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Stratafin

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Richard Ivey School of Business

The University of Western Ontario

9B12C006

STRATAFIN INC.: AUDITING CHANGE

Verity Hawarden, Professor Margie Sutherland and Dr. Mandla Adonisi wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.
Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing. Richard Ivey School of Business Foundation, The University of Western Ontario, London. Ontario, Canada, N6A 3K7; phone (519) 661-3208: fax (519) 661-3882; e-mail cases@ivey.uwo.ca.
Copyright © 2012, Richard Ivey School of Business Foundation

Version. 2012-05-08

It was a chilly winter day in June 2010. Ben Adams, Chief Executive Officer (CEO) of StratAFin Inc, reflected on the previous Friday's company event when all the staff had spent the evening leaming the diski i dance, the official dance to celebrate the upcoming World Cup football toumament The South
African nation "vas united in its excitement about hosting this prestigious international sporting event held every four years in a different country, and the StratA Fin atrium reflected this energy. The vast central area 111 the building was festooned with flags representing all the participating countries: the colour and diversity of the flags mirrored the diversity of employees and job functions within the finn All the staff. from the most selllor to jumor levels, had embraced the diski dance evening with great enthusiasm This made Adams reflect on the profound changes that both South Mrica and StratAFin had wldergone in the last decade.
Adams had Im'ed the adrenaline rush of leading his fmn through large-scale change for the last seven years. His dilemma now was whether he had done enough to align the company with the new operating environment in South Mrica or if at this point there was a need for radical change. If so, did he have the right team, culture and business model in place to implement it?

A COUNTRY OF SWEEPING CHANGE

In 1994, South Africa emerged from a dark history oflegislated polarization based on race The apartheid system had enabled the small White minority to have the vote, hold most of the econonllC power in business and 0\\,11 the majority of the land. Apartheid affected every area of daily life, and there was systemIc racIsm in all aspects of society. Consequently, global sanctions were placed on the country_ resulting in businesses becoming mtemally focused.

Spearheaded by SA Tourism, the diski dance is based on the unique way in which South Africans play soccer.
"rhythmically somev(hat showy, but never boring" The dance was initially devised for an international television advertisement aimed at highlighting South Africa's readiness to host the 2010 Football World Cup. It was screened globally on CNN. BBC, National Geographic, Eurosport and Sky News Sport. See www.diski.co.za. accessed June 30. 2010.

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In the 1994 general elections, the African National Congress (ANC) was voted into power, and Nelson
Mandela became the first democratically elected president (see Exhibit 1). In the eyes of the intemational community, South Africa was no longer "the polecat of the world.": The ne,v govenllnent inherited a country in which the provision of basic needs (hous111g, health_ education, access to water and electricity) for the majority of the population was insufficient 3 The gross domestic product (GDP) real gro\\ih rate in
1994 was approximately 1.1 per cent 4 and the country -s Gini coefficIent (measurement of inequality between rich and poor) was 593 5 By 2002, the GDP real growth rate had increased to 2.6 per cent 6 : however. the Gini coefficient had increased to 65,7 \yhich signaled greater inequality between rich and poor over the previous eight years Life expectancy had dropped from age 65 to age 45, due largely to the dramatic increase in HIVI AIDS. During this period, the goyemment focused on extending health care and crucial infrastructure of water. sanitation and housing to the broader population 8 After 1994, a huge
Black middle class emerged, but there was still a need for a further transfer of economic power. As a result, there was a push for implementation of industry charters to address this and for Black Economic
Empowennent (BEe) to be a consideration in most goyemment policies. While initially there was no clearly articulated strategy, BEE was more carefully defined by the BEE Commission in 2000. A fonnalized strategy for broad-based BEE was released three years later in 2003 10 In 2010, there was still much debate in the media about racial issues and whether the transfer of economic power had, in fact, taken place. The country still faced societal challenges with the education backlog, imbalance of wealth, systemic racism and perceptions of reverse discrimination. In spite of this, South Africa remained a rapidly developing state, the economic powerhouse of Africa. Furthennore, hosting the 2010 World Cup football tournament encouraged much more global interest 111 the country, which promised interesting possibilities for South African businesses

THE MODEL OF PROFESSIONAL SERVICE FIRMS

Professional service firms, such as accounting finns, are defined as organizations that employ professionals, that is, people who have obtained a qualification accredited by a professional body, who practice under the disciplinary rules and standards of such a body and who also are personally liable for the work they do. In addition, professional service finns focus primarily on the nahlre of the value of what they offer to their clients. The emphasis is on customization, and tIllS is what differentiates professional service [inns from other organizations.]; Most professional service fimls are struchlred both vertically
Address by President Nelson Mandela at the opening of Parliament. February 5. 1999; see www.info.gov.za/speecheS/1999/99205_openin99_1 0091htm accessed June 30. 2010
3 Goliath, The South African Economy 1994-2004. 2010. httpJ/goliath.ecnext.com!coms2lgL0199-5012123/The-SouthAfrican-economy-1994.html, accessed May 1,2010.
4 Central Intelligence Agency (CIA), The World Factbook. 1994 South Africa. 1994. wwwums/.edu/services/govdocs/wofact94/wf950220.txt. accessed May 1. 2010.
5 CIA, The World Factbook, South Africa. 2010. http://www.cia.gov/library/publications/the-world-factbook/fieldS/2172.html. accessed May 1,2010.
6 CIA, The World Factbook, 2002 South Africa. 2003. www.faqs.org/docS/factbook/print/sf.html. accessed May 1. 2010.
7 CIA, The World Factbook, South Africa, 2010.
B Goliath, The South African Economy 1994-2004.
9 Black economic empowerment (BEE) is a strategy aimed at increasing Black participation at all levels of South Africa's economy. It aims to redress imbalances of the past by seeking substantially and equitably to transfer ownership, management. industry and operational expertise. as well as proportionate control of South Africa's financial and economic resources. to the majority of its citizens. It also aims to ensure sustainable. broader and meaningful participation in the economy by Black South Africans. See www.southafrica.info/public_serviceS/citizens/travelkit-bee.htm. accessed May 1,
2010.
10 BEEBiz, History of Black Economic Empowerment. 2010. www.beebiz.co.za/content.asp?PagelD=22&bhcp=1. accessed
May 1.2010.
11 C. Jonker. "The Impact of Organizational Design on the Work Habits and Processes of a Professional Services Firm,"
MBA Research Report, Johannesburg: Gordon Institute of Business Science. University of Pretoria, 2001.

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and horizontally The vertical design consists of three levels: senior directors or partners]: at the senior level ("finders"): junior partners, associate partners, managers or associates at the middle level
("minders"): and professional assistants at the lowest level ("grinders''). The ratio of finders to minders to grinders is referred to as "leverage." Junior staff, called trainee accountants, work closely in project teams alongside more experie'nced staff, thereby leaming the skills of the trade through an apprenticeship process while delivering service to client companies. Senior professionals are expected to share their highly personalized tacit knowledge, which they have acquired over many years of experience Long tenure of the partners contributes towards robust retention of knowledge. This leyerage results in an effective knowledge management structure and an efficient income generation strategy (because the majority of the work is undertaken by the "minders" but billed to the client at the "finders" rate).
Furthennore. senior level resources are made available to market the finn and solicit new work. :3
Accounting finns motivate trainee accountants by setting the goal for them to become partners. Typically the partner track after graduation is betw'een seven and nine years. The practice of accounting and finance is learnt at universities and via the trainee accountant system. Once out of this "apprenticeship" system, the option is to either progress up through the ranks of the corporate structure or to leave the fiml.
Generally, accounting firms employ more trainee accountants than are required in the long term, specifically because there is natural attrition at the end of the apprentice period. From a rennmeration point of view, the general billing and salary arrangement in accounting finns intemationally is that an accountant has to cover their cost to the company (salary) by three times through billing to clients. For example, an accountant earning R500,OOOi4 per annum should write annual fees of RL500,OOO. Usually the first third covers the salary, the second third covers overheads and the last third is profit to be shared among the partners.

ACCOUNTING FIRMS RESPOND TO GLOBALIZA nON

In 2002, South Mrican accounting finns were facing many challenges. Many clients were consolidating in order to be globally competitive, and their expectations were growing due to global exposure, resulting in fierce competition between accounting finns trying to differentiate themselves This often required accounting firms' service portfolios to expand. Many accounting fimls accepted the intrinsic risks of expansion in the knowledge that this should yield increased reputation, a greater client base and larger profit At the same time there were intemational changes in terms of the introduction of Intemational
Financial Reporting Standards (IFRS).
StratAFin was fomled through the merger of three prominent South African accounting finns 111 1998 It had offices in Centurion and Cape Town, South Africa and an association with finns in Nairobi, Kenya and Lagos, Nigeria. The merger allowed the finns to consolidate their offering to large corporate clients and to reposition itself as a full service corporate accounting finn.
The traditional model of an accounting finn featured a chainnan/senior partner and a managing partner who ran the firm This was the model that existed in 95 per cent of accounting finns around the world
Typically, these would be men and women who had been practicing accounting for many years and who were respected and had credibility within the financial environment The challenge experienced with this model was that nvo people at the top of the eamings scale were then removed from practicing and billing
12 The terms "partners" and "directors" are used interchangeably. "Partners" is the international term, but because StratAFin is an incorporated company, the partners are in fact directors from a legal point of viev(.
13 Jonker, "The Impact of Organizational Design."
14 R500,OOO is equivalent to US$69,990 (US$1 = ZAR7.15 as at February 2, 2011); www.coinmill.com. accessed February
2,2011,

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hours. As a result, within StratAFin, there was strong motivation to change this and to retain the senior partners in their area of expertise As the \vorld flattened with increasing globalization and foreign investment into South Africa picked up with the end of the apartheid era, StratAFin positioned itself more towards doing business with multinationals operating in Africa It wanted to offer a more personal experience than was offered by the Big Four intemational accounting finns1>, to become essentially an
African accounting firm that would use its understanding of the operating environment as part of its distinctive offering StratAFin acknowledged, however, that if it wanted to play in a global arena, it had to operate as a First World leading accounting fiml. It also recognized that pursuing growth as a strategy would bring greater complexity As Adams stated, "the complexity of pursuing growth meant that the day-to-day challenges of the organization called for full-time professional management focus.,,16

IMPERATIVES FOR CHANGE

To respond to these new challenges, StratAFin embarked on a transfonnation process in the early years of the new century. One of the key thought leaders and proponent for the need to transfoml the business was
Joseph Mbizo, head of the corporate finance department and probably the country's most renowned Black accountant Mbizo had a long history with the finn and played a most influential role in its organization.
He had joined immediately after graduation, completed his training contract and remained there ever since, apart from two and a half years in the late 1990s when he had worked for one of the Big Four accounting firms in Sydney, Australia. This experience taught him how these firms organized themselves institutionally and how they became "forces of nature within their environment"i7 Mbizo came from an activist background and realized that the many fears of the various sub-sectors of the country's population were very well-founded and that transformation issues within the company had to be addressed.
The original objective for the transformation was twofold First, there was a need to corporatize and institutionalize, so as to position the company as a world-class, best-practice intemational accounting firm on the Mrican continent. Mbizo realized that a way of controlling the costlincome imbalance as a result of the loss of revenue from having senior partners at the helm, as well as a way of modemizillg the finn, was to appoint a professional Chief Operating Officer (COO). This was the role for which Adams was recruited. At the same time, the release ofthe govemment's codes on Black empowerment was imminent, and there was much debate about what they were going to be. There was a recognition that transformation had to take place in order to align the firm with what the govemment was espousing to insure the future sustainability of the business. Consequently, the second component of transformation for StratAFin was to make it more representative of the South Mrican population in tenllS of racial and gender diversity at all levels Socially and ethically, this was understood to be the right thing to do

CHANGING THE MANAGEMENT MODEL

Most of Adams's teenage years were spent in Wales where his group of best friends was globally and racially diverse. To his mind thIS was the nomL and, looking back, he felt privileged to have grown up in such an unbiased emironment. Back in South Mrica in the early 1980s (the height of the apartheid era), he completed his schooling at an all-boys boarding school in tlle consenative town of Pretoria. It was here that he became more 3\vare of the societal challenges facing the country. This understanding of the challenges of diversity was further contextualized for him when he was conducting research for his
15 0eloitte and Touche, Ernst and Young, KPMG, and PricewaterhouseCoopers. www.big4accountingfirms.org, accessed
February 8, 2012.
16 Interview with Ben Adams. March 2. 2010.
17 Interview with Joseph Mbizo. October 28. 2010.

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Master's in Business Administration (MBA) thesis, which examined "the effect of national culture in mergers in financial services companies in Africa." He began to see hm\- companies were fragments of the society in which they operated.
Adams had spent the early years of his career with one of South Africa's largest retail banks, moving through positions in back office management, through IT implementations, strategic planning and investor relations His long tenure with the bank enabled him to complete his studies while working: he successfully received a Bachelor of Commerce (B.Com), m~oring in mfonnation systems and industrial psychology, and an MBA from South Mrica's leading business school Adams realized that his career path within the large bank was not very clearly mapped out. He felt that he was not leaming how to run a business as he was operating in a division \\'here eyerything-financial and human resource systems, marketing and branding-was dictated from group leyel He realized that strategically he was leanllng very little, and he was becoming restless. Adams appreciated that he needed to join a smaller organization where he would be able to apply all the skills he had acquired from both his shldies and general management grooming within the bank
StratAFin was looking for a COO who understood business and the professional services environment.
Most importantly, StratAFin needed someone \vho would be respected by the partners as a person who could bring value to the finn. This was a critical issue as, without intemal acceptance, nothing would be achieved by the new recruit. At this stage, StratAFin's vision for change was not yet clearly articulated, but the idea of adopting best practice and modemizing \\-as certainly apparent, and this excited Adams. He joined StratAFin in October 2003, nine years after South Africa had celebrated the end of apartheid and begun its transition to democracy. Initially, Adams played to his strengths in areas that were not necessarily those of a person who had been schooled in accounting: infonnation technology (IT), operations, marketing and human resources (HR), He thus realized the opportunity for quick wins. It was also an interesting time: the firm was perfonning relatively well financially, but, as Adams stated, it
"wasn't firing on all cylinders."] 8
Adams believed tlIat there were two initiatives in which he was involved that inspired greater confidence in his leadership abilities. The first was that he was able to remodel the entire IT platfoIDL in particular, he implemented an online timesheetlbudgeting process that immediately started delivering results and through its transparency enabled many divislOns to exceed budgets regularly Adams acknowledged that if one understands the human dimension of organizational life, one has great lllsight into what drives the busmess. He reworked the individual bonus scheme, making perfonnance bonuses far more achievable, with threshold bonuses being handsomely rewarded (up to 50 per cent of base pay) for those who perfonned exceptionally The resulting benefit for the finn was that tlIis new bonus system often forced more junior staff to initiate discussions with their partners around work allocation and utilization. The second action \vas that, shortly after his arriyaL he was alerted to the fact that the finn's lease within the
Civic Towers city office block was due for renewal within 18 months and that he was expected to provide the solution, namely, whether to renew, move or build.

BUILDING A NEW IDENTITY

It was decided to build new premises in the suburb of Cenhlrion, halfway between the two large cities of
Pretoria and Johannesburg, to help establish a new corporate identity This decision galvanized the thinking into what StratAFin wanted to become. After much discussion, it was felt that a free-flowing building was needed, a place where infomlation could flow and where people could congregate and could
18

Interview with Ben Adams. March 2. 2010.

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have a physical sense of the brand that StratAFin was aspiring to become The symbolism in the old building had been colonial and White male-oriented. Eyery aspect of the new building was designed to create a flow of communication and to be easy to navigate. Several '~pause areas" were incorporated into the design, encouraging frequent intemal contact. The vast central atrium with its iconic eight metre high statue depicting emblems from currencies throughout Mrica was designed to emphasize openness, expertise and movement. The restaurant facility was created to be used widely and frequently for many functions. The new brand even filtered down into fumlshings and art There was an awareness of how bland other accounting firms' corporate decor appeared. The art displayed at StratAFin, accumulated over the years, had been dominated by pictures of previous company chairmen, English hunting scenes, and a collection of etchings of European cathedrals. Because Adams and many partners and staff were concemed about the systemic racism and discrimination in society, they wanted the firm's art to celebrate the diversity of the country and its artists The new artwork was symbolic of the changed organizational culture: it vvas eclectic and self-defining, meant to reflect South Mrica as it should be. There were no masks or drums or other such cliches of African culture.
By early 2005, 18 months after joining tlle finn, Adams had generated confidence in his leadership ability, and in March 2005 new leadership roles were assumed Brent Botha, who had been the senior partner in the most profitable division became chairman and Adams the CEO.

THE TRANSFORMATION JOURNEY BEGINS

The move into the new building at the end of 2005 became a symbol of all the change that was taking place in the firm. Adams's mandate was now to transform its orgamzatIOn. The fonnal official mandate canle from the executive committee (essentially equivalent to the board of directors, to which Adams reported), and the more informal mandate came from the many individuals who sought to influence from the corridor. There was consistency of intent between the two. Adams embraced this opportunity to make effective changes.
One of the charismatic leaders was Stuart Murray, who headed up the financial planning division. He had worked for and with StratAFin since the 1970s: as well, he had been intensely involved with assisting
Black trade unions and the ANC in exile with their financial affairs. causes which were unpopular with the White govemment and establishment of the dav. Murray's reputation gave the firm a progressive attitude, and the subsequent ranlification was an influx of women and Black accountants. By 2003, there was disparate work going on around transfonnation within the finn: for instance, there was an employment equity committee and a recruitrnent committee, but there was nothing to bind any of these initiatives into a coheSive strategy. Murray consequently suggested that all the individual initiatives should be pulled together into one process. He led the onginal diSCUSSions within the firm by suggesting two altematives be considered. The first option was to contract with external consultants who would draw up a proposed methodology that could then be amended, adopted and imposed from the top down The alternative suggestion was for the finn to draw up a transfonnation process itself by using a standard strategic planning methodology The firnl accepted the second suggestion, and Murray set to work with
Adams late 111 2004. They adapted a strategic transfornlation model that Murray found on the Internet from the U.S. National Aeronautics and Space Administration (NASA) and, based on guidelines therein, laid out the suggested steps to be followed.

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A SYSTEMATIC APPROACH TO TRANSFORMATION

At the end of 2004, the senior partners spent 10 days in one month listening to outside people, who came to share VIews on the broader perspectives of transfonnarion in the country and to better ennch their understanding of the context oftransfonnation for StratAFin. To sell the concept oftransfonnation within the finn, a one-week conference was organized \yith a cross-section of 34 employees balanced between gender, race, departments and organizational levels. The purpose of the conference was to fonnulate recommendations on a transfonnation strategy for the finn that would enable it to function effectively in and to make a constructive contribution to a changing South Africa. To ensure a thorough understanding of the subject, pnor to the conference every attendee was given a substantial amount of explanatory reading material, which addressed issues such as diversity, employment equity and BEE benchmarks,
SOCIal investment, economic upliftment and organizational transfonnation. DiSCUSSIOns centred on what transfonnation meant for the finn and what it meant for individuals The desired outcome of the process was to be a transfonnation strategy that was comprehensive, legitimate, attamable and effective. It was a very controlled process; everyone was made to feel comfortable and knew that anything could be discussed in confidence.
A report was produced after this meeting and was circulated to everybody within the finn. Eyeryone was able to provide comment and was given an opportunity to talk about it; it was a theme that ran through the entire fiml and energized one and alL Every occasion was used to show people exactly where transfonnation fitted into other strategies of the fim1 and hoy\' it was central to the business's sustamability Mter receiving feedback from all levels of the finn, a smaller group met again for an additional three days to finalize the input This document was then presented to the full body of 35 partners at the partners' retreat in 2005. Different people in the finn who had been part of the charting process came to the retreat to share their experiences. A "road shov/' was then conducted witllin the whole finn as well as to clients, explaining what was being done in tenus of the transfonnation of
StratAFin. A transfonnation committee was established and met periodically to ensure continual open dialogue and to report back on what was and was not working.
Reflecting back on the process in 2005, Mbizo commented on how inclusive and transparent it was: "All people at all levels seemed to take ownership and had a positive approach to the process. It was refreshing to note how honest people were when engaging.,,19 Murray believed that the courage that the finn showed was profound: "In 2004, the topic of transfonnation was still very controversial but the process brought everyone along and many fears were successfully addressed ,,20

CORPORA TIZA TION

The strategic growth that StratAFin was considering was monumental and was going to affect every aspect of the business Growth of the finn would not be successful without ensuring that effective support structures were in place. When Adan1s jomed the finn, the support structure consisted of one HR manager with an assistant, a marketing officer, a financial manager, an IT manager and a few administrative people These functions were very operationaL with little value being added to the business. The magnitude of tlle task ahead was so great that Adams realized he had to build a team of very strong experienced professionals in the areas of human capitaL marketing, business deyelopment and IT. Many of the committees of accountants that had been rumling these areas of the finn were very quickly disbanded. Some people who had taken ownershIp of the areas felt displaced, and as a result some of
19

20

Interview v{ith Joseph Mbizo. October 28, 2010.
Interview vvith Stuart Murray, November 2. 2010.

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them started to look for jobs elsewhere. The importance of retaining and managing knowledge within the finn was understood, but there were occasions when this was not possible.
A further challenge was that it was difficult to always find the right replacement first time. The finn experienced many casualties in tenns of bringing in the wrong senior managers. The recruinnent process would sometimes take up to six months, so it was a great blow when the recruit realized a few months later that this was not the correct career solution On one occasion, a new recruit walked into a meeting on her first day and realized that she had made a mistake. In this instance, both parties benefitted from the immediate acknowledgement that the recruit had made the wrong employment decision Adams stated that this was where he leamt to become far more philosophicaL While he tried many changes, he realized that it was not the end of the world if some of them failed. The importance was "to keep trying and to have fun trying.,,21
The result of disbanding the committees was that it gave Adams more support and more leyerage. Adams believed his power came from his ability to influence as well as from his previous actions that demonstrated his ability and credibility. He relentlessly pursued active engagement with StratAFin employees, discussing what was important to tlIem, what their yiew of the fim1 was and where it was headed. He then consolidated this infonnation into a common vision, value system and strategy for the finn going forward so as to ensure unity of purpose. A priority for Adams was to make certain that he spoke often and enthusiastically about the finn's planned transfonnation strategy in order to build support, which would ensure alignment of people, their departments and their practices to the new line of thinking. Excitement about growth and change was created. The intention was to persuade people to believe how much they could actually achieve. Adams stated iliat it was important to ensure all managers disseminated a clear unified message in infonnal "corridor" talk.

CHANGE DOES NOT COME CHEAP
The finn recognized that if it wanted to im'est in human capital development and deployment of the best technology possible, replicating on a smaller scale what the leading firms around the world were doing, it needed to have money to do so. Adams realized this would result in a debate around short-tenn versus long-term benefits He insisted that if the fim1 wanted to grow and follow its vision, long-tenn investment was necessary. There was now the recognition that the finn needed to invest significantly in human capital initiatives such as recruitment, development, continuous leaming and scholarslups Financial growth was required to enable the finn to transfonn.
The firm needed change agents, that is, people who would challenge the status quo within the finn. This meant having resilience and a thick skin to take on people who were in positions of power A marketing director, HR director and financial director were appointed. All were professionals with strong track records and who were quite outspoken and firn1 in their views TIle new marketing director initially focused on internal issues, ensuring that the corporate identity and brand "alues were brought alive so that staff could align themselves with them and gain a strong sense of where the business was headed Up until this point, employees had been defined as either professionals or non-profeSSIOnals, who were defined as those who were not practicing as accountants. This made them feel like "second cousins" The ne\v HR director Colleen Hollis, insisted that this had to change.
The firnl's leadership decided early on to avoid playing games by embarking on "quick and dirty" solutions to transfonnation. For example, becoming a partner usually took seven to nllle years. Some
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Interview with Ben Adams. March 2, 2010.

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competitors \vere achieving transformation targets by making Black accountants partners one year after finishing their training contracts without allowing them the opportunity of completing their learning experience StratAFin found this incomprehensible. The finn realized that there was no sustainability \vith this model, that universally there were no short-cuts to becoming a top-rated accountant. Too rapid promotion did not allow an individual the opportunity to gain sufficient experience to become a trusted adviser. This could result in damaging that individual's reputation forever.

MANAGING RESISTANCE TO CHANGE

Adams stated, "Resistance to change is part and parcel 111 any org…...

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