"Whateverhappenedtoourpartnership?Ithasn'tbeeneasybutthepast16 WaterlooMicrochipst
JoeBennettlookedwistfullyoutherofficewindowandmused. yearshasseenourfriendshipsanddreamrewardedbyacumulativeseriesof successesandwham!Nowwe'rearguing,backbiting,withholdinginformation, andsecondguessingoneanother.Thiscan'tgoon."
ThreeelectricalengineeringstudentshatchedWaterlooMicrochips duringatermprojectintheirfinalyear.JosephineBennett(Joe),Lawrence Martin(Larry),andMorrisWatson(Moe)foundedthefirmduringthefallof 1981,totakeadvantageofacontrollerchipdesigntheyhaddeveloped.The ideawastofocusonthedesignandmanufactureofmicrochipsusedin productcontrolunits.Allthreehadstronginterestsinappliedresearch, excellenttechnicalskills,drivingdesirestolearn,agenuinelikingfor oneanother,andhighneedsforautonomy.Theirskillsetsoverlapped,but nottothepointofdisadvantage.Theycomplementedandenergisedone anotherwhenevertheyputtheirheadstogether.Joewasthebrainbehind mosttechnicalbreakthroughs.Sheexcelledinconceptualisingapplied researchquestionsanaressingundamentalnewproductdevelopmentissues. BothLarryandMoewereparticularlyadeptatspottingdownstreamcommercial applicationsanddesigninglifeintothem.Allthreehadtheinterpersonal skillsneededtodevelopclientrelationshipsandtrust,butnonewas particularlyinterestedinthesalesandmanufacturinginitiativesthatmore matureproductsrequired.Therecessionof1981madethedecisiontosetout ontheirowneasierbecauseelectricalengineeringjobswerescarce. Thecompany'sfirstcommercialproductwastheonethegroupdesignedfortheirterm project.It wasamicrochipusedinacomplexchronometerandittook11monthsbefore thatinitiativepaiddividends.Workinginuniversitylabsasresearch assistantsandoutofagaragetheyperfectedtheirdesignaddressingissues ofreliability,qualitycontrol,cost,manufacturability,andclient development/commercialisation.Thesecondproductwasacontrolunitfor industrialairconditioningsystemsandthatproductwasfollowedquicklyby acontrolunitforahearingaid. Inthebeginning,thepartnersdecidedtoconcentrateondesignonly andcontractedoutorlicensedchipmanufacture.Allthreepartnersworked togethertodevelopandtestnewproductdesigns.Asthecompany'sproduct linebegantogrow,however,thethreepartnerssawanincreasingneedfor specialisation.In1988,withafulltimestaffof27(21ofwhowere technicalprofessionals),theyorganisedthecompanyintothreedivisions automotive,industrial,andelectronic,witheachpartnerassuming responsibilitforoneofthedivisions.Althoughtherewasinformal collaboration,effectivelythepartnerswerenowworkingmoreindependently, sincetheproductlineswerequitedifferent.
Areaswheretheycontinuedtoformallycollaborateinvolveddecisions concerningstrategy,commitmentstonewprojects,governmentresearchfunding initiatives,quarterlyprojectreviews,andoverallfirmperformancereviews. TheSeniorManagementCommitteewasthecoordinatingvehicleandJane Drysdalechairedthiscommitteeafter1991.Afinalareaofformal collaborationinvolvedthenurturingofprofessionalrelationshipswith universityfacultyandgraduatestudentsinelectricalengineering.This paiddividendsinthreeways.First,itprovidedaccesstoanexcellent talentpool.Second,itservedasareadysourceoftechnicalinput, insights,andideas.Third,itprovidedsuperbcommunicationchannels throughwhichtotrackandaccesstechnicaldevelopmentsandbreakthroughs. Newproductsquicklyfollowed.Theautomotivedivision,managedby Joe,designedanddevelopedthreesuccessfulcontrollers,oneforantilock brakingsystems,oneusedfordriverinformationsystemsinautomobiles,and anotherforregulatingfuelmixturesindieselengines.Theindustrial division,managedbyLarry,focusedondevelopingcontrolunitsforheavy dutyindustrialapplicationswherereal
tAnthonyAtkinsonandGeneDesczapreparedthiscasefortheSocietyofManagementAccountants ofCanada.Thiscasewasdevelopedtopromotediscussionofmanagementaccountingissuesandis nottobereproducedordistributedwithouttheexpressedwrittenpermissionoftheSocietyof ManagementAccountantsofCanada.
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timesensingandfeedbackofhundredsofpiecesofproductioninformationwas criticalforthecontrolandefficiencyofhighspeedproductionmachines. Themostimportantapplicationswereinpulpandpaper,oilrefining,and steelmaking.Theelectronicsdivision,managedbyMoe,focusedon medical/scientificandhomeuseapplications.Thisdivision'sproduct developmentsincludedchronographicapplications,telemetryinformation integrators(e.g.foruseinneonatal,intensivecareandrecoveryroom applications),andcontrolunitsforuseinkidneydialysismachinesand bloodmonitoringequipment.Tworecentproductdevelopmentsthathadthe potentialforwideapplicationinvolvedmicrochipcontrolunitsforhome alarmsystemsandhearingaids. WaterlooMicrochipsmovedintotheircurrentfacilityin1989,with additionsmadetotheoriginalbuildingin1993and1995.Thissitehad ampleroomforexpansion.Itwaswelllocatedinanindustrialpark,in closeproximitytobothuniversitiesandtransportationcorridors. Inthelate1980'sandearly1990's,thecompanywasinthetruest senseapartnership.Thepartners,eachwiththeirownsmallbutgrowing staff,focusedonidentifyingproductopportunitiesanddesigningthenew productsintheirrespectivedivisions.Administrative,salesandmarketing, accounting,contracting,anddistributionwerelefttoJaneDrysdale,the SeniorManagementAssociate.Drysdalefirstmetthepartnerswhileshewas anengineeringcoopstudentin1986,butherinterestsweremoremanagerial thantechnical.Sheenjoyedthedynamicscreatedbyahightechnology, entrepreneurialenvironment,andshethrivedontheautonomyandchallenges itprovided.ShejoinedWaterlooMicrochipsin1988aftercompletingherMBA andsheearnedherCMAdesignationin1991. 1 Duringthe80'sandearly90's,thethreepartnerssharedcommon administrative,sales/marketingsupport,anddevelopmentexpenses.The partners'baseincomeswereidenticalwithoneimportant FigureI WaterlooMicrochipsInitialStructure
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exception20%oftheirearningswerederivedfromthecontributionoftheir respectivedivisions,netofanyallocationsforcommonexpense.Fifteen percentofDrysdale'sremunerationwastiedtooverallfirmprofitability, andallassociateswhohadbeenwiththefirmformorethan12months participatedinaprofitsharingplanthatcontributed,onaverage,15%of theirgrossincomeduringthe1990's.Toattractthebestandthebrightest employees,paylevelsforassociateswereinthetoptwentypercent (nationally).Thepartnersoptedforamore eration,choosingtomaintaintheirconservativeapproachwhenitcame totheir ownremun paylevelsataround$100,000,reinvestingresidualprofitsinthefirm. Thesearrangementsappearedtosuitthepartnerswellandtheyremained steadfastfriends,frequentlyprovidingeachotherwithtechnical suggestionsandhelp.Thepartnerseachowned1/3ofthefirmuntil1992. Atthatpointtheirownershipdeclinedto30%eachwhenDrysdalepurchased1 0%ofthefirmthroughbonusesandstockoptions.Thereafter,theyjokingly referredtoherasthenonproducingpartner.Figure1showsthe Organisationchartthatevolvedduringthecompany'sfirst14years. WaterlooMicrochipsbelievedintheimportanceofdocumentationand scientificrigourwhenitcametoengineering,science,andcontract management,buttheytriedtokeepthemselvesasflexibleandadaptiveas possiblewhenitcametointernaladministrativematters.Theyplacedlittle stockinsuch
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mechanismsasformaljobdescriptions,policyandproceduremanuals,andOrganisation charts.Astimeprogressed,itbecameclearthatthesystem(orlackthereof)was becomingunwieldy.Whilethedesignoperationsflourished,themarketingandsalesunits founditincreasinglydifficulttorepresentthreesuchdifferentandcomplexproduct lines.Qualityandcostconcernsaroseregardingthecontractmanufacturerofthe microchips.Therewerealsoserviceconcernsastheoutsidemanufacturerregularly misseddeadlines,notonlyinthedesignofprototypechips,butindeliveringwell establishedchips.
By1995fulltimestafflevelshadclimbedto87,53inengineeringanddevelopment and25inmarketing/sales,accounting,distribution,contractmanagement,andotherforms ofadministrativesupport.Ofthestaff,56hadatleastoneuniversitydegreeina technicaldiscipline(electricalengineering,computerscience),and9hadbusiness degreesand/oranaccountingdesignation).Only7oftheemployeeslackedauniversity degreeofsomesort.Becauseofthelevelofstaffcompetence,thecollegial environment,normsofopennessandcandour,aboveaverageremunerationlevels,aculture oftechnologicalexcellence,andanaccommodatingandcomfortableworkenvironment, WaterlooMicrochipswasviewed,bothinternallyandexternally,asanexcellentplaceto work.However,by1995,mostemployees(includingJaneDrysdaleandthepartners) believedthattheOrganisationhadoutgrownitscapacitytooperateasinformallyasit hadinthepast.Attentiontoorganisationalsystems,procedures,andformalstructures andprocesseswasalmostuniversallyviewedasneeded,inordertosupportcontinued technicalsuccess,economicsuccess,andgrowth.
Mattersworsenedinthefallof1995,whenoneoftheoutsidesuppliersmissed threecriticaldeadlinesandtheautomotivedivisionlostavaluedcustomer.Atthesame usedinaroboticmanufacturingsystem.Allfourpartnerswereconvincedthatitwas time,themarketinggroupmissedanopportunitytobidonthedesignforanewcontroller timetorenewtheexistingstructuralandadministrativeapproaches.
Thepartnerscalledinaconsultinggroupassociatedwiththeirauditingfirm. Afterasixweek,$125,000study,theconsultantsproposedtwoalternatives.Thefirst wasthatthethreeoriginalpartnerswouldeffectivelysevertheirrelationshipandfocus individuallyandexclusivelyonproductdesign.Eachpartnerwouldthensellorlicense thedesigntoamanufacturer.Thesecondalternative,whichthepartnerschose,wasto integratetheOrganisationmorefully. Theupshotofthis reviewwas Figure2 showninFigure WaterlooMicrochipsRevisedStmcture threepartners wasgivencontrolof theirown dedicatedmarketingand salesstaff,to 2.Eachoftheoriginal theOrganisationchart
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awarenessamongststaff.Thepartnersalsoagreedtosharetheprofitsof theOrganisationequallysincetheElectricalDivisionhadbecomemore profitablethantheothertwoandseemedtoofferthegreatestpotentialfor futuregrowth,givenmarketconditionsandtheuniquecompetenciesofthe firm. Togaingreatercontroloverproduction,thepartnerspurchasedoneof theirsuppliers,AyrMicro,asmallmanufacturer(32employees)of microchips.TheymadeMilburnHathaway(theformerowner/presidentofAyr Micro)theproductionmanageratWaterlooMicrochip,andamemberofthe SeniorManagementCommittee.Milburncommunicatedregularlywith administrationandsalespersonnel,visitedheadofficeapproximately1day perweek,butspentmostofhistimeattheproductionfacility(180 kilometresaway).Becausetheproductionfacilitydidnothavethecapacity tohandlealltheproduction,Milburnalsoassumedresponsibilityfor identifyingwhatworkwouldbecontractedoutandwhatorganisationswould begiventhework. Initially,thethreeoriginalpartnerswereconcernedthatJanemight feelslightedbyhavingsomeofherresponsibilitiesreassigned.However, Janesupportedthesechangesbecauseshebelieveditwouldgiveheran opportunitytodevelopneededsystems,processes,andsupportsinthe accounting,information,andadministrativeareas.Further,shenowhad2 children(ages3and6),andassheputit,"Ihavehelpedbuildthis company.NowIwouldlikeamorenormalworkweeksothatIcanbetter balancemypersonalandprofessionallives." Almostfromthebeginning,theneworganisationaldesignwasa disaster.Attendanceatthe Fridayworkshopsbeganstrongbutdwindledoncethepartnersstoppedshowingup. Forthefirsttimeever,thethreeoriginalpartnersstartedtobicker, complainingaboutothers"notsharinginformation,providingassistance,and contributingtoinnovation,growth,andoverallprofitability."Costssoared asadditionalmarketingandsalesandresearchanddevelopmentstaffwere hiredtosupporttheworkineachdivision. Itwasquicklyapparentthattherewasahugeduplicationofeffort. Inresearchanddevelopment,peopleassignedtodifferentdivisions sometimesdidworkonindividualmicrochipmodulesthateitherduplicated ongoinginitiativesorreplicatedoutputsfromanotherdivision.This problemhadbeenavoidedbytwomechanismsinthepast.First,thepartners hadusedscheduledweeklymeetingstokeepeachotherinformed.Second,R&D staff,inconjunctionwithsales/marketingpersonnel(manyofwhomhadcome fromR&D),hadusedlunches,breaksandinformalresearchmeetingstoask questionsandshareinformationandideaswithoneanother.Salesefforts reachedthepeakoffutilityinthefallof1996,whensalesrepresentatives fromtwoofthethreedivisionsvisitedthesamecustomeronthesameday. Turfwarfarebrokeoutamongthemarketinggroupsoverwhoshouldhavethe
responsibilityfordevelopingand,sellingtwoimportantnewproductsthat hadmarketpotentialinmorethanonedivision. Themanufacturingsituationwentfrombadtoworse.Althoughvery personableandhighlylikedbyalltheemployees,Milburnseemedunableto designandimplementsystemstoimprovequality,serviceandcost performanceonasystemwidebasis.Thiswasparticularlytruewhenitcame toexternalsuppliersandmanufacturers.Duetothelevelofconfusion, Drysdalefounditimpossibletomakeprogressonimprovingtheinformation andaccountingsystems,theformalisationofthestrategicplanningprocess, andthedevelopmentofamorestructuredapproachtopolicyandprocedures. Thesesimmeringproblemsanddisputesfinallyboiledoverduringthe firm'squarterlyreviewmeetinginApril1997.Themeetingeruptedinchaos when,forthefirsttimesince1983,thefirmreportedalossandemployees weretoldtherewouldbenoprofitsharingpoolandnobonuses.Groups blamedeachotherfortheproblemsWaterlooMicrochipwasfacing.Sales complainedthatproductswereoftendeliveredlate,withordersincomplete, andwithseverequalityproblems.Marketingcomplainedthattheresearch anddevelopmentworkwasineffectualanddelayed,resultingini...