TORENTO CONSTRUCTION: ETHICAL CONTRACTING
On December 27, 2010, Cary Holmes, manager of the Supply ChainManagement (SCM) group at Torento Construction Inc. (NCG), was inhis office in Torento, Ontario, trying to organize the thoughtsrunning through his head as a result of a recent bidding to saveoperating costs at NCG. There was no problem in terms of the finaloutcome; in fact, the bid was going to result in cost savings of 25per cent, which was exactly what NCG’s founder and chief executiveofficer (CEO), Michael Wells, had asked for. The problem was thatthe cost savings represented only part of the story: He wonderedwhether the process to achieve the savings was unethical. As hegazed out of his office window, Holmes reflected on the series ofevents that had occurred over the previous few weeks.
INDUSTRY OVERVIEW
The construction industry’s main activities came from theconstruction of buildings, houses, and other engineering projects(e.g., utility systems and highways). The sector also involved themaintenance of infrastructure. Much of the work in the industry wasdone through contracts with the owners of construction projects, orthrough subcontracts with other smaller construction companies. In2008, construction projects put in place within the Canada peakedat US$2.32 trillion.1The industry employed workers in a widevariety of positions, including labourers, carpenters, andelectricians. During times of economic growth, both the private andthe public (e.g., federal, state, and municipal governmentprojects) portions of the construction industry flourished. TheGlobal Financial Crisis and Industry Downturn Like many industriesworldwide, the Canada construction industry experienced a drasticand unprecedented decline following the financial crisis andrecession in the late 2000s. Economists agreed that the economic 1All currency amounts are in US$ unless otherwise specified; FMICorporation, CANADA Markets Construction Overview 2016, 2015, 2,accessed January 17, 2017,www.smacna.org/docs/default-source/business-management/fmi-s-2016-u-smarkets-construction-overview.pdf. downturn that began in 2008 was the mostsevere since the Great Depression of the 1930s, and the effects ofthe crisis were felt across the world.2 The financial crisis wastriggered primarily by the subprime home mortgage industry, whichsaw high default rates due to misdirected regulation and aggressivelending practices; these events resulted in the near-collapse ofmany banks and other financial institutions, government bailoutsacross multiple industries, plummeting stock markets, unemployment,declines in consumer wealth, and the widespread collapse ofbusinesses.3The construction industry was far from immune to thefallout of the crisis. In fact, in the Canada, construction was theindustry that suffered the most during this period: the 568,000 joblossesin thissector comprised one-third of all Canada jobs lost in2008. Before the crisis, Ontario province had been a hotbed ofconstruction activity, powered by the constant building andmaintenance of the hotels, casinos, and infrastructure of itslargest city, Torento. With the economic downturn, Torentodevelopersshifted their focusfrom the expansion of projectsto costcutting. Jobs were shed, contracts delayed, and projects downsized.Keeping operations as lean as possible became the new priority forthe few ongoing projects and operations in the surrounding desert.4From October 2008 to October 2009, construction in Torento dropped92 per cent, and the city saw its unemployment rate increase from0.4 per cent to 8.0 per cent by November 2009.5With the sharpdownturn of the construction industry, the rest of Torento’seconomy sagged, sinking to levels last observed in the 1980s.Despite this dramatic decline, the more optimistic of the city’sbuilders and hoteliers pressed forward with their existing plans,with a renewed emphasis on efficiency and lean operations. In thenew economic environment, cost cutting was the key to survival.
TORENTO CONSTRUCTION INC.
Founded in 2000 and headquartered in Torento, NCG was amedium-sized construction firm that employed approximately 1,000people. The company focused primarily on construction work as maincontractors for multiple projects on “the Torento Strip” (a centralstretch of road known for its concentration of hotels and casinos)and surrounding areas. Only six years after it was founded, NCGwent public and began trading on the Canada Stock Exchange. Thefirm showed strong growth after completing a number of acquisitionsof smaller construction companies in Ontario, Qeubec, and BritishColombia. In spite of the industry-level downturn, NCG actuallyfound itself in better shape than many other Ontariobasedconstruction firms. As of December 2009, due to its outstandingbalance sheet and effective hedging strategy, NCG’s stock pricedropped by only 11 per cent compared to the previous year, whilecomparable firms’ stocks had dropped over 45 per cent. With anumber of long-term construction contracts on the horizon, NCG wasin a good position to survive the economic downturn. Accordingly,although business was not exactly thriving at NCG, there were somereasons to be optimistic. As a lean, dynamic company that hadfocused on technological advancements, acquisitions ofsmallerfirms, and an aggressive approach to acquiring new clients, NCGlooked as though it might even be able to profit from the losses ofrival companies who found themselves in worse situations. Rumoursbegan to surface about NCG making another acquisition. However,this mood of optimism did not last. By December 2009, the fewmultibillion-dollar projects that had promised to provideemployment for the construction firms in Torento had either beencancelled, put on hold, or scaled down. The financial crisis showedno signs of being relieved in the Canada, and the outlook for thesurvival of Ontario’s construction firms was grim. It was at thispoint that Wells (NCG’s CEO) called an emergency meeting with NCG’sSCM group.
THE MEETING
Although he was not quick to anger, Wells was angry now. Sittingat the head of a long, wooden conference room table, he clenchedhis fists and pounded the table, emphasizing the gravity of thesituation that his company was facing. Sitting around the table andwitnessing this display of anger were the five members of NCG’ssmall SCM team; most of them were both young and relativelyinexperienced. The team included the SCM manager, Holmes; twospecialists, Matt Daniels and Tory Falk; and two analysts, MichelleGrover and Sean Nichols. Holmes had been with NCG for four years.He was chosen to lead the SCM group when it was created because ofhis 15 years of experience in managing supply chains andlogistics—including managing the contracts and relationships withsubcontractors—at various other construction firms in Torento. Incontrast, the other team members had considerably less experience.The two specialists, Daniels and Falk, had only recently graduatedfrom business programs at prestigious universities in the Canada,and the analysts, Grover and Nichols, had had little experience insupply chain management before being transferred to the SCM groupfrom other business units within NCG. Nevertheless, although theirtenures with NCG had been relatively brief, the members of the SCMteam had made small but consistent progress throughout the economicdownturn in lowering costs among the company’s various internalbusiness groups. Unfortunately, this progress did not meet Wells’expectations. “It’s not good enough!” the CEO exclaimed. “We’relooking at a large-scale economic downturn here! The current marketis not sustainable for us. If we are to meet our targets with thecurrent budget, we need to see at least 25 per cent reductionsinour capital and operating costs. Basically, we need to be insurvival mode!” Holmes, who was never one to shy away from achallenge, understood his boss’s request completely. He lookedaround the table at the different members of his team. His gaze wasmet with looks of shock and awe. He then turned to lock eyes withthe CEO, stating, “You can count on us, Wells. We will find a wayand you will get the result. I know it will not be easy, but wewill try our best. Please, give us some time.”
THE BIDDING
Since the meeting with Wells, Holmes and his team had beenworking as hard as they could, and they were producing veryimpressive results for NCG. They were seeing compliance with a massletter that they had sent out asking for cost concessions fromtheir vendors. In addition, the team members were executing bidsand requests for proposals that resulted in reduced rates,increased discounts, and greater efficiencies. The young team wasoperating at a level that Holmes had not thought possible given thelimited number of employees he had at his disposal. Yet thedaunting target that the team members had to meet always seemed toovershadow the progress they made. A 25 per cent reduction in allcosts contributing to capital and operating expenditures was almostunheard of; they still needed to cut more. Holmes thought thatthere was one particular expense category that had been leftuntouched by the SCM group: costs of subcontracting. Theconstruction industry relied heavily on subcontractors, especiallywhen the project required additional labour that exceeded acompany’s capacity. Project companies like NCG acted as the maincontractor, and these firms then subcontracted plumbers,carpenters, electricians, landscapers, drywallers, painters,roofers, and flooring specialists. Holmes had long been looking foran opportunity to scrutinize this category, because he felt thatNCG was not fully attentive to the potential cost savings ofre-evaluating its subcontractors. A single manager who coordinatedwith three of the company’s subcontractors was in charge oforganizing the acquisition of outside labour that NCG used for itslarge projects. This manager, Bernie Miror, was essentiallyresponsible for sourcing the subcontracting servicesthat NCG used.Miror had been with NCG for seven years and was a fast riser withinthe company ranks. He felt that his management was contributing tothe company’s overall efficiencies and success on the projects ithad completed in Torento. Miror knew the CEOs of the threesubcontracting companies that NCG used on a first-name basis. Heplayed golf with them in a company tournament every year, andreceived bottles of wine from them as Christmas gifts. Therefore,when Holmes called him about helping with cost reductions for hisdepartment, Miror politely reassured him by saying, “No, I canhandle it. Just give me some time.” Miror hung up the phone, andsubsequently called his friend, who happened to be the head of thelargest labour service company in Ontario. The conversationinitially consisted of a few friendly jokes and updates about eachother’sfamilies. Finally, Miror brought up the topic of costreductions. The call concluded with Miror's counterpart throwingout a number: “I understand your concerns . . . . How does 10 percent off the all-inclusive rate sound to you?” Miror felt that thediscount was more than sufficient, and agreed immediately. He thenmore or less repeated the same phone call with his friends at thetwo other labour service companies. When Holmes received an emailfrom Miror reporting the 10 per cent reduction in subcontractingcosts, he was perplexed and annoyed. He had been asked by his CEOfor a 25 per cent reduction; 10 per cent just would not suffice. Ithad become obvious that Miror was not using proper techniques innegotiating with vendors, and this was negatively affecting Holmes’cost-reduction initiative. Holmes had been preparing a bid documentfor the subcontracting expense category, and he had planned to sendit to Wells and the other executives with Miror's help. Holmesrefused to appear ineffective, so despite Miror's actions, he sentthe bid document to a pre-screened group of labour servicecompanies. All the companies included in the bid had the capabilityto meet NCG’s external labour demands when the company needed them.The deciding factor would be how much each company would be willingto lower the price they charged, which was critical in reducingoperating costs. The bid included the three companies Mirorcurrently used, as well as six other companies that operated inTorento and the surrounding areas. It seemed that these six othercompanies were excited about this new business opportunity. As thedeadline for bidding approached, Holmes received nine proposals forthe labour subcontracting position, six of which were not onlybetter prepared and more thorough than the three companies NCGalready worked with, but also included rates in line with Wells’request for a 25 per cent cost reduction. Holmes was ecstatic withthe results of his bid; not only was he able to finally bring aboutchange in the subcontracting category, but he would also be able tofulfill his promises to NCG’s CEO. He felt this was a huge win forhis team, and one that would eventually improve the company’sfinancial performance during an economic downturn. Holmespainstakingly compiled the data he had received, analyzed it, andformulated it into a recommendation. It turned out that the threecompanies that Miror insisted on using were asking the highestrates, at only a 10 per cent discount. In his analysis, Holmesstressed the confidential manner in which the data must be treated;the proper legal and ethical procedure was not to disclose anyinformation about the other participants’ submissions. Once he wassatisfied with the document, Holmes sent Miror the final copy,along with a request to meet to discuss plans to switch from usingthe three current labour providers to any of the other six firmsthat had submitted better bids. New Proposals The following day,Holmes received an email from Miror. The email contained newproposals from the three companies that had submitted bids with thehighest costs. In the three new proposals, the rates had beendrastically reduced to match the lower rates—surprisingly, to theexact dollar amounts—proposed by the other respondents. Yet otherthan the reduction in rates, the proposals had not changed much.Holmes was furious. He thought that Miror had simply looked at thedocument Holmes had sent him, and upon discovering that his“buddies” would be losing NCG’s business, had contacted the threeexecutives and warned them to lower their bids. In fact,Holmessuspected that Miror had probably told them exactly how muchthey would need to take off the price in order to continueproviding theirservicesto NCG.
Assignment Questions: 1. What facts should be considered inevaluating Miror's actions? (address at least three facts and usingthe case content, explain why these facts should be considered)
2. Who would be the primary and secondary stakeholders withrespect to Miror's decision? ( address at least three primary andthree secondary stakeholders)
3. What are the possible consequences of Miror's actions? Whenestimating consequences, consider the magnitude and probability ofthe consequences based on both short-term and long-termperspectives (see Exhibit TN-1). (list at least three consequencesand explain about them as the question asks you ).
4. Are there any relevant ethical principles (other thanconsequentialist principles) or violations of human rights orjustice involved in this decision? (at least 2 approaches)
5. In light of all of the above considerations, what do youthink Holmes should do? How can NCG prevent unethical decisions inthe future? (at least 4 recomandation for each one)
