T4 - part B – case study report – November 2010 by Chartered Institute of Management Accountants

T4- Part B – Case Study VYP – TV Production company case – November 2010 REPORT To: Steve Voddil and John Young, Joint Managing Directors From: Management Accountant Date: 25 November 2010

Review of issues facing VYP Contents 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Introduction Terms of reference Prioritisation of the issues facing VYP Discussion of the issues facing VYP Ethical issues and recommendations on ethical issues Recommendations Conclusions

Appendices Appendix 1 Appendix 2 Appendix 3 Appendix 4 Appendix 5

SWOT analysis PEST analysis Leah drama programme – analysis of revenue, costs and profitability Evaluation of the alternative VT filming proposals Part (b): Email on the need for improved IT systems to achieve better control of direct programme-making costs

1.0 Introduction VYP is an independent TV production company in the UK which is commissioned by TV broadcast companies to make programmes. It had revenues greater than £28 million and it made over 121 hours of programmes in total last financial year. There are many small TV production companies making programmes for the UK TV broadcast companies, such as Hat Trick Productions and Tiger Aspect. In terms of Porter’s Generic Strategies, VYP is a differentiator, focusing on innovative, high quality programmes.

2.0 Terms of reference I am the Management Accountant appointed to write a report to the Managing Directors which prioritises, analyses and evaluates the issues facing VYP and makes appropriate recommendations. I have also been asked to draft an email for the Finance Director to send to all of VYP’s programme producers. This email should persuade VYP’s programme producers of the need for improved IT systems in order to achieve better control of direct programme making costs. This is included in Appendix 5 to this report.

3.0 Prioritisation of the issues facing VYP 3.1 Top priority – Proposal to re-commission a new series of the “Leah” drama programme This is considered to be the top priority as this is for a re-commission for a new series of 24 programmes and a decision is required within the next week. VYP needs to prepare a programme budget and decide whether the return on commissioned revenue is acceptable or not and whether to accept or reject this proposed re-commission. 3.2 Second priority – TV presenter taken ill A decision needs to be taken to cancel the series or to find a new presenter as the current presenter has been taken ill and has withdrawn from the making of these programmes. This could affect VYP’s reputation to deliver commissioned programmes and therefore could have an impact on future commissioned documentary programmes. 3.3 Third priority – Cost control VYP is under pressure to make programmes to meet reduced levels of commissioned (and recommissioned) revenues. The company has grown considerably over the last 7 years and now needs to implement better IT systems to improve the control of direct programme-making costs. This was always important, but with pressure from falling profit margins, this is now more urgent for VYP to address. 3.4 Fourth priority – VT filming proposals VYP currently outsources all of its VT filming to 2 different companies but it has an opportunity to acquire Tee, one of its VT filming outsourcing companies. VYP has 2 other alternatives, which are to carry on outsourcing or to take this operation in-house by buying its own equipment and recruiting suitably experienced employees. This is a fundamental change in the way VYP operates, but is not especially urgent and therefore this has been ranked as fourth priority.

Note: In exam conditions, some candidates may choose to prioritise, discuss and prepare recommendations on fewer than the above 4 issues. However, as this Case writer’s answer can be used as a teaching document all 4 business issues in the unseen material are discussed below.

A SWOT analysis summarising the strengths, weaknesses, opportunities and threats is shown in Appendix 1. A PEST analysis is shown in Appendix 2.

4.0 Discussion of the issues facing VYP 4.1 Overview VYP is a profitable and successful independent TV production company but last year saw its operating profit margin on programme making fall from 10.1% to 9.4%. There is a downward pressure from TV broadcast companies to reduce the commissioning revenue for both new programmes and re-commissioned series of programmes. Against this backdrop of pressure to deliver quality programmes at substantially lower costs, VYP must change the way it operates to become more cost conscious and to implement new IT solutions to help manage and control direct programme-making costs.

4.2 – Proposal to re-commission a new series of the “Leah” drama programme This is a good opportunity to make a new series of 24 programmes but the re-commissioning revenue proposed by the TV broadcast company is substantially lower than the first series of programmes. The first series of 12 programmes generated commissioned revenue of £2.6 million for 12 programmes, equal to £216,667 per programme. The revenue for recommissioned programmes is usually 10 – 20% lower than the initial series. The maximum commissioned revenue that the broadcast company is willing to pay is £4.16 million for 24 programmes, which is equal to £173,333 per programme. This represents a reduction from the first series of 20%, which is at the top end of re-commissioned revenue reductions. The problem lies with whether VYP can deliver 24 programmes and still make the required level of profits. The first series cost an average of £197,500 (£2.37 million / 12 programmes). Therefore unless VYP can make the programmes at a substantially lower cost than the first series, it may not be financially viable. Furthermore, the Joint MD’s have stated that they require a return on commissioned revenue of not less than 9%. The first series only generated a return of 8.8% and the revenue has been cut by 20%, so it will be a challenge as to whether the proposed second series will be acceptable to VYP’s management. The stated aim of VYP is “to make successful programmes for profit”. So will a second series of “Leah” generate the required profit? Can VYP make these programmes at an acceptable profit to the Joint MD’s or should VYP reject this proposal. However, this could have longer term implications for VYP if it turns away programme re-commissions. Appendix 3 shows that the cost per programme is £168,300, using the assumptions given in the case material. With re-commissioning revenue of £173,300, this results in a small operating profit margin of £5,000 per programme (£120,800 for the series), which is a return on commissioned revenue of only 2.9%. The Joint MD’s have stated that they require a margin of more than 9%. So clearly this is not acceptable and would bring down VYP’s average operating margin. However, the programme’s producer considers that he may be able to save 8 days of both studio time and 8 days of VYP programme-making employee time. Assuming this is possible, then this brings down the cost for the entire series to £3.765 million against the commissioned revenue for the series of £4.16 million. This results in a higher operating profit of £0.3945 million, which is a return on commissioned revenue of 9.5%. Therefore, with these 8 days of savings the series meets the criterion of a return on commissioned revenue of more than 9%. In respect of the allocation of Head Office overhead costs, there are 2 opposing arguments as to whether they are relevant to the decision to accept or reject this re-commissioned programme. The 2 views are: 

These overhead costs are fixed in nature in the short term, and acceptance or rejection of this programme would have no effect on the overhead costs. Therefore the programme could be costed on a marginal costing basis and the overhead cost allocation excluded. This increases the return to 14.6% or £605,700 (after the 8 days of savings).



That all programmes should be allocated a share of VYP’s Head Office overhead costs as these costs are incurred in the process of making TV programmes and it is unfair for some programmes not to be allocated a share of these costs. After all, if they were to be excluded from programme costs, incorrect decisions could be made on programme profitability as these costs need to be incurred in order for VYP to exist.

However, in respect of the decision of whether to accept this proposal to re-commission the “Leah” programme, a marginal costing method is probably a better way to evaluate the financial benefits of this opportunity. Therefore if the costing for this additional series of programmes is treated on a marginal cost basis, without the allocation of overheads costs, the total cost for the series of 24 programmes comes down to £3.554 million (with the 8 days of savings), which generates a return on commissioned revenue of 14.6%. However, it is important to note that VYP’s overhead costs will remain and that they need to be allocated to all of the programmes that VYP makes each year. Therefore the overheads costs cannot be ignored, although profitable programmes should not be rejected based on a full allocation of overhead costs, as it is anticipated that VYP will win other programme commissions that will be allocated a share of overheads. Furthermore, if VYP were to reject this programme proposal it could affect its reputation and requests for re-commissioning of some of its other programmes. Overall therefore, and considering Johnson and Scholes SAF framework of analysis: 

Suitability: the re-commissioning of the “Leah” programmes would appear to be suitable as it is a core product for the company and VYP has made these programmes before



Acceptability: it should be acceptable as it is profitable at 9.5% with savings and this includes a contribution towards fixed overheads of £192,000. Without the overhead allocation, the series makes an operating profit (with 8 days of savings) of £605,700, a return on commissioned revenue of 14.6%



Feasibility: VYP has the programme-making skills and is capable of undertaking this work.

It is important to maintain tight control over the budget and to ensure that the producer does manage to achieve the forecast 8 days savings, so that the series does not become loss making. 4.3 - TV presenter taken ill VYP is in the business of making programmes and if it were to cancel this documentary series it would let down the TV broadcast company which commissioned it. This would reflect badly on VYP and subsequently VYP may have difficulties getting further programmes commissioned. Therefore the option of cancelling the programme and refunding the revenue and writing off the £0.6 million costs incurred to date is not a commercially realistic option as it has these long-term implications. Therefore the other alternative of finding and appointing a replacement presenter is the preferred option to solve this problem. The commissioned revenue was for a total of £2.4 million which has already been funded to VYP to make the entire series of 12 programmes for delivery by December 2011. In deciding whether or not to continue on with the documentary programmes VYP needs to consider:   

The cost incurred to date of £0.6 million is a sunk cost. The relevant numbers are really future costs of £2.0 million compared with the lost revenue of £2.4 million that would have to be repaid to the broadcast company, The damage to VYP’s reputation of a failure to complete a contract to the client’s satisfaction, Potential loss of future work with the TV broadcast company, and



The loss of potentially valuable publicity arising from the controversial nature of these documentary programmes.

If VYP proceeds with completing the 12 programme series the accounting profit would be as follows:

Commissioned revenue Costs incurred to date Costs forecast to complete the series

£ million 2.4 0.6 2.0

Operating profit / (loss)

(0.2) loss

However, it could be considered that the costs incurred to date are sunk costs and therefore the completion of the programme generates a profit of £0.4 million (£2.4 million less forecast future costs of £2.0 million). The alternative of cancelling the series, would result in VYP refunding the commissioned revenue of £2.4 million back to the TV broadcast company and therefore VYP would have to write off the costs incurred to date, which would be a loss of £0.6 million. In summary it faces making a loss on this series of programmes whatever action it takes, which is summarised as: 

£ (0.2) million loss if the programme is completed with a new presenter



£ (0.6) million loss if the programme is abandoned and the commissioned revenue is refunded to the TV broadcast company.

The other factors to be considered here concern the accuracy of the £2.0 million forecast costs for the completion of the series and whether these costs could be reduced to try to bring the series to a breakeven position, rather than a loss. The other aspect is the cost of the fees payable to the replacement presenter and whether these could be reduced. This assumes that the replacement presenter, who will be appointed at short notice, is less “high profile” than the original presenter. Overall, if VYP were to choose to complete this series of programmes, its hard-earned reputation would not be affected. The TV broadcast company which commissioned VYP should be considered to be a key player with high power and high interest in respect of Mendelow’s stakeholder analysis. The power the TV broadcast companies have could have a significant impact on future TV programme commissions (or the lack of them). 4.4 – Cost control The lack of adequate investment in IT systems over the years is causing a number of problems. Some of these are operational ones, such as a failure to book facilities or subcontract people in time. Other problems are costing issues, where programme production teams are not always aware of costs incurred to date. The TV production industry is one in which artistic people control large budgets and they are often not very numerate or interested in finance. Therefore it is important that IT systems are relatively straightforward for them to use and also to encourage them to be more financially aware. It is also necessary for finance staff to work alongside, and assist, the programme producers in the preparation of programme budgets and monthly forecasts. At the moment VYP’s Finance department has a nominal ledger system and VYP has a forecasting database system, in which programme producers input their forecast of future costs

for the programmes they are working on. However, most of the programme producers use manual records or spreadsheets for planning programmes and monitoring costs. VYP is now a multi-million pound business and growing fast. Together with reduced margins, caused by reduced levels of commissioned revenue, it has never been a more important time to better manage and control its programme-making costs. All of VYP’s producers are under increasing pressure to make programmes to meet lower programme budgets and the use of IT solutions to help them manage the programme-making process is now necessary. A new IT system is necessary to help with the planning and project management process of making programmes and controlling costs, both actual committed and contracted costs as well as costs yet to be incurred. An array of different spreadsheets is clearly not adequate and a new formalised IT system is required. This new system should cover the following activities:       

Programme planning and activity planning Preparation of programme budget Project management to ensure the sequence of events is realistic and dates are achievable Bookings made should be linked into the programme activity schedule and actual contracted and committed costs should be included All costs should be able to be “drilled down” to individual programmes, as well as grouped by series, or programme genre Programme costs should be split between costs already incurred, costs committed (where contracted for but the activities have not yet happened) and forecasts for other future activities which have not yet been contracted for or committed. The system should be driven by activities, such as person days for outsourced facilities or freelance programme-making people.

It is necessary for VYP to appoint an IT manager, who would report to Janet Black, the FD. This IT manager should be briefed with reviewing potential software products on the market, for example Microsoft Project and SAP in particular, that will provide BOTH resource planning (over outsourced purchases in particular) and costing information. It may be necessary for the IT manager to work with an experienced outsourced IT consultant. As a minimum the IT solution should embrace planning for bookings for outsourced services, and a costing package that will link in with the company’s purchase order system, as well as the purchase ledger, to enable a commitment accounting approach to individual programme costs. There are many TV production companies operating in both the UK and overseas and therefore it is likely that VYP could purchase a standard IT package that should help it to achieve better control. It is unlikely that VYP will need to have bespoke software written for it. In terms of the selection of the proposed new IT system, it is recommended that a small team is established by the new IT manager comprising production staff, finance and perhaps with the assistance of an outsourced IT specialist. This multi-disciplined team should help with the selection of a suitable IT system for VYP. The IT manager should be responsible for implementation of the system in VYP and arranging training for VYP’s employees. When the new IT system is implemented, all departments (programme making, bookings and finance) should all use same IT system. Additionally, to help with planning programmes and also controlling costs, the activities planned should identify dates when outsourced people or facilities should be booked, and the system should be updated by the booking managers when a booking (or contract) has been made. This will help reduce (or eliminate) the instances where last minute bookings (at higher costs) have to be made due to an oversight by programmemaking employees.

It will be necessary to train and help programme-making employees to ensure that they “buyinto” the use of the new IT system and that they understand that it is there to assist them and not to duplicate what they currently do on spreadsheets. Much training and assistance from the finance department will be necessary but the benefits are clear. It is planned that the new IT system should be used to help manage and control direct programme-making costs only and should not encompass Head Office overhead costs, which should continue to be managed in total by cost category, rather than as an allocated cost for each programme. The new IT system should help VYP to improve both its operational and financial planning in order to better control its direct programme-making costs, and in order to make programme producers and directors more accountable for the costs under their direct control. 4.5 – VT filming proposals 4.5.1 Alternatives VYP has a choice of 3 alternatives: 1. Acquire Tee (and continue to outsource the balance of its VT filming requirements) 2. Carry on outsourcing this activity 3. Take this function in-house by buying the required equipment and recruiting experienced people The financial analysis of these 3 alternative proposals is shown in Appendix 4 and is summarised below: NPV £ million

Difference from outsourcing £ million

Acquire Tee

(11.95)

+0.89

Carry on outsourcing

(12.84)

Take VT filming in-house

(13.11)

(0.27)

Clearly VYP has a close working relationship with Tee, as Tee works exclusively for VYP and undertakes around 3,150 days of VT filming each year for VYP. This represents 90% of the VT filming work in total. However, there is no urgency for VYP to vertically integrate and to acquire this activity. Indeed, if it were to acquire Tee, it would have to manage this function and ensure that it retains the people who work for Tee. There is also little information given about the quality and age of Tee’s VT filming equipment. If this is coming to the end of its useful life, VYP may find that it has to invest in new equipment as well as the fee paid to acquire the company. 4.5.2 Acquiring Tee The proposed cost of acquiring Tee is £3.4 million based on the proxy P/E of 4 multiplied by the profit of £0.85 = £3.4 million. What skills does Tee’s MD bring to VYP? Tee’s MD is clearly the driving force behind the company and he is operating a successful VT filming business. However, if his company is acquired and he is paid £3.4 million perhaps he would want to retire and not be actively involved in running 15 VT crews. However, if he were to stay with VYP, and share in VYP’s profits as a director and shareholder, then he may have useful people management skills.

4.5.3 Carry on outsourcing The alternative of continuing to outsource will give VYP the flexibility to hire VT filming crews as and when it needs them to meet programme-making needs. The case material stated that usage is forecast to grow at 10% each year. Therefore it is likely that all of Tee’s VT crews will be kept fully occupied, whether VYP were to acquire the company or continue to outsource from them. The only benefit is the cost savings. Appendix 4 shows that the NPV of acquiring Tee over a 3 year period would be £(11.95) million negative. This compares to the negative NPV of outsourcing at £(12.84) million. This produces a discounted saving of £0.89 million in 3 years, with further savings over future years.

4.5.4 Take VT filming in-house VYP has an alternative, which would be to take VT filming in-house by buying the equipment and recruiting experienced VT filming people. This would be a difficult challenge and VYP does not have an experienced manager to make this happen. All of VYP’s managers are working on making programmes and buying in outsourced skills and facilities when needed. So this would be a difficult and risky alternative. To take VT filming in-house has significant resource implications for VYP in terms of the initial finance required of £7 million. In terms of financing, £7 million is a large amount of money to find for a private company like VYP. Unless VYP wishes to seek a new investor for the business, possibly a venture capitalist, then VYP will have to seek bank support for this initiative. It is unlikely that Steve Voddil or John Young would be able to provide further finance of this size. Of course the same issue would arise should VYP take over Tee, but the latter would cost only £3.4 million and perhaps the payment to Tee’s MD could be spread over 2 years. Furthermore, if VYP were to acquire Tee, then shares could be offered to Tee’s MD, although there would be a problem with how to value VYP’s shares (as VYP is an unlisted company). One of the aspects of the proposal to take VT filming in-house would be to try to recruit some of Tee’s experienced VT filming employees. This would reduce the risk of taking this activity inhouse as these people are experienced and known to VYP. VYP’s programme-making staff work with these VT film crews and they would know which employees are the most skilled and hard-working. However, this would be bad business practice and may result in Tee’s MD refusing to work for VYP in the future and could leave VYP without the required VT filming crews in the short-term, until an alternative outsourced VT filming company could be located. The alternative of taking VT filming in-house has the highest cost option at £(13.11) million negative NPV. It would also reduce VYP’s flexibility to have this entire function in-house, as there may be times when there is a peak in usage which can be met by outsourcing. By taking this in-house, it assumes full utilisation evenly throughout the year, which is unlikely to happen. Overall VYP does not have the skills to establish, recruit and then to manage a VT filming department. It is easier and more flexible for VYP to book VT filming crews when needed. 4.5.5 Summary Overall, having VT filming crews as part of VYP’s in-house facilities (whether by acquiring Tee or setting up on its own) would decrease VYP’s flexibility and also increases VYP’s risk.

5.0 Ethical issues and recommendations on ethical issues 5.1 Range of ethical issues facing VYP There are a range of ethical issues that will be discussed and recommendations made, including the following: 1. Gifts given to booking managers 2. Documentary programme which highlights the use of child labour and whether VYP has any ethical responsibilities to do anything more than just make the programme 5.2 Gifts given to booking managers 5.2.1 Why this is an ethical issue VYP booking managers (and other VYP employees) should be performing their job to meet the requirements of the programmes being made and they should not be influenced by gifts or other ways to entice them to make bookings with any particular company. It is commonplace in the entertainment industry for companies seeking to win business to send small gifts (such as wine or flowers) or to entertain the programme-making employees. This is similar to bribery. Although it is usual, it does not make it acceptable. There is a need for guidelines to be followed to ensure the bookings for freelance people and outsourced facilities are made in accordance with the needs of the programme and that VYP achieves value for money. 5.2.2 Recommendations for this ethical issue It is recommended that Ralph White, the HR Director, should set out some guidelines for what value of gifts or entertainment is acceptable. VYP employees should ensure that they do not break these guidelines which should result in disciplinary procedures. Any gifts that exceed the value acceptable should be disclosed to Ralph White and VYP should return them or decline them. Where the programme producer has asked for outsourced people or facilities to be booked, the 2 criteria that should be used for the selection of a particular outsourcing company should be: 1. suitability to meet the requirements for the programme 2. cost It is further recommended that training on procurement procedures should be given to all VYP booking managers. It is further recommended that Janet Black should establish a small Internal Audit team who should perform audits of programme costs and bookings made. 5.3 Documentary series which shows the use of child labour 5.3.1 Why this is an ethical issue The use of child labour is not an ethical issue for VYP as it is not VYP which is employing the child workers. The ethical aspect is the knowledge and VT film footage that it has and what responsibilities it has to act on this knowledge.

ÂŠ The Chartered Institute of Management Accountants 2010

VYP has been commissioned to make 4 documentary programmes about children’s lives and the education differences between countries. In the course of making the programmes, VYP’s programme director and an outsourced VT filming crew have recorded sequences which include the use of child labour in several programmes. VYP does not intend to publicise the use of child labour, even though some of these child workers are making goods for global retail companies. One of the VT film crew, Greg Jackson has now asked both the programme director and Steve Voddil to contact the global companies who indirectly employ the child workers to ask them to intervene. Steve Voddil has stated that this is outside the scope of VYP’s programme-making responsibilities. The ethical issue here is whether VYP should intervene to try to stop the use of child labour. There are several actions that VYP could take and these are:      

VYP could contact the Head Offices of the global companies whose products it has filmed with child workers and give them details of factories and locations and ask them to take suitable action. VYP could supply a copy of extracts from the programme that it has filmed and ask for a response from the global companies to what it has filmed, which could be included in the programme VYP could publicise the name of these global companies and raise press interest in the story. This could also raise publicity for the programmes. VYP could also ask for the global companies to cancel the supply contracts with the suppliers who are using child labour. VYP could do nothing and simply complete the programmes for broadcast in 6 months’ time. VYP could make further documentary VT filming sequences in 1 or 2 months’ time to see if the practice of child labour is continuing.

5.3.2 Recommendations for this ethical issue It is not good ethical behaviour for VYP’s management to ignore this problem, which clearly they have done until Greg Jackson, an outsourced VT cameraman had raised his concern with Steve Voddil. It is recommended that VYP should contact each of the global companies whose products they have filmed being made by child workers and supply them with a copy of the VT footage filmed. The global branded companies affected by this scandal have a legal right to reply and to investigate the circumstances themselves. VYP should ask for a response from each of the global companies and ask for a written response of what action has been taken with 2 weeks. It should ask for confirmation that the supplier contract has been cancelled or that child workers are no longer working on their products. If VYP were to act with total integrity it should return to the locations in which it initially filmed the child worker sequences to be assured that the global brands have acted upon the information (and VT footage supplied to them). It would be reasonable for the global companies to take action of this kind of potential bad PR for their companies within a month. Therefore if VYP were to film further sequences in 6 – 8 weeks time, and still find child workers employed on making products for these global branded companies, then it should publish this to the press. It is not ethical behaviour for VYP and especially for Steve Voddil, the Joint MD, an experienced documentary maker, to ignore the circumstances that have been filmed. Action must be taken.

6.0 Recommendations 6.1 – Proposal to re-commission a new series of the “Leah” drama programme 6.1.1 Recommendation It is recommended that VYP accepts the proposal from the broadcast company to recommission a 24 programme series of “Leah”. This should be communicated to the TV broadcast company immediately and contracts drawn up. 6.1.2 Justification The rationale for this recommendation is that this contract alone would be equivalent to 14.5% of its last year’s revenues i.e. it is a significant contract to win, and would increase VYP’s market position in the industry. The genre of drama programmes is new for VYP and a re-commission of 24 programmes is a substantial volume of programme time. VYP only just started making Drama programmes and if it declined this re-commissioned series due to low revenues, it may find it difficult to get any other drama series commissioned and cause damage to its reputation. It is further recommended that the programme producer’s suggestion of reducing the studio days should be undertaken. This would reduce costs by £273,700 (including the 10% contingency), and significantly increase the return on commissioned revenues to 9.5%, or 14.6% if Head Office overhead costs are excluded.

6.1.3 Actions to be taken VYP should contact the broadcast company immediately to indicate its acceptance of the recommissioning proposal. Les Fisher, Business and Legal Affairs Director should draw up contracts. The producer should start the script writing process. The producer or bookings managers should also contact the required actors, presumably the same as the first series, to assess their availability for the time period when it is planned that the programmes will made. Janet Black’s finance team should work with the producer closely to help plan a detailed budget and activity planning to ensure that the planned 8 days of savings are achieved. 6.2 - TV presenter taken ill 6.2.1 Recommendation It is recommended that VYP notifies the TV broadcast company that it will complete the 12 documentary programmes by December 2010 at the agreed (and already paid) commissioned revenue of £2.4 million. 6.2.2 Justification The rationale for this recommendation is that the future costs of £2.0 million are less than the £2.4 million revenue received, which it would otherwise have to refund back to the TV broadcast company if the series were to be cancelled. The costs incurred to date of £0.6 million are not relevant to the decision. Furthermore, VYP’s reputation is at risk here and failure to complete this contract would jeopardise both future work and VYP’s image in the market place. 6.2.3 Actions to be taken

VYP needs to notify the TV broadcast company that it plans to complete the series with a new presenter. The new presenter needs to be identified and timing of the work discussed and agreed before contracts are signed. Presenter’s fees need to minimised to try to reduce the overall loss that this programme will make. The programme director needs to ensure that all of the new sequences with the new presenter for the 4 partially completed programmes are edited in without losing the quality of the documentary. It may be necessary for some location VT filming and interviews to be redone to ensure that the new presenter is fully part of these programmes. VYP’s programme producer with the finance team need to try to find other cost reductions so as to reduce the forecast series loss of £(0.2)million. It is recommended that Les Fisher, Business and Legal Affairs Director, should investigate whether it is possible to take out insurance cover for loss caused by an event such as this where the presenter was taken ill as VYP may have a similar occurrence in any of its other programmes. Perhaps insurance cover is prohibitively too expensive, but it should be investigated. 6.3 – Cost control 6.3.1 Recommendation It is recommended that VYP appoint a new IT manager, reporting to Janet Black, the FD. It is also recommended that the new IT manager, together with an outsourced IT consultant, select and implement a new company-wide IT system that helps to improve project management of programmes and control of programme-making activities. This should help to improve management control of the activities, and therefore cost control, and help programmemaking staff control their programme costs better. This new IT system should help and improve the level of control over direct costs and the accuracy of forecasts for programme costs. 6.3.2 Justification VYP is under increasing pressure to deliver programmes to meet reduced levels of commissioned revenues and tighter operating profit margins. A new attitude to cost control is required and VYP’s programme-making staff need to be given, and trained how to use, IT solutions to enable them to control and manage the activities involved in programme-making. VYP is now a medium sized company with growing revenues, now over £28 million in the last year, and the time is right (or even overdue) for the company to use IT solutions to improve operational efficiency. 6.3.3 Actions to be taken Identify and appoint a new IT manager for VYP. The new IT manager should work with an outsourced IT consultant as well as a multi-disciplined team from VYP to identify and select a suitable IT package. This package should encompass project management, cost control and activity planning aspects. All producers and production staff and booking managers should be trained when the system has been implemented. Target timescale for implementation should be 12 months.

6.4 – VT filming proposals 6.4.1 Recommendation It is recommended that VYP does not acquire Tee. It is recommended that VYP carry on outsourcing and continue to hire VT filming crews from Tee, as a key outsourcing company. VYP has no specific need to acquire a VT filming company and it has no experience in managing this operation. 6.4.2 Justification The rationale for this recommendation is that there is little difference in the NPV for all 3 alternatives over the next 3-year period. Continuing to outsource allows VYP flexibility. VYP would not need to finance the cost of acquiring Tee at £3.4 million (or the cost of equipment at £7.0 million). There seems to be little that could be gained by giving Tee’s MD a place on VYP’s Board together with a shareholding. With the large payment for his company, he may be less committed to managing the VT film crews and therefore this is another resource that VYP would need to manage. As a TV production company, its skills lie in making programmes and “buying in” skills and facilities that it does not possess.

6.4.3 Actions to be taken VYP’s Joint MD’s should notify Tee’s MD that they do not want to acquire Tee but that they wish to continue to outsource the majority of its VT filming requirements from Tee. As VYP’s usage of VT filming grows, it could ask Tee to provide more of its usage which would mean that Tee would need to decide whether to increase the number of its VT filming crews in order to meet this growth in demand.

7.0 Conclusions VYP is a profitable company which is facing some important challenges. Operating profit margins are falling and there has never been a better time to improve control over its direct programme-making costs. The use of IT solutions to help producers plan the activities and resources that are needed to make a new series of programmes may be met by scepticism or even hostility. However, with encouragement, involvement and training, the new IT system should help them to better manage the administration involved in the planning and making of programmes. VYP has the opportunity to accept the re-commission of the new drama programme, “Leah” and although margins are low, with good management of studio utilisation, this new series could generate an acceptable margin. Furthermore, it establishes VYP’s reputation in the genre of programmes. The problem of the presenter falling ill and withdrawing from the documentary series was unfortunate but a small loss on this series would be preferable to damage to its reputation if it chose not to complete the commissioned series with a new presenter.

VYP needs to continue to remain flexible and to hire freelance people and facilities to make programmes as and when required. Therefore the proposal to take VT filming in-house, by acquiring one of its key outsourcers, is not necessary at this time and does not generate sufficient saving for the increased risk of loss of flexibility. The future looks promising for VYP but it needs to ensure that costs are properly controlled. VYP needs to be more innovative to ensure it continues to be a leading independent TV production company which will be commissioned for a growing volume of new, and repeat series, of programmes.

ÂŠ The Chartered Institute of Management Accountants 2010

Appendix 1 SWOT analysis for VYP

Strengths        

 

Successful and fast growing company Experienced programme makers Profitable company Large growth in sales revenue (up by 39% from 2009) Large numbers of programmes made each year 4 genres of programme made Won awards for documentary programmes Sales of VYP programmes internationally Outsourcing gives VYP flexibility and enables it to keep fixed costs to a minimum Charity and community work undertaken by VYP

Opportunities    



To acquire Tee (a VT filming company) Proposal for the re-commissioning of the “Leah” drama programme To improve cost control To invest in IT solutions in order to achieve better control over programme-making activities and direct programme-making costs To complete the documentary series with a new presenter

Weaknesses  

   

Control of direct programme-making costs needs to be improved Lack of IT solutions to make the business more efficient and control programme-making activities and costs Poor control of bookings managers in respect of gifts given to influence choice Dependent on outsourced people and facilities Conflict between what the programme director wants and what the producer can afford Utilisation of outsourced facilities such as studios

Threats     



TV broadcast companies reducing the level of commissioned revenue Fall in operating profit margins Damage to VYP’s reputation if documentary series is cancelled Low levels of profitability for the recommissioning of the “Leah” programme Very competitive industry with few TV broadcast companies and many independent production companies trying to win new commissions Losing key employees

Note: The above SWOT analysis is detailed for teaching purposes. However, in exam conditions a SWOT containing fewer bullet points, which cover the main issues from the case and the unseen material, is expected.

Appendix 2 PEST analysis Political/Legal  

Increased pressure on small companies such as VYP to reduce their carbon emissions New employment laws which increase VYP’s employee costs

Economic   

Reduced advertising revenue for broadcast companies has resulted in lower commissioning revenues to TV production companies such as VYP The need to reduce costs and find alternative ways to make TV programmes to much tighter budgets Increased competition from other TV production companies

Social    

Changes in fashion and taste for programmes Viewer’s like or dislike of controversial documentaries Changing trends in entertainment programmes with greater viewer involvement (through texting / phoning / voting) Greater viewer awareness of TV production company brands such as VYP

Technological     

New high technology facilities available to enhance the effects of sequences in TV programmes New IT solutions to increase VYP’s operational efficiency and establish better control over direct programme-making costs Use of technology to complete programmes to a high standard Skills of Directors and VT editors to achieve the desired finished effects for programmes Use of technology to get viewer involvement in programmes (through voting. Accessing programme websites etc)

Appendix 3

Leah drama programme – analysis of revenue, costs and profitability

Relevant number of days

Scriptwriters’ fees Studio time VT crew O/S programme-making VT editing VYP staff Other direct prog. costs Artists’ fees VYP Head Office overhead costs Sub total

Total cost per prog.

Total cost for 24 progs.

£'000

144.0 1,200.0 230.4 240.0 48.0 413.6 115.2 840.0

144.0 1,440.0 230.4 240.0 48.0 422.4 115.2 840.0

8.0 153.0

192.0 3,672.00

192.0 3,423.2

0 3,231.2

15.3

367.2

342.3

323.1

Total cost

168.3

4,039.2

3,765.5

3,554.3

Commissioned revenue

173.3

4,160.0

5.0

120.8

394.5

605.7

2.9%

9.5%

14.6%

Profit

Return on comm. revenue

2,000 30,000 1,200 1,000 500 1,100 300

Revised units

Marginal cost with savings for 24 progs.

6.0 60.0 9.6 10.0 2.0 17.6 4.8 35.0

Contingency 10%

3 2 8 10 4 16 16

Cost per day

Total cost with savings for 24 progs.

376

Appendix 4 (Page 1) Evaluation of the alternative VT filming proposals Year 0 £ million

Year 1 £ million

Year 2 £ million

Year 3 £ million

(4.62)

(5.08)

(5.59)

(3.40)

1.54 (3.08)

1.69 (3.39)

1.86 (3.73)

Discount rate 9%

1.000

0.917

0.842

0.772

Discounted cash flows

(3.40)

(2.82)

(2.85)

(2.88)

Cumulative DCF

(3.40)

(6.22)

(9.07)

Proposal to acquire Tee: Valuation based on proxy P/E ratio: P/E x Profit after finance costs and tax 4 x £0.85 million Forecast cost of outsourcing: 3,500 VT crew days @ £1,200 per day rising by 10% from the first year Savings Total cash flows

(3.40)

NPV Or: Cost of outsourcing: 3,500 VT crew days @ £1,200 per day rising by 10% from the first year Discount rate 9%

(11.95)

(11.95) negative

(4.62)

(5.08)

(5.59)

1.000

0.917

0.842

0.772

Discounted cash flows

(4.24)

(4.28)

(4.32)

Cumulative DCF

(4.24)

(8.52)

(12.84)

(12.84) negative

NPV Or: Take the activity in-house: Capital costs Total operating costs rising by 10% Total cash flows

(7.00) (7.00)

(2.20) (2.20)

(2.42) (2.42)

(2.66) (2.66)

Discount rate 9%

1.000

0.917

0.842

0.772

Discounted cash flows

(7.00)

(2.02)

(2.04)

(2.05)

Cumulative DCF

(7.00)

(9.02)

(11.06)

(13.11)

NPV

(13.11) negative

Note: There are alternative approaches to these calculations, taking into account possible different timings for cash flows and different presentation of figures. The alternative approaches shown on the next page in Appendix 4 page 2 were awarded the same level of marks as the above calculations.

Appendix 4 (Page 2) Alternative Evaluation of the VT filming proposals Year 0 £ million

Year 1 £ million

Year 2 £ million

Year 3 £ million

(4.20)

(4.62)

(5.08)

(3.40)

1.40 (2.80)

1.54 (3.08)

1.69 (3.39)

Discount rate 9%

1.000

0.917

0.842

0.772

Discounted cash flows

(3.40)

(2.57)

(2.59)

(2.62)

Cumulative DCF

(3.40)

(5.97)

(8.56)

(3.40)

NPV Or: Cost of outsourcing: 3,500 VT crew days @ £1,200 per day rising by 10% from the first year Discount rate 9%

(11.18)

(11.18) negative

(4.20)

(4.62)

(5.08)

1.000

0.917

0.842

0.772

Discounted cash flows

(3.85)

(3.89)

(3.92)

Cumulative DCF

(3.85)

(7.74)

(11.66)

(11.66) negative

NPV Or: Take the activity in-house: Capital costs Total operating costs rising by 10% Total cash flows

(7.00)

(2.20) (2.20)

(2.42) (2.42)

(2.66) (2.66)

Discount rate 9%

1.000

0.917

0.842

0.772

Discounted cash flows

(7.00)

(2.02)

(2.04)

(2.05)

Cumulative DCF

(7.00)

(9.02)

(11.06)

(13.11)

(7.00)

NPV

(13.11) negative

Further alternative approaches to these calculations are: Difference between Outsourcing from Acquire Tee = (£11.66m) – (£11.18m) = £0.48m Difference between Outsourcing from In-house = (£11.66m) – (£13.11m) = (£1.45m)

Appendix 5 Part (b): Email on the need for improved IT systems to achieve better control of direct programme-making costs To: Janet Black, Finance Director (to be sent to all VYP programme producers) From: Management Accountant Date: 25 November 2010 Re: The need for improved IT systems to achieve better control of direct programme-making costs 1. VYP is under pressure from TV broadcast companies to deliver programmes at reduced levels of commissioned revenues and operating profit margins have fallen from 10.1% in 2009 to 9.4% in the year to March 2010. 2. The only people who can control the programme costs are you â&#x20AC;&#x201C; the producers of the programmes. 3. VYP is now a multi-million pound business and it needs to invest in IT solutions to help you to manage this business. 4. It is proposed that the new IT solutions should help you to both project manage programmemaking and to help to control activities and therefore programme-making costs 5. The proposed new system will then interface with Finance systems to ensure that programme costs are monitored against agreed budgets more accurately and any cost overspends are identified at the earliest possible point, to ensure that the programme budget is not exceeded in total. 6. The proposed new IT system will involve the input of data from producers and their production staff as well as the booking managers when bookings are actually made and committed. 7. All activities will be recorded including all freelance programme-making people and outsourced facilities. 8. In this way, you control the volume of activities for each programme (such as the number of studio days or use of freelance programme-making people) and the IT system will generate the estimated cost based on the actual contracts for these outsourced facilities or freelance people. 9. This will interface with Finance systems to match bookings with actual invoices. Cost accruals will be prepared by this proposed new system based on bookings made (at the actual cost for each booking) and also for each of the activities planned at the budgeted (or updated cost) for activities required for the completion of the programme. 10. It is recommended that the introduction of IT solutions will reduce the volume of administrative paperwork and help you to better manage the programme-making process and that this will result in better cost control for direct programme-making costs. Best regards

Management Accountant Note: The above 10 sentences are slightly more detailed for teaching purposes and in exam conditions brief sentences are expected.

ÂŠ The Chartered Institute of Management Accountants 2010