Assignment on:

12/12/2020
ABC Learning: Collapse of an
Entrepreneurial Venture
MGT 729-1: Compensation Management

Submitted to
Dr. M. Nazmul Amin
Faculty, Human Resource Management
BRAC University

Submitted by
Fatema Jahan
ID – 18374012

Fall Semester, 2020

Company Overview:

ABC Learning was an Australian based largest corporate child care provider founded at Brisbane
in 1988 by Eddy Groves and his wife, Le Neve. ABC Learning started it’s operation in Australia
and gradually it expanded it’s business in many countries and became an international
organization. During the time of its high peak it ran approximately 4,700 childcare centers and
provide care services to more than 1,10,000 children throughout Australia, New Zealand and the
United States and the UK. Since being listed on the Australian Stock Exchange in March 2003,
with 43 centers ABC Learning had experienced a meteoric rise.

The principal function of ABC Learning was the operation of its long day care centers. ABC
Learning offered child care for children from six weeks up to pre-school age. Many centers also
offered before and after school and vacation care. The vision of ABC Learning’s was to ensure
that each child was loved, nurtured and educated and thus given the best possible chance in life.
The ABC learning had four building blocks to ensure the development of the children as 1. A
learning curriculum, 2. Nutrition and physical development, 3. Center staff training &
development and 4. Facilities and environment.

The reason for growth of ABC Learning is the steady economic growth in Australia, in US and
other countries had created a huge employment opportunity was then the past 30 years. This
record unemployment created optimal condition for child care services. A large number of
women participated in child care service that created benefits for ABC Learning. Moreover,
demographic changes had also great impact on the beneficial business of ABC Learning. Such
as: The grand parents who looked after the child became less able to do that. Furthermore, ABC
Learning had the access of leading organization for necessary funds.

At the beginning of their establishment, they had made a success story by being a world largest
child care Centre. In October, 2008, the ABC Learning was put into receivership. To a backdrop
of severe debt and financial crisis which forced the ABC Learning to go into voluntary
administration as on November 06, 2008. During that time 40% of their centers were

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unprofitable and the company’s Board of Director handed ABC Learning over to administrator.
In April 2008, ABC Learnings CEO, Eddy Groves, was forced to sell US business to pay down
debt.

Objective of this Assignment:

The objective of this assignment is to figure out the answers of three questions. These questions
are stated below:
1. Critically evaluate the main reasons for ABC Learning’ collapse.
2. What are the lessons learned from ABC’s mistakes?
3. What compensation policy regime do you recommend for a viable childcare industry?

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 1. Critically evaluate the main reasons for ABC Learning’s collapse.

Answer:

ABC Learning was a high growth company. It collapsed late in 2008 after several months of
financial trouble which started on February 2008 by largely margin call after the share value fall
from 8.80 to 54 cents in august 2008. The main reason behind the collapse was the ABC
learning’s rocketing debt levels from the company’s rapid expansion overseas mainly from
acquisition in USA & UK. The main reasons behind ABC Learning collapse are pointed as
below.

Opaque operation: The business model of ABC Learning was not well devised, the economics
of the individual sites were not fully breezed and no proper analysis happened for site selections.
There was no organizational hierarchy & it was not decentralized properly. That’s why no
supervision was there from the supervisor for the subordinates. It is without doubt that there were
fundamental flaws in the accounting book keeping of the company and it was not well
maintained. There seems to be significant discrepancies in the revenues, profits and figures
stated in the company books. In a ward there was a huge lack of transparency of ABC Learning’s
operations. In addition, their income statement was inaccurate in terms of their sources of profit.
A big part of ABC Learning’s net profit was generated through an unusual system of “Liquidated
damages” & compensation from developers of its new centers. Moreover, there was no
organizational philosophy, values, business strategies, and objective in the organization.
Employee in an organization should work with a common goal to achieve objective but it was
absent.

Poor Strategic Planning & Inorganic Expansion: Poor Strategic Planning & Inorganic
Expansion: Proper risk analysis was not done prior to the rapid international expansions thus
making ABC Learning a highly levered company. It is the term used in business to explain the
expansion of organizations through mergers and acquisitions, by creating leverage in the market
on the commodities of other organizations. This was the process which ABC Learning Centres
used for their expansion strategies. Through various mergers and acquisitions they crossed

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international boundaries and took over many daycare and childcare providers in New Zealand,
UK and the USA. Due to this reason the company had huge loans and at a point those loans
exceeded the capacity of the company to repay. In a word the expansion of ABC Learning was
based on borrowing & equity margin.

Poor risk management: A huge loan made the company risky as its leverage went far beyond
its capacity to repay. There was no risk management before merger & acquisition which
increased their debt up to 1.7 billion within 18 months. There was lack of systematic accounting
practice which means a professional accountant was not hired by the company. As well as there
was no professional recruitment for the finance department such as internal auditor. The role of
government was also very much important as there should have government regulation against
merger and acquisition which was not there by Australian government.

Staffing problem: ABC Learning did not have any an experience and skilled human resource
department. They had to hire external support to for fulfilling recruiting purpose that incurred
huge additional cost. They had a relief staff provider named as 123 Careers with whom ABC
Learning had also experienced a serious problem. They had an outstanding of $9 million to 123
Careers as well as they faced problem with compensation package of 16000 employees of $31
million which made the high turnover & lack of efficient employees. Employees were uncertain
about their job security. The employment throughout all centers were not well distributed which
means the ratio between children & careers was well managed. There was also casual
employment which doesn’t support the industry standard.

Practices of nepotism: Management did not give priority to skilled employee rather the CEO of
ABC Learning practiced nepotism by involving his former brother in law in the major
expenditure as he provided the maintenance & refurbishment work to Queensland maintenance
service owned by that brother in law.

Less skilled management: ABC Learning was affected by poor management and by a weak and
non-independent board. Firstly, the CEO of ABC Learning Eddy Groves was fully inexperienced
in this particular industry as well as the board of directors was the politicians. So ABC Learning

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was managed by the totally inexperienced management whereas management needs to have
hands-on knowledge as there was no well-developed service quality benchmark in this industry.
Those inexperienced managements could not recruit the right persons for the right places who
might forecast & protect the collapse.

Lack of HR practice: In ABC Learning there was lack of human resource practices because
there was no HR planning as job analysis, recruiting & selecting the right person, proper training
and development. There was no performance management which could do the performance
appraisal of the employees. Employees were very concerned about their job security that could
bad impact on their performance level.

Problems with franchise (RMCs): Franchise is not a popular option for childcare industry,
which was not considered by ABC Learning & they started regional management companies
(RMCs) as ABC Learning franchises. ABC Learning staff ran the near about 800 RMCs to avoid
payroll tax.

Conclusion:

In conclusion it is believed that the failure of ABC Learning Centre was not only its failure but it
became the reason of failure of all the investors who have invested in this company, the staff
who worked in the company, and the mother who kept their child in their centre also fall in
trouble to take care of their baby. It is really important to ensure the safety of the investors as
well as the employee who worked there.

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 2. What are the lessons learned from ABC’s mistakes?

Answer:

The sudden collapse of ABC learning was a nightmare for the investors, shareholders, creditors,
and the staff worked in there. ABC Learning Centres has gone in receivership and its shares are
suspended because of the weak organizational structure and strategy. ABC Learning made the
business profitable in a very short time. For a company that had only listed in March 2001, the
rise of ABC Learning was spectacular. In mid-December 2006, ABC’s share price hit its peak of
$8.62, valuing the company at a staggering $3.4 billion and Groves’ personal fortune at around
$300 million. Two years later it was clear true position of ABC in the market. ABC Learning
showed an improper financial statement that was full of flaw, complex way revenue flowed back
from individual centres to the parent company; the high level of related-party transactions
involving family members; expanding business without understanding risk management; not
following any strategy for business growth and establishing the unprofitable centres – these were
mistakes of ABC learning. Here are the lessons from ABC’s mistakes-

Strategic Planning:
ABC Learning should have proper strategy and plan for expanding it’s business. The business
model of ABC Learning Center was Hard to Decipher and that’s why they failed badly.
Management can play a vital role in this situation. They should have gone with following a
mission and vision and strategy to make those plan viable. A skilled workforce with core
competency set was very necessary for their company as they help to make a feasible business
plan.

Understanding the appropriate investment:

Due to expansion, ABC Learning Centre was investing too much on the intangible assets. Their
acquisitions are all based over recognizing the licenses of the operating childcares and huge
amount of the investment was made over goodwill. In 2006, they have almost 647.6 million
Australian dollars invested in the childcare licenses and almost 37.4 million Australian dollars
was invested in the goodwill. The balance sheet was full of intangible assets rather than the

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tangible assets, and that later become reason for collapsing the ABC Learning Centre. This is
very important accounting issue; how much money a company can afford to invest in intangible
assets. ABC Learning was already well known so this was the great mistake done by them to
further invest in goodwill.

Understanding Demographic Trends and business expansion:

ABC Learning’s original vision was to corporatize the cottage childcare industry was sound. The
industry was supported by good demographic trends (increasing birth rates and growing numbers
of working mothers, and underpinned by large government subsidies which provide a steady
platform for cash-flow and earnings). ABC Learning’s strategy of creating economies of scale by
bringing together large numbers of childcare centres worked well. But Groves was focused on
buying as many centres as he could, as quickly as he could. Between 2001 and 2005 he made an
almost non-stop stream of acquisitions, taking ABC’s centre numbers from 43 to 697. The price
paid for centres was not important – the key was to keep growing at all costs. For expanding
business, he made huge amount of debt that he could not payoff. ABC Learning did not make
any proper risk analysis and there were estimates that around 200 Australian centres were
unprofitable. It is the lesson not to let your grand vision distract you from actually running the
business. So, expansion at any cost can kill a company.

Hiring Skilled HR Professional:

There has been a significant blow-out in costs in the Australian business, particularly staffing
costs. When Groves was in charge and focused, ABC never used agencies to find staff because it
costs more. But when he was off travelling, rostering and recruitment costs blew out and profits
slumped. Hiring skilled HR professional could reduce the cost in a significant level.

Following Proper Accounting Standard:

ABC Learning Center was overwhelmed by the debts they have taken and failed to pay off. As a
result, they have to sell their centers in UK and USA. The trade price was 8.62 Australian dollars
at the peak time and it fell to only 0.54 Australian dollars. They were delisted from the ASX
market.

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ABC’s auditor Ernst & Young has spent months poring over the company’s accounts of the past
three years, trying to unravel the complex way revenue and profit was accounted for, particularly
the way compensation payments from centre developers were counted as revenue. The corporate
regulator ASIC is also reportedly examining ABC’s accounting practices. The shoddy state of
the books has also made it impossible for ABC to attract a buyer for all or part of the business in
the last few months. So, financial reports matter a lot. Every organization should think about it.

Need to have a good corporate governance practices

The CEO of ABC Learning Eddy Groves never seemed to worry too much about corporate
governance, and entered into a number of related-party transactions during his time at the helm.
In 2006, ABC paid broking firm Austock – in which Groves owns a sizable stake – $27 million
in transaction fees. Also in 2006, ABC paid Queensland Maintenance Services $74 million for
untendered renovation and maintenance work on ABC centres. QMS’s sole director is Frank
Zullo, who was listed as Groves' brother-in-law in property documents in fiscal 2007. It is the
learning that an organization need to have a good corporate governance practices for long term
business operation. ABC always argued that these transactions were conducted at arm’s length,
but for many investors that wasn’t the point. Becoming known for poor corporate governance
can damage a company’s reputation and kill investor confidence.

Understanding Managers role:

Eddy Groves aggressive his passion for his company and the childcare industry was
unquestionable. But Groves’ drive consumed him. He took his eye off the management of the
company to concentrate on his growth strategy – and then became so wrapped up in the idea of a
global empire that he overpaid badly for ABC’s US and British acquisitions. The CEO thought
he can handle everything to grow ABC, but it was his lack of focus on the company’s operations
that has brought it into failure. The CEO should appoint the right manager at the right time, the
company could have been saved.

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Conclusion:
In a nutshell, ABC Learning made many mistakes to make the business growing. Rather cost
savings the company incurred loss. Acquisition and expansion abruptly does not help business at
the time when a business does not make an appropriate risk assessment and business strategy and
policy to support positive growth. The above lesson from ABC Learning’s mistake is very
helpful for the new entrepreneur.

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 3. What are the compensation policy regime do you recommend for a viable childcare
industry?

Answer:

Compensation is the total of all rewards provided employees in return for their services is called
compensation. Compensation is what employees receive in exchange for their contribution to the
organization. It is a systematic approach to providing monetary value to employees in exchange
for work performed. Compensation policy is derived from organizational strategy and its policy
on overall human resource management. In order to make compensation management to work
effectively, the organization should clearly specify its compensation policy, which must include
the basis for determining base compensation, incentives and benefits and various types of
perquisites to various levels of employees. The policy should be linked with the organizational
philosophy on human resources and strategy. Childcare industry is not a profitable industry as it
doesn’t generate high profit unless one can charge very high fees. The occupancy has to be good
enough otherwise it will not generate profit for the organization. The major expenses of the
childcare industries are staff salaries while there are other expenses as food, equipment’s, toys,
administration and maintaining grounds or premises. So all the above things need to keep under
consideration before entering into this industry.

Followings are the compensation policy regime recommended for a viable childcare
industry.

Compensation Management Process: It includes organization’s strategy compensation policy

job analysis and evaluation. Analysis of contingent factors design and implementation of
compensation plan evaluation and review.

Organizations Strategy: Organization’s overall strategy though not a step of compensation

management is the starting point in the total human resource management process including
compensation management. Companies operating in different types of market/product having

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varying level of maturity, adopt different strategies and matching compensation strategy and
blend of different compensation methods.

Effective & organized HR department: HR is very important part in any organization. So, in
case of child care industry, there should be some job openings for human resource department. In
case of ABC learning we saw, employees were very frightened about their job security and
dissatisfaction with benefits, pay, and stressful working conditions causes many to leave the
industry. A HR department can play an effective role to keep the motivation level on among the
employee as because their productivity level dose not compromised. Furthermore, HR can guide
management to take fruitful decision where necessary.

It is obvious that, for every organization there should be an effective & organized HR department
with specific policies to run all the operations, otherwise they might collapse as ABC Learning.
The employment for a child care industry would be as follows:

1. Job Analysis and Job Evaluation:

Job analysis techniques include the use of interviews, questionnaires, and observation. Job
analysis also provides base for job evaluation which determines the relative worth of various jobs
in the organization. The relative worth of various jobs determines the compensation package
attached with each job. Job analysis for this industry will determine the duties & skills required
for childcare industry & which person would be hired for it. Mainly Preschool teachers, teacher
assistants, and child care workers are required for this industry.

i) Job description: A critical component of both compensation and selection systems, job
descriptions define in writing the responsibilities, requirements, functions, duties,
location, environment, conditions, and other aspects of jobs. Helping children grow,
learn, and gain new skills can be very rewarding. The work should be sometimes routine;
however, new activities and challenges mark each day. Child care can be physically and
emotionally challenging, as workers constantly stand, walk, bend, stoop, and lift to attend
to each child’s interests and problems. Child care workers must be constantly alert,

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 anticipate and prevent trouble, deal effectively with disruptive children, and provide fair,
but firm, discipline. The hours of child day care workers vary. Many centers are open 12
or more hours a day and cannot close until all of the children are picked up by their
parents or guardians. So energetic & cool minded. There might be unscheduled
overtimes. Employees have to be there until all of the children’s parents come & pick up
their children.

ii) Job Specification: Job specification with the former dealing with various characteristics
and responsibilities involved in a job and the latter dealing with qualities and skills
required in job performer. Child care centers should have staffing requirements that are
imposed by the country. Although requirements may vary, in most cases a minimum age
of 18 years should be required for teachers, and directors or officers should be at least 21.
In some places, assistants may work at age 16—in several, at age 14. Teachers must have
a high school diploma and, in many cases, a combination of college education and
experience. Assistants and child care workers may need a high school diploma. If it is
necessary, a childcare company should hire workers who have received credentials from
a nationally recognized child day care organization.

2. Analysis of Contingent Factors:

Compensation plan is always formulated in the light of various factors, both external and
internal, which affect the operation of human resource management system. For analysis of
external factors of child care industry, we must consider the conditions of human resource
market, cost of living, level of economic development, social factors, pressure of trade unions
and various labor laws dealing with compensation management. Various internal factors are
organization’s ability to pay and employees' related factors such as work performance, seniority,
skills, etc. These factors may be analyzed through wage/salary survey.

3. Design and Implementation of Compensation Plan:

Child care industry is a critical industry. If it very hard to make profit from this sector. So,
compensation plan must be design accordingly. After going through the above steps, the
organization (child care) may be able to design its compensation plan incorporating base

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compensation with provision of wage/salary increase over the period of time, various incentive
plans, benefits and perquisites. Sometimes, these are determined by external party, for example,
pay commissions for Government employees as well as for public sector enterprises. After
designing the compensation plan, it is implemented. Implementation of compensation plan
requires its communication to employees and putting this into practice.

4. Evaluation and Review:

A compensation plan is not a rigid and fixed one but is dynamic since it is affected by a variety
of factors which are dynamic. Therefore, compensation management should have provision for
evaluating and reviewing the compensation plan. After implementation of the plan, it will
generate results either in terms of intervening variables like employee satisfaction and morale or
in terms of end-result variable like increase of productivity. However, this latter variable is more
important. The evaluation of compensation plan must be done in this light. If it does not work as
intended, there should be review of the plan necessitating a fresh look.

5. Pay Structures:
A pay structure should be set for child care industry based on hourly and monthly salaried staff,
managerial, Clerical, information supervisory, management etc. Factors that can affect
remuneration/pay structure of child care like internal factor and external factor such as: Business
Strategy, Job Evaluation & Performance Appraisal, The Employee, Labor Market, Cost of
Living, Society, The Economy, Geographic Location

6. Recruitment & Selection:

In the case of recruitment & selection process, there should be a clear personnel policy.
Childcare industry is a very specialized industry, so HR managers should hire accounting,
finance, legal & management expertise. Before the final selection of an employee, HR managers
should obviously check the references of that particular employee because parents will not ever
handover their child to a criminal or bad person. There shouldn’t be any practice of nepotism like
ABC Learning. The CEO & the board of directors should be manned by experienced & qualified
people.

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 7. Training & performance management:
Because there is no service quality benchmark for childcare industry, so training & performance
management is essential for a viable childcare industry. Each and every employee should be
carefully supervised through performance appraisal.

8. Employee management:
A childcare industry should manage its employees in a well-mannered system. A huge number of
employees are required for a childcare company. Employees should be effectively distributed to
each centre according to the employee demand of that particular centre. To reduce employee
turnover, a childcare company should provide enough job security to employees. Casual
employment is not a good option for a childcare industry, so HR managers should concentrate on
permanent employment.

9. Effective management decisions:

Because childcare is a very specialized industry, huge investments & expenditures are requiring
in this industry, so management decisions should be effective. A company may collapse because
of a single wrong decision. It’s too costly to establish a new center, so the managers should be
aware of site selection for the establishment of a new centre. In case of merger & acquisitions,
management should conduct feasibility study. They should justify whether they have enough
capital or not, whether the asking place is a suitable place to build up a centre or not, whether it
will be helpful for both the general people & company or not, how big should be the particular
center, how many employees should be recruited for that centre, how much should be the
investment, what facilities should be provided by the particular center etc. Borrowings should be
conducted within a limit. Sources of profit should be systematic (e.g. by improving service
quality & by gaining new customers). Liquidity damages, compensations & government
subsidies shouldn’t be the main sources of profit. If a particular company does not have enough
capital to establish a centre then it may choice franchise option (e.g. regional management
company or RMC). Although franchise is not a good option for childcare industries but if
anybody wants to develop franchise, HR managers should let those franchises to run
independently so that the staffs can concentrate on its parent’s company’s own operations.

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Conclusion: The collapse of ABC learning was not basically because of the severe debt and
financial crisis but also there were many more things related behind it. The role of the
government was also a vital point, as well as the inexperience CEO, the unprofessional Board of
Directors, the wrong decision of management in every step, untrained and ineffective human
resource department, and many more. The vision was perfect for the ABC learning but the way
of achieving the vision was wrong and resulted as the collapse of the organization. So every
organization before entering into a service industry which is highly specialized as childcare
industry they should consider all those mentioned fact and will hire each and every employee in
every department after matching with industry standard. The forecasting has to be done by
highly specialized so that the operations move smoothly and soundly. The financing has to be
secured by their expected revenue so that they can pay off their debt and does not fall in bank
crafty.

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I will not cheat, use unfair means, join intentionally or unintentionally any online or offline
group in which exam answers are posted or discussed, or engage in any behavior that would
commonly be deemed to be academically unethical. I will immediately notify the course teacher
of any such activity or online or offline groups that I become aware of. I acknowledge that I may
be suspended or expelled from Brac University if I am found to have engaged in any
academically unethical behavior.

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