American Management Systems, INC

American Management Systems (AMS) has fourteen sub-divisions. The sub-divisions operates as separate entities, but they are able to team with other divisions for specific projects, and trade key-personnel when needed. The Federal government is represented by the AMSDG - the Defense group of the company. This division represented 29% of the client base in 1990. The firm has highly diversified its services, and its divisions range from financial services institutions to telecommunications firms. Most of its personnel in the AMSDG division come from a military background.

In the 1980's the defense group of AMS had to confront a major problem, cut-downs in the military defense budget. As a direct impact on tighter budgets, fewer contracts and projects were awarded by the federal government to private enterprises. AMSDG now had to respond to the changes in the external environment, which now had become much more competitive than before.

SWOT ANALYSIS.

AMS's opportunities have decreased in the market field of federal government agencies and aerospace companies due to federal defense budget cuts. However, there are several new market opportunities in other markets. For the AMSDG division, one opportunity would be to seek new markets outside the United States. The North American Free Trade Agreement may make it easier for companies such as the AMS to compete for foreign governmental contracts with local firms in other nations. Furthermore, new market segments, such as the manufacturing sector may have great potential for growth. AMS has internal technical expertise within the areas where the company operates. However, certain skills will have to be up-dated in order for the company to take advantage of these new market segment opportunities. An example of such a skill deficiency is in the field of marketing and in human resources.

The external threats that may make AMS business environment more unfavorable include all of the following; Slow market growth in its defense group, technological changes, the possibility of new competitors entering similar markets, the shrinking labor-pool, and finally cyclical changes. A slow growth can be expected in the US-defense market. Defense cuts would account for most of this slow-down, but also disarmament of forces as a response to political world stability. However, we have to realize that the US will always be prepared to pay the price needed to live up to its reputation as being a world superpower. Therefore it is possible to conclude that there will always be a market for AMSDG in the US defense industry. Also, other expanding market segments may leverage a slow-growth in the defense industry. In addition, technological changes may be a threat for the organization if it id not able to keep-up with the latest technology. AMS operates in a highly sophisticated industry, where technology is frequently changing. New computer technology may make AMS's services less attractive, as organizations may be able to fulfill their own needs. Furthermore, other technologically innovative companies/ entrepreneurs could easily become a competitive threat to AMS. It is true that AMS has technological expertise, but the possibility that small, and very dedicated companies may penetrate the already saturated market, and a very competitive industry. Also, the shrinking competent labor-pool in the US may also be a threat to AMS, as the company may not be able to meet the seasonal high demand for personnel. Finally, cyclical changes in the demand for AMS's services is a threat to the organization. Economic downturns, and other external factors cause these fluctuations in demand.

The internal strengths of AMS are numerous. First, the company has strong financial resources. The company has a very strong working capital, and increasing revenues. Second, AMS has technologically experienced and skilled personnel. A large portion of middle management has a military background with great knowledge of the defense industry. Finally, the company is a market leader in its niche. That leadership automatically gives the company a favorable image in the business environment.

The internal weaknesses of the organization are mostly related to personnel problem, and in marketing skills. By examining the financial reports, we can conclude that this deficiency in human resources and in certain skills have affected the company's overall performance. First, the company suffers from great productivity problems, which makes it difficult for the organization to operate efficiently. AMS has practiced a non-layoff policy, which has made it possible for non satisfactory performers to continue to work for the group. Second, cyclical changes cause internal constraints on labor. High overhead costs are incurred when employees are not directly associated to a contract. Other firms, will fire employees when there are not enough contracts available to keep expenses under control. A reduction of AMS's work force might allow the group to get its cost structure under control. Third, AMS, and particularly AMSDG has great deficiencies in its marketing skills. In addition to the personnel problems mentioned, top management has a problem with lack of focus on strategic direction. If AMSDG should move into commercial fields, the division would cause an internal competition between the divisions of market shares.

STRENGTHS OF AMS AND AMSDG.

The AMS corporation as one entity has shown extensive growth in many of its markets. All market divisions are showing increasing revenues except from the market covering federal government agencies and aerospace companies. The division covering that market is AMSDG. Please refer to graph #1 for a comparison of revenues by market. The market division which show the more growth is the market of financial services institutions, and State and local governments and universities market. Both of these markets show rapidly increasing revenues. Overall, the corporation's revenues have increased in each one of the years from 1985-1989, however, the increasing rates of total revenues have decreased in recent years.

Another strength which has to be taken into account is the firm's excellent reputation. AMS is a pioneer in the industry and the company has highly diversified its operations. This contributes greatly to the firm's financial stability. If one segment of the market fails, other market segments will be able to compensate for the decreases in revenues from the failing market segment. It is highly unlikely that all the segments would face a downturn at the same time. Furthermore, by having a flexible work force, it is possible for the company to transfer personnel within the departments to avoid labor shortages in certain divisions, and control an excess in personnel in other divisions.

AMS's WEAKNESSES.

The financial problem lay in the high overhead costs and other expense accounts. Apparently, AMS is facing increasing revenues, but the company's net income is slightly decreasing. However, the total assets and the total working capital are both increasing. These high overhead costs could be explained by the excess and inefficiency in the labor force in the AMSDG division.

In addition, the company's organization is highly decentralized in the operational levels and the individual departments have a lot of control over their operations. However, most of the strategic financial decisions are concentrated to the corporate level. Even though the corporate level control these financial factors, there is a risk that the divisions start competing with each other in the market place. That fact could be an essential problem for the company in the future.

Personnel training and policies of management training is affecting AMSDG to a high degree. Since, a logical solution to the division's difficulties to operate efficiently due to it's employee surplus, we can conclude that the division will face a change in the "non layoff" policy. AMSDG will most probably be asked to follow the industry's example of adopting the number of employees to the number of contracts. By increasing and decreasing the division's personnel base as contracts starts or are completed. This approach insures that unnecessary overhead costs due to nonbillable personnel are kept to a minimum. There is however a negative aspect to that approach since many qualified and valuable employees could be lost in the process. Most of the personnel in the organization are relatively easy to replace, since they have similar educational backgrounds. However, some key personnel would have to be protected and given the opportunity to advance from within the organization's hierarchy. Furthermore, another alternative to laying off employees would be to exchange personnel between the divisions.

Lack of marketing skills was earlier mentioned as an elemental weakness of the AMSDG department. There are two alternatives to increase marketing knowledge in the division; Hire new personnel with marketing skills, or introduce a new training program within the organization. I believe that the second alternative is the best one. By educating the existing employees, the extent of layoffs may be reduced, since successful employees could move into the field of marketing within the business group. If new personnel is hired, layoffs will be inevitable. On the other hand, the merits associated with bringing in personnel from other organizations is that a new person would bring in new ideas and concepts to the AMSDG.

If we examine activity ratios and profitability ratios of the AMS corporations from 1988 to 1989, we can conclude that all of the ratios have decreased. The return on sales have decreased by 0.05, and the return on investment has decreased by 0.02. These changes show us that the overall profitability of the company has decreased. Furthermore, the activity ratios show us that the firm is not managing its resources as effectively in 1989 as it did in 1988. The asset turnover ratio has decreased from 2.07 in 1988, to 1.81 in 1989. Please refer to appendix #2. I believe that these numbers indicate that one of the company's main weakness is inefficiency.

THREATS THAT AMS AND AMSDG CURRENTLY FACES.

The AMSDG division, however, is not as secured as the company as a single entity. The competition in the defense industry is extremely tough, since the number of contracts initiated by the defense industry have decreased due to federal budget cuts. To survive in this business, a company does not only have to be the best alternative, but also the cheapest alternative for the government. Tougher competition, tighter budgets and internal personnel problems could synthesize a major threat to the AMSDG division. Even though the business group has diversified some of its products and services for industries other than the defense industry, however, 70% of its revenues still come from this industry.

Any company that is working for some government agency have to be aware that there are often strict regulations supported by strict legislation. Operating policies have changed for those in the defense industry. The most obvious change was the implementation of conflict of interest laws that made awarding contracts based on favoritism illegal. These laws impacted greatly AMSDG's operations, since client connections played an integral part in the process of awarding military contracts. Since the large portion of the organization's employees were former military personnel, there was an imbalance of skills in middle management. The new laws made things even worse, as these employees were no longer able to use their contact, and lacked the marketing skills necessary to compete in the new environment.

POSSIBLE GROWTH OPPORTUNITIES.

For the AMSDG division the future market does not look to bright. Future defense cuts can be foreshadowed and the division will be forced to find an alternative market for its products and services. In the process searching for alternative markets such as the commercial business, the division much be careful so that the organization will not have to compete with other divisions within the company. Such a situation could easily further decrease corporate revenues. Divisions competing against each other for contract in the same corporation is idiocy.

I would suggest that the AMSDG division should examine the possibility to go multinational. Since the organization is already used to deliver highly specialized products and services, it should a relatively easy transition in merging into foreign markets. Market development must be given high priority in the strategic planning of the company. In addition to international expansion, national expansion is still possible in other federal department than the defense department. In order to attract other market segments, the AMSDG business group will have to develop product and service variations to appeal to these new segments. The organization should take advantage of its favorable reputation in the market. Perhaps, if the company would find it difficult to move parts of its operations overseas, strategic alliances could be developed with international management consulting firms.

SELECTED FINANCIAL RATIOS FOR AMERICAN MANAGEMENT SYSTEMS (1993)

Asset turnover:
Sales / Total assets: 2.07

PROFITABILITY RATIOS: Profitability ratios indicate how effectively the total firm is being managed.

Return on Sales:
Net Earnings / Sales: 0.35

Return on Investment:
Net earnings / Total Assets: 0.07

Du Point Analysis:
(Sales / Total assets)*(Net earnings / sales): 0.07

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