Question

Media Impact Group (MIG) is a large advertising agency home-based in Toronto and Montreal and with several newer divisions in other cities across Canada. MIG specializes in consumer service clients including food chains, resorts, and theater operators. Headquarters in Toronto is eager to develop a larger client base in the lodging industry.

Besides having made the company's initial reputation and continuing to provide financial and administrative management, headquarters also offers expertise, databases, and other knowledge resources for the local offices. When a local office wins a bid, it receives 20% of the revenues. The Toronto and Montreal offices jointly receive 50% of the revenues with the remainder distributed to all other offices. Local offices absorb the cost of preparing specific bids, although they can draw on headquarter expertise. Local managers' pay includes a salary and a large bonus, 50 % of which is based on the office's current profitability, and the other 50 % based on overall company profitability.

The Quality Inn chain has just approached the Vancouver office with a request for a bid on an advertising contract estimated to require over 6,000 hours per year for 3 years. Quality has made it clear that the billing rate for the winning bid will not exceed $120 per hour, although the industry standard for this type of contract is $140 per hour. The bidding is expected to be intense with at least six other agencies willing to prepare bids.

Nathan estimates the minimum cost of a credible bid will be $200,000. Moreover, given the current heavy workload, Nathan will have difficulty finding individuals with time to prepare the bid. As the Vice President in charge of the Vancouver office, Nathan is reluctant to attempt the bid.

Comment on the factors in the system for motivating and rewarding Nathan that contribute to his reluctance to bid on a contract that headquarters is eager to win. What changes would make Nathan more interested in bidding?

Answer 1

Nathan estimates that minimum cost of creible bid would be $ 200,000. However the customer is willing to pay $ 120 per hour for 6000 hours work, which means that there is revenue potential of $ 720,000 in this work. This implies that the same is high profitability deal.

Nathan will also recieve incentive based on his office profitability and overall company profitability. This may be one of the driving factors for him to attempt the bid. To make Nathan more interested in bidding, company can roll out an incentive percentage on Sales Order won.