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Alternative Organization Models for the
Services Business
Ward Roofthooft, Ph.d.
Abstract
What is the suitable organization
model for services firms? The
conventional organization with long
lines of authority and communication
may impede close customer contact.
Four alternative models picked up
from the literature and management
practice are discussed. They are
linked to the Four Value Business
Model Framework.
The Virtual Organization operates
from a small core and outsources other
business functions. The Boundaryless
Organization replaces departments by
project teams. The Flower Organiza­
tion unites functional managers in the
“general management” for clarity of
communication and maximum com­
mit­ment to decisions. The Networked
Organization pools the expertise of all
the companies in a group.
1. INTRODUCTION
“The basic functions of organizations
are to provide (1) a route and locus of
decision making and coordination and
(2) a system of reporting and com­
munications. Authority and communi­­
cation are typically depicted in the
organizational chart”1.
“A business model, from our point
of view, consists of four interlocking
elements that, taken together, create
and deliver value. The most important
to get right, by far, is the first. Customer
value proposition”2.
“Value” for the customer is going to
be the primary concern in this article.
Business structure and organization
models only have meaning if they lead
to this all-overruling idea: providing
customer value.
2. THE CONVENTIONAL
ORGANIZATION, MODELLED
AFTER THE MILITARY The archetypical organizational chart is
the one used by the military. It covers
perfectly the description of functions,
processes, and responsibilities described
above. The military seems to be satisfied
with it considering the fact that the same
scheme has been in use since Roman
times and will probably stay in use for the
foreseeable future. Here is a comparison
between the ranks in the Roman army,
today’s military ranks, and ranks in a
conventional business organization:
– Legatus / General / CEO
– Tribunus / Colonel / Director
– Centurion / Captain / Senior
Manager
– Optio / Lieutenant / Operation
Manager
– Decanus / Sergeant / Supervisor
– Legionair / Soldier / Worker,
employee
There is little doubt about the clarity
of authority in the military organization
model. From the four-star general
down to the simplest private, everybody
seems to know exactly what to do, when
to do it, how to do it, whom to ask for
permission to do it, and whom to tell if
it has been done or not done and why. In
2007 the US military used 542 manuals.
Through the “Army’s Doctrine 2015
Initiative” this astronomical number
should be reduced to 50 manuals.
(Global Security.org n.d.) Surely, that
should still be sufficient to tell every
person in the service where he or she
stands and what to do or not to do.
However, will these 50 manuals still
© FINANCIAL MANAGEMENT INSTITUTE OF CANADA 2015. ALL RIGHTS RESERVED.
offer the necessary legroom for initiative
and creativity, both of which have
shown to be of the utmost importance
in the frequently unexpected situations
of military action?
Communication should be no
problem in the strictly hierarchal
military organization. Or is it?
On the 7th of December 1941 at
Pearl Harbor, the military organization
chart appeared to be not as watertight as most military men thought
it was, especially not in terms of
communication3. . . Nonetheless, many
companies, especially large industrial
companies have chosen to adopt this
model for their organization. But while
the military seems to be able to stick to
6 levels of functions, responsibilities,
and reporting stations, some companies
have seen fit to go as far as 12 or even
15 levels between first line supervisor
and company president3. Even when
leaving out this kind of aberration, one
can ask the question if this age-old form
of organization serves the purposes of
today’s companies well.
Is hierarchal clarity really the most
valuable asset of a company that has
to confront today’s challenges of
globalization and run-away technological
revolutions? Is even the largest multinational company a unit in which all
ideas are born on the top and all work
has to be done at the bottom? Or has
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maybe the conventional organization
degraded into “Along this tree, from
root to crown, ideas flow up and vetoes
dawn” (accredited to a “senior Unilever
executive” by Drucker 19743)?
If one can rightfully question the
wisdom of organizing a large, mostly
industrial business the same way as a
successful army two millenniums ago,
how much more should one be cautious
when organizing today’s services
businesses!
In order to confront the traditional
organization model described above
with the organizational needs of services
companies, let us consider the four most
salient differences between a “products”
and “services” business as described by
several authors1, 4–8.
Contrary to products, services are:
– Intangible
Services cannot be seen, heard, tasted,
or smelled, yet a services business can
only attract customers by performing
its “intangible” services in appealing
tangible circumstances e.g. the cozy
interior of a restaurant or the comfortable
seats on an airplane.
– Inseparable
Provider and consumer of a service
are typically acting simultaneously.
Mostly the service will be rendered by
a person. It is therefore important to
show “the best side” of the provider, e.g.
a sympathetic smiling face or tangible
proof of the professional capabilities of
the service provider.
– Variable
Each service is a unique happening.
“KLM has only ONE customer, 20
million times but each time only
ONE”8. And since humans are such a
strongly variable item of creation, both
the service provider and the consumer
of the service will be different each time,
even if the same service is rendered
hundreds of times over.
– Perishable
A service not rendered is a service lost…
Forever. A room not occupied in a
hotel, or a patient not showing up for a
surgical procedure are lost forever as an
opportunity for generating income.
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These important differences have
inspired several authors to add 4 more
“Ps” to the classical price, product, promotion, and place of McCarthy- Kotler4:
– People
People are obviously the most important
element in the interface between service
provider and service receiver.
This has caused two switches of
emphasis in the marketing process.
Firstly, companies have become aware
of the high need for “Internal Market­
ing” i.e. the development of customerconsciousness in ALL employees. In
­order to achieve this, recruitment, train­
ing, coaching, man­age­ment, and leader­
ship have all acquired new intensity in
services businesses.
Secondly, “Customer Experience
Management” (CEM) i.e. managing each
customer experience in such a way as to
make it consistent and valuable to the
service receiver. Companies use CEM
to differentiate their services from those
offered by other services providers.
– Physical Environment
This is another way to highlight the
need for proper “tangibles” at the place
and time of the delivery of services.
– Process
One could consider the “process” factor
in services tantamount to “product” in
the classical “4Ps” model. But there is
a real difference; in services, it is not
only WHAT the customer receives,
as with a product, but also HOW he
receives it, as with a service. Nobody
is interested in whether or not the girl
in the Coca-Cola bottling plant was
smiling while she was operating the
machine, but all customers are very
keen on a friendly smile when another
girl is serving the same bottle of CocaCola in a restaurant.
– Productivity
This calls for “Capacity Management”.
In services, a capacity not used is a full
loss. Planning the balance between
demand and supply is therefore much
more important in the services business
than in product-related business.
Seasonality becomes a primary concern.
The arch-examples are airlines and
hotels. They have to compose their
portfolio of offerings wisely between
fixed, predictable business, high season
and low season business, individual
guests and groups. All marketing efforts
will be affected by these considerations,
but most of all the price. That is why one
can sometimes go on vacation to Rio on
a shoestring, but NOT around carnival
or during the World Cup football.
How can one contemplate to deal
successfully with the above described
idiosyncrasies of services when the
process of conceiving, planning, and
executing a service has to be taken into
account? How to deal with the adjacent
issues of taking responsibility, asking
and giving permission, reporting the
outcome, and insuring the quality of a
service? How to do all that while having
to follow the long-winding road of
blocks, lines (straight and dotted lines),
vertical and horizontal interferences of a
conventional organization chart?
The most daunting question is
whether the conventional organization
structure can deal with the specificity
of “value” as the cornerstone element
in the structure of a services company.
In the discussion of the four alterna­
tive organization models that follow,
it will become apparent how they of­
fer a better chance to realize a “Value
Business Model Framework” made of
Value Proposition, Value Architecture,
Value Network, and Value ­Finance9. It
will also be demonstrated how in each
of the four alternative models, one of
the “4Ps” of the marketing mix business
tool plays a major role in each of the
four value structures.
3. ALTERNATIVE
ORGANIZATION MODELS 3.1 The Virtual Organization The virtual organization is defined
as: “A small, core organization that
outsources major business functions”.
(Robbins 2001).
A services business following this
principle of organization sticks to the
functions that are absolutely essential to
rendering the service. Such a company
farms out the “generic” functions that
are common to any kind of business such
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ALTERNATIVE ORGANIZATION MODELS FOR THE SERVICES BUSINESS
as gardening, cleaning, security, serving
meals, etc. But they can also let go some
really important functions as long as
they are not absolutely essential to the
full control over their core business
i.e. rendering the service. Thus, they
may entrust a “social secretariat” with
personnel administration or a training
consultant with the professional devel­
op­ment of the Sales Force. Above all
they want to avoid imperium building
with thousands of employees; taking
care of each function a business needs,
from the most essential one to the most
generic one. They want to “stick to the
knitting”10 i.e. the service they sell and
which is their very reason for existing.
It is clear that in services business,
the quality of the one-on-one contact
between service provider and service
receiver is of paramount importance.
All the attention should go to that
contact. This is only possible if the
company organizes a maximum of flex­
i­bility in all its other functions. The
fastest, the surest, and possibly the least
expensive way of achieving this is to rely
on outside competencies. Recruiting,
selecting, hiring, training, controlling,
and administering people who are not
directly involved in service rendering
seems to be an exercise in futility, more
so because on the ­labour market one
can find already highly qualified people
who can be used only for the time one
needs them. In a Virtual Organization,
the words of Thomas Jefferson: “Never
put off till tomorrow what you can do
today” are contradicted by the principle:
“Never put off till tomorrow what today
someone else can do better and cheaper
for you”.
The Virtual Organization has some
less obvious but by no means less
precious advantages for a services
business where the “Value Proposition”
is indeed of utmost importance. It can
be rightfully said that in no other kind
of business the “P” of Product (although
here of course a service!) is totally in the
hands of the person in contact with the
customer. Not having to deal with the
complications of conventional authority
and communication seems to be an
absolute prerequisite for the service
provider to offer a high level of value,
time after time.
To illustrate the virtual organization
one could playfully explain the logo of
KLM as being their organization chart.
1. The little cross on the top is not the
president, nor is it a reference to the
royal interest in the company. It is
the real boss of the company: the
customer. Notice: THE customer.
Remember that KLM has only ONE
customer, more than 20 million
times but each time only ONE!
2. The 4 circles are the “front people”:
the lady at the check-in counter, the
steward or the stewardess. They are
Photo courtesy: KLM Royal Dutch Airlines
the only real “service people” of
(nieuws.klm.com/en/)
KLM. They are the ones that make
KLM a services business.
3. Under the service people is the line of “supporting people, i.e. all those who
directly make the rendering of service possible: pilots, technical maintenance
personnel,... theoretically their functions could be farmed out, but in practice
it would be difficult and probably more costly than using KLM personnel.
4. “KLM” stands for are all the people who make KLM a business, with or
without services. If KLM were a virtual organization all these functions could
in theory be farmed out, from the cleaning women up to the president. No
passenger would notice in the least a difference in service quality when a
cleaning women or the president have been replaced by someone else. But for
the sake of continuity, KLM will of course hold on to some key functions such
as the post of president.
3.2 The Boundaryless Organization
Some companies want to escape
completely from the straight jacket
of conventional organization. Instead
of designing an organization and
allocating responsibility, authority, and
consequently power to every specific
level, such companies seek to define
first the task at hand and then worry
about how it will be performed. This
is a form of organization that seeks to
eliminate the chain of command, have
limitless spans of control, and replace
departments with empowered teams.
The Boundaryless Organization is
about two concepts: “blurring organi­
zational boundaries” and “net­worked
computers”.
“Blurring organizational boundaries”
does away with the conventional
organization chart. When an opportunity
arises or a problem appears, the company
creates a team to address the situation.
This happens by allowing the formation
of spontaneous alliances among
stakeholders throughout the company.
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“Departments” lose their meaning. No
more funnels in which groups of people
are more concerned with protecting
their power base or extending it to
the detriment of other departments.
Stakeholders from outside the company
can also be drawn into the alliance.
Regulators, suppliers, customers, con­
sultants are welcome to join if they
can contribute usefully to the task at
hand. In other words, the Boundaryless
Organization makes it possible to put on
the field the most competent team using
competencies from inside and outside of
the company.
The “networked computers” are
necessary because of the need for
accurate communication. Even in this
radically new organizational landscape, a
number of conventional communication
channels will still be in function. In
addition, there will be a host of new
channels that have to be supported by
a well-oiled computer network. New
lines of communication will emerge
between the members of the team,
between the teams, between each team
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and whatever higher authority may still
be maintained, and finally between the
teams and whatever external support
they have enlisted in the project.
A Boundaryless Organization can
be very appealing to many services
companies because of the volatile nature
of their offerings. Indeed, instead of
producing thousands of units of products
in a well-organized way, a service is each
time a unique occurrence calling for the
total involvement of whatever assets of
the company are needed. In the services
business everything happens NOW and
it happens for the first and the last time. A
company burdened with the overweight
of a conventional structure cannot hope
to respond with the speed and flexibility
that are required to compete successfully
in the services business.
A structural worry of any company is
that of “Value Architecture”: How are
we making sure that our value offering
is reaching the target customer, fast,
conveniently, and at an acceptable
cost? In an industrial firm, that is a
matter for the value chain: inbound
logistics, operations, outbound logistics,
marketing and sales, pre- and postsale service. The goal is to provide a
holistic structural design for ensuring a
valuable offering to the customer. That
puts the “P” of Place at the endpoint of
the chain. In a services firm, the “P” of
Place is the end AND the beginning of
the process. The value of the offering
is discharged not only NOW but also
HERE. This puts a severe demand on
the intangibles surrounding the delivery
of the service. If ever there was truth in
the saying: “You get only one chance
to make a first impression”, it was in
providing a service!
Here is an example of a successful
Boundaryless Organization:
Five marketing executives had
done so well in their career that
they could retire long before the
official retirement age. They were
all in their early fifties and soon
found out that life was boring with
nothing really exciting to do.
They met by chance at a ski
resort in Switzerland. Over “aprèsski” drinks they discovered that
they had been working in different
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disciplines of marketing. One
had been in Marketing Research,
one was in Marketing Strategy,
one was an expert in Advertising
and Promotion, one was a Group
Product Director, and one had
been a Marketing Planner. Since
they had such diverse track
records they decided to form a
team of Marketing Consultants.
They agreed that with whatever
assignment that required more
than their own expertise they
would first turn to each other for
help and then to the network of the
entire team. They incorporated the
team under the name “The Five
Aces” (fictional name for the sake
of confidentiality). They decided
that they would never employ any
personnel except themselves and
that every normal business function
was going to be outsourced.
Not surprisingly the expected
success did materialize. After all they
were top-notch marketers. Here was
a “company” of five people. They
did not reach the revenue of “The
Big Five” consulting companies,
but they far out-performed them in
profits per employee!
As apparent from the example
above, with services that require such
a high concentration of providerreceiver interplay, some­thing else
has to give way. It may not always be
possible to go as far in breaking down
all barriers, but surely many services
businesses would become more
flexible and more accomplished by
eliminating the “departments” as
much as possible.
This project was a pure “Value
Finance” structure: high quality of
service because of the competency of
the providers, no overhead costs, and
operating costs restricted to “when
needed only”. The “P” of Price was
what it should be: a perfect harmony
between price and value.
3.3 The Flower Organization In his book “Management”, a monument
of business literature, Peter Drucker
cites two major symptoms for the
malfunctioning of an organization. The
first and most serious symptom is the
multiplication of management levels.
The second most serious symptom is the
recurrence of organizational problems.
“No sooner has a problem supposedly
been solved than it comes back again in
a new guise”11.
Drucker thinks that a company can be
successfully organized with a minimum
of management levels. Drucker makes
his point by leaving the world of
business. He cites the Catholic Church
which has over one billion members and
a history of two millenniums, and all
that with only three levels of authority:
the pope, the bishop, and the parish
priest. He is right. When it comes to
the core business (with due respect) of
the church: preaching the gospel and
administering the sacraments, those are
the only functions that matter. All other
titles are honorific, task-oriented, or
other names signifying one of the two
primary functions: prelate (honorific);
cardinal (procedural: choosing a pope);
archbishop (coordinating the dioceses
of the bishops); canon (task oriented:
assisting the bishop); abbot (in reality
a bishop). Surely, an organization that
big, that old, and with such a tumultuous
history should deserve some closer study
in order to find out what the world of
business could learn from it.
Drucker stated convincingly that a
company could be run with a minimum
of levels of authority. Some managers
carried this principle over into a
practical model of organization. It
became known as the “Flower Model”12.
Rather than having the highest
authority at the top of the organization,
this model puts it in the center. All
functions are attached to this center
like the petals of a flower. The center
is called the “General Management
Team”. It is composed of all functional
heads plus the general manager who is
the coach of the team and the ultimate
decider in case of deadlock.
By far the most important benefit of
the Flower Organization is “controlled
commitment”. “Commitment” stems
from the function heads making all
the decisions which they also have
to implement. It is also “controlled”
because team decisions reduce the risk
for “Escalation of Commitment”, a state
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ALTERNATIVE ORGANIZATION MODELS FOR THE SERVICES BUSINESS
Production
Marketing
IT
General
Management
Finance
Personnel
Logistics
that leads to the stubborn continuation
of failed strategies so masterfully
described by Barbara W. Tuchman in
“The March of Folly”3.
A word of warning: The general
manager should be aware of the
“democracy trap”: When there is
disagreement, we will take a vote and
the majority wins. Wrong! The majority
may be mistaken. It matters to make the
right decision and that it may not always
be the most popular one. If necessary
the general manager will have to resort
to old-fashioned: “I do not want yesmen. When I say no, it’s no”.
One convincing demonstration of the
benefits of the Flower Organization was
the return to profitability of a Belgian
paper distribution company after losses
for 12 consecutive years. The formula
allowed the successful mix of managers
with a long-term investment in the
company and new managers joining the
company from very diverse businesses
without a shred of experience in this
type of organization.
It is easy to imagine how well the
Flower Organization would fit a services
company. Because of the collegial nature
of decision-making and the direct
responsibility for implementation, there
is a high level of coherence which should
logically lead to services of the highest
quality. There can be little doubt that
the customers of such a company would
be aware of this coherence and hence
experience the services rendered with
great satisfaction.
Of the four alternative organization
models discussed in this article, the
Flower Organization responds best to
the “Value Architecture” structure-type.
Indeed, this model distinguishes itself
most radically from the conventional
military-style model with its long lines
of communication and command. The
“P” of Place describes the way from
product (or service) concept to the
value brought to the customer. Surely
the Flower Organization provides the
shortest and most reliable way to make
this happen.
3.4 The Networked Global
Organization Selling services on a global scale is usually
a lot simpler than selling products.
The permission for starting a services
business is, in most countries and for
most services, a lot less complicated
than the requirements for starting a
products business. Compare the process
of establishing a law firm (especially
when the lawyers are locals) with the
registration of a pharmaceutical company.
The law firm can start its activities
almost immediately. The pharmaceutical
company, once approved, may need years
to have its products registered by health
authorities.
Another advantage of services over
products is the virtual absence of logistics
in the case of services. No shipping, no
discussions over FOB (Free On Board) or
CIF (Cost, Insurance and Freight) prices,
no customs bureaucracy, no worries
about warehousing, inventory control,
physical distribution, etc. . . All this makes
a Networked Global Organization13 a
very attractive proposition for a services
business. But there is more.
Any business operating on a global
scale will have to answer this inevitable
question: To what extent will this business
be run in a centralized or a decentralized
mode? A services business can largely
escape this dilemma because it can easily
operate in both ways simultaneously.
Indeed, information, instructions and
knowhow can flow from headquarters
to the peripheral units and back. That is
centralization. However by applying the
principle of “subsidiarity”, i.e. lodging
every decision at the lowest possible
implementation level, it is also a
decentralized organization. In addition,
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peripheral units can be encouraged to
communicate and to operate among
them, without the necessary intervention
or even the blessing of headquarters.
This presupposes of course a high level
of competence in the peripheral units
and a high degree of confidence and
trust from headquarters in the ability of
the peripheral units.
Can this function without derailment
when there is so little control from a
central point?
Yes, it is possible. A company can give
a lot of leeway to its peripheral units,
but it should stringently stay master
over strategy. One way to achieve this
is through regular strategic meetings,
often called “strategic workshops”14. A
workshop is most often organized per
continent for reasons of convenience,
language, and strategic similarities. A
strategy worked out by headquarters
on the basis of inputs from the
periphery is submitted for discussion
and refinement. After an agreement
has been achieved, the tasks for
implementing the strategy are divided
among the participants. There is a
right for dissent, but the dissenter will
be sentenced to success if he/she wants
to keep his/her position.
The most important benefit of the
strategic workshop formula is the high
degree of commitment that comes
from the fact that strategy is based on
the input of everybody. That, in itself,
is already a guarantee for success. The
workshop formula also invites a high
degree of internal benchmarking. After
the strategy has been agreed upon,
the various aspects of implementation
can be entrusted to the companies
most competent in this or that area.
This way, all companies enjoy the best
implementation at the lowest cost and,
if they are just a little bit inquisitive
and eager to learn they will pick up a
great deal of knowhow from the more
competent companies.
The workshop formula is for many
reasons a good example of a “Value
Network” structure. The input of every
member of the network is almost a
guarantee for quality. Nobody likes to
put in a poorly conceived, sloppy idea
as his contribution to a workshop. The
result should be a well-thought out
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strategy which has the commitment
of the whole network since everybody
will recognize his contribution to
it. Inevitably every contributor will
compare his input with that of others.
Sound internal benchmarking is
therefore a precious by product of a
strategy workshop.
It also takes the best care of the “P” of
Promotion. The lead for the promotion
will be entrusted to the member(s) most
competent in promotion. That saves
cost and it may inspire all members of
the network to attain the promotion
quality level of the leader(s).
4. HOW TO CHOOSE A
BUSINESS STRUCTURE AND
ORGANIZATION MODEL? All successful services company, even
the gigantic multinationals, started
once upon a time as a tiny SME. How
did they become successful? Well, they
broke out of their old paradigms and
put new ones in place. Surely, they did
this by working harder but more than
anything they did it by working smarter.
They did something different, or they
did something differently. They applied
good old creativity to their business.
And in the context of this paper it can be
taken for granted that they constantly
adapted their structure and organization
to new circumstances and to new ways
to provide value to their customers.
What about the small SME? The
terms “small” and “medium” are only
acceptable if they refer to the number
of employees. They should never mean:
small or medium in ambitions, quality,
and performance. No SME is too small
to be ambitious! “Subsilire in caelum ex
angulo licet”, said Seneca (4 BC- 65 AD).
(“You can storm the heavens from a small
corner.”)
But change must be a planned process.
Managers are usually quick at unfreezing
and moving. What they often forget is
“refreezing”, to make the employees not
only accept but even embrace the new
situation. Choosing the appropriate
Business Value Structure commensurate
with the company’s Credo, mission, and
strategy will be the first step. Once that
is done, the most suitable organization
model can be put in place. This will
often be an alternative model such as
the ones described above, rather than
the military-type conventional model
inherited from the Roman legions.
A company which has planned its
future this way will be doing the right
thing and doing things right.
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Moffett, “International Business,”
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Kagermann, “Reinventing Your Business
Model,” Harvard Business Review, p. 60, 2008.
3. B. Tuchman, “The March of Folly,” p. 218,
1984.
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“Marketing,” pp. 296–318, 2011.
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About the Author
Ward Roofthooft, Ph.D. was a former
international marketing consultant at
L’OREAL and Janssen Pharmaceutica.
Since 1989, his own company ERI-X
offers consulting to several Fortune
500 companies and UN agencies
such as ITC of WTO/UNCTAD, ILO and
UNDP. Additionally, he lectures in MBA
programmes in
Europe, the Americas
and Asia and is
author and co-author
of books and articles
on these subjects.
Ward Roofthooft can
be reached at WR@
eri-x.com.
Master of Accounting
Fast track to the CPA designation.
Full and part-time streams.
sprott.carleton.ca/macc
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FMI*IGF e-JOURNAL
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