 

 

 

II. Bonus Versus Stock A. The company has offered you a $5,000 bonus, which you may receive today, or 100 shares of the company’s stock, which has a current stock

price of $50 per share. Mathematically, what is the best choice? Why? B. What are the advantages and disadvantages of each option? Be sure to support your answers. C. What would you ultimately choose to do? What is your financial reasoning behind this choice? Consider supporting your answer with

quantitative data.

III. Compliance A. While investigating the shares offered to you by your potential boss, you discover that the company you are considering working for is not

registered as required under the Securities Act of 1933. How does this influence you as a potential employee and as a potential shareholder? Be sure to reference any applicable statutes or laws.

B. You know that accepting this job may eventually lead to a promotion into the role of the financial manager. As the potential financial manager, what federal and shareholder requirements would you need to be familiar with in order to ensure that you are being completely compliant?

 

 

 

 

 

Final Project Part III Rubric Guidelines for Submission: Please ensure that your decision plan is submitted as one comprehensive and cohesive short essay. It should use double spacing, 12- point Times New Roman font, and one-inch margins. Citations should be formatted according to APA style.

Critical Elements Exemplary Proficient Needs Improvement Not Evident Value

School Versus Work: Finance Your Education

Accurately calculates the worth of stocks, bonds, and combinations of stocks and bonds, including the appropriate data and calculations with submission (100%)

Calculates the worth of stocks, bonds, and combinations of stocks and bonds, but calculation is inaccurate or appropriate data and/or calculations are not included in submission (55%)

Does not calculate the worth of stocks, bonds, and combinations of stocks and bonds (0%)

11.88

School Versus Work: Advantages and Disadvantages

Meets “Proficient” criteria and provides historical data, as well as quantitative data, to support answer (100%)

Comprehensively differentiates the advantages and disadvantages of selling a combination of stocks and bonds and provides support for answer (85%)

Differentiates the advantages and disadvantages of selling a combination of stocks and bonds, but analysis is not comprehensive or support is cursory or missing (55%)

Does not differentiate the advantages and disadvantages of selling a combination of stocks and bonds (0%)

11.88

School Versus Work: Choose to Sell

Meets “Proficient” criteria and supports examination with quantitative data (100%)

Examines choice to sell stocks, bonds, or combination of both, explaining the financial reasoning behind the choice (85%)

Examines choice to sell stocks, bonds, or combination of both, but explanation of the financial reasoning behind the choice is cursory or missing (55%)

Does not examine choice to sell stocks, bonds, or combination of both (0%)

7.92

School Versus Work: Accept the Job

Meets “Proficient” criteria and supports examination with quantitative data (100%)

Examines choice to accept the job, explaining the financial reasoning behind the choice (85%)

Examines choice to accept the job, but explanation of the financial reasoning behind the choice is cursory or missing (55%)

Does not examine choice to accept the job (0%)

7.92

Bonus Versus Stock: Offered

Meets “Proficient” criteria, and explanation of the best choice demonstrates nuanced understanding of the time-value of money (100%)

Accurately calculates the best choice of receiving a cash bonus versus receiving company stock, including an explanation of the best choice (85%)

Calculates the best choice of receiving a cash bonus versus receiving company stock, but calculation is inaccurate or explanation of best choice is cursory or missing (55%)

Does not calculate the best choice of receiving a cash bonus versus receiving company stock (0%)

11.88

Bonus Versus Stock: Advantages and Disadvantages

Meets “Proficient” criteria, and analysis includes quantitative data (100%)

Comprehensively analyzes the advantages and disadvantages of the cash and stock options, supporting each option (85%)

Analyzes the advantages and disadvantages of the cash and stock options, but analysis is not comprehensive or support for each option is cursory or missing (55%)

Does not analyze the advantages or disadvantages of the cash and stock options (0%)

11.88

 

 

 

Bonus Versus Stock: Choose

Meets “Proficient” criteria and supports choice with quantitative data (100%)

Chooses cash or stock option, including logical financial reasoning behind the choice (85%)

Chooses cash or stock option, including financial reasoning behind the choice, but reasoning is illogical or missing (55%)

Does not choose cash or stock option (0%)

7.92

Compliance: Investigating

Meets “Proficient” criteria and references demonstrate knowledge of current events in finance (100%)

Comprehensively analyzes the influence of noncompliance on potential employees and potential shareholders, including references to statutes and laws in analysis (85%)

Analyzes the influence of noncompliance on potential employees and potential shareholders, but analysis is not comprehensive or support does not include references to statutes or laws (55%)

Does not analyze the influence of noncompliance on potential employees or potential shareholders (0%)

11.88

Compliance: Accepting Meets “Proficient” criteria, and analysis demonstrates nuanced understanding of requirements for compliance with federal laws (100%)

Comprehensively analyzes the federal and shareholder requirements necessary for a financial manager to become familiar with in order to ensure compliance (85%)

Analyzes the federal and shareholder requirements necessary for a financial manager to become familiar with in order to ensure compliance, but analysis is not comprehensive (55%)

Does not analyze the federal and shareholder requirements necessary for a financial manager to become familiar with in order to ensure compliance (0%)

11.88

Articulation of Response

Submission is free of errors related to citations, grammar, spelling, syntax, and organization and is presented in a professional and easy to read format (100%)

Submission has no major errors related to citations, grammar, spelling, syntax, or organization (85%)

Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas (55%)

Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas (0%)

4.96

Earned Total 100%

 
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Cost and Decision-Making Analysis

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Assignment 2: Required Assignment 1—Cost and Decision-Making Analysis

Cheryl Montoya picked up the phone and called her boss, Wes Chan, Vice President of Marketing at Piedmont Fasteners Corporation.

Cheryl: “Wes, I’m not sure how to go about answering the questions that came up at the meeting with the President yesterday.”

Wes: “What’s the problem?”.

Cheryl: “The president wanted to know the break-even point for each of the company’s products, but I am having trouble figuring them out.”

Wes: “I’m sure you can handle it, Cheryl. And, by the way, I need your analysis on my desk tomorrow morning at 8:00 sharp in time for the follow-up meeting at 9:00.”

Piedmont Fasteners Corporation makes three different clothing fasteners at its manufacturing facility in North Carolina. Data concerning these products appear below:

Velcro Metal Nylon
Normal annual sales volume 100,000 units 200,000 units 400,000 units
Unit selling price $1.65 $1.50 $0.85
Variable cost per unit $1.25 $0.70 $0.25

Total fixed expenses are $400,000 per year.

All three products are sold in highly competitive markets, so the company is unable to raise its prices without losing unacceptably large numbers of customers.

The company has a very effective lean production system, so there is no beginning or ending work in process or finished-goods inventories.

Using the module readings, the Argosy University online library resources, and the Internet, research break-even point and costing systems. Analyze the case based on your research and what you have learned so far in the course.

Respond to the following:

  • Calculate the company’s overall break-even point in total sales dollars. Explain your methodology (approximately 2 pages).
  • Of the total fixed costs of $400,000: $20,000 could be avoided if the Velcro product were dropped, $80,000 if the Metal product were dropped, and $60,000 if the Nylon product were dropped. The remaining fixed costs of $240,000 consist of common fixed costs such as administrative salaries and rent on the factory building that could be avoided only by going out of business entirely (approximately 2 pages):
    • Calculate the break-even point in units for each product. Explain your methodology.
    • Determine the overall profit of the company if the company sells exactly the break-even quantity of each product. Present your results.
  • Evaluate costing systems for this company. Explain if this company should be using a job-order or process-costing system to accumulate costs (1 page).

Be sure to include your calculations in Microsoft Excel format.

Write a 5–6-page report in Word format. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M3_A2.doc.

By Wednesday, November 27, 2013, deliver your assignment to the M3: Assignment 2 Dropbox

 
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