Baker & McKenzie (A): A New Framework for Talent Management Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Baker & McKenzie (A): A New Framework for Talent Management case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Baker & McKenzie (A): A New Framework for Talent Management case study is a Harvard Business School (HBR) case study written by Boris Groysberg, Eliot Sherman. The Baker & McKenzie (A): A New Framework for Talent Management (referred as “Mckenzie Framework” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. It also touches upon business topics such as - Value proposition, Cross-cultural management, Developing employees, Employee retention, Hiring, Human resource management.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of Baker & McKenzie (A): A New Framework for Talent Management Case Study

Describes the process by which the largest law firm in the world developed a unique framework for personnel management. In 2004, John Conroy is about to take the reins as the leader of Baker & McKenzie, the largest law firm in the world by employees, with offices in 38 different countries. Facing an intensifying war for talent and associate retention concerns in some offices, Conroy has spearheaded the development of a framework for guiding the hiring, development, and retention of employees. As he is getting ready to introduce his framework at the firm's annual meeting, however, he faces many questions about its implementation. Could a single framework effectively apply to lawyers across so many different regions and cultures? Had this framework properly identified the attributes needed to succeed at Baker & McKenzie? How would the firm's hundreds of partners react? Offers the industry- and firm-specific content necessary for students to explore these questions and more.

Case Authors : Boris Groysberg, Eliot Sherman

Topic : Leadership & Managing People

Related Areas : Cross-cultural management, Developing employees, Employee retention, Hiring, Human resource management

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Calculating Net Present Value (NPV) at 6% for Baker & McKenzie (A): A New Framework for Talent Management Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10019150)	-10019150	-	-
Year 1	3471011	-6548139	3471011	0.9434	3274539
Year 2	3982843	-2565296	7453854	0.89	3544716
Year 3	3943673	1378377	11397527	0.8396	3311184
Year 4	3245067	4623444	14642594	0.7921	2570397
TOTAL			14642594		12700836

The Net Present Value at 6% discount rate is 2681686

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Profitability Index
2. Payback Period
3. Internal Rate of Return
4. Net Present Value

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Timing of the expected cash flows – stockholders of Mckenzie Framework have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.
2. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Mckenzie Framework shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of Baker & McKenzie (A): A New Framework for Talent Management

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Leadership & Managing People Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Mckenzie Framework often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Mckenzie Framework needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10019150)	-10019150	-	-
Year 1	3471011	-6548139	3471011	0.8696	3018270
Year 2	3982843	-2565296	7453854	0.7561	3011602
Year 3	3943673	1378377	11397527	0.6575	2593029
Year 4	3245067	4623444	14642594	0.5718	1855378
TOTAL					10478279

The Net NPV after 4 years is 459129

(10478279 - 10019150 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10019150)	-10019150	-	-
Year 1	3471011	-6548139	3471011	0.8333	2892509
Year 2	3982843	-2565296	7453854	0.6944	2765863
Year 3	3943673	1378377	11397527	0.5787	2282218
Year 4	3245067	4623444	14642594	0.4823	1564944
TOTAL					9505534

The Net NPV after 4 years is -513616

At 20% discount rate the NPV is negative (9505534 - 10019150 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Mckenzie Framework to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Mckenzie Framework has a NPV value higher than Zero then finance managers at Mckenzie Framework can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Mckenzie Framework, then the stock price of the Mckenzie Framework should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Mckenzie Framework should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

Understanding of risks involved in the project.

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

What will be a multi year spillover effect of various taxation regulations.

What can impact the cash flow of the project.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of Baker & McKenzie (A): A New Framework for Talent Management

References & Further Readings

Boris Groysberg, Eliot Sherman (2018), "Baker & McKenzie (A): A New Framework for Talent Management Harvard Business Review Case Study. Published by HBR Publications.