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

T4- Part B – Case Study VYP – TV production company case – September 2010 REPORT To:

Steve Voddil and John Young, Joint Managing Directors VYP

From: Management Accountant Date: 1 September 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 Evaluation of the new daily programme Evaluation of the proposal to purchase new computer graphics package Part (b): Email on whether to try to retain Tom Harrison

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. The company was formed only 7 years ago and has grown fast. Included in the £28 million of sales revenue is £1.3 million of sales of VYP programmes to other TV broadcast companies around the world. 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.

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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 been asked to draft an email to brief the Managing Directors on whether to try to retain Tom Harrison, the Head of International Sales. This is included in Appendix 5 to this report.

3.0 Prioritisation of the issues facing VYP 3.1 Top priority – Damage to VT editing equipment This is considered to be the top priority as it is urgent and could impact on completion of programmes and VYP’s reputation to deliver on time. 2 of VYP’s 4 VT editing suites have been damaged and need replacing. VYP needs to make alternative arrangements to hire facilities to replace its own in-house damaged editing suites. The replacement cost is large at £1.4 million and lessons must be learnt in respect of tighter security of VYP’s offices. 3.2 Second priority – New daily entertainment programme This issue is the second priority as the newly commissioned series of 100 programmes will require tight control of the programme budget in order to achieve the profitability levels required by John Young, who wants the programme to achieve a return of 10% on commissioned revenue. This is the largest single series of commissioned programmes undertaken by VYP and its revenue at £6.0 million represents almost 22% of last year’s commissioned revenues. If this programme is popular, it may result in a further series, resulting in further growth in VYP’s revenues. The budget is tight and the producer has not got a good record for meeting agreed budgets and therefore cost control is important here. 3.3 Third priority – Advertiser funded programmes This has been placed as third priority as VYP has recently lost the commission for a new series of documentary programmes to a rival, which had secured AFP funding. VYP needs to urgently start to prepare for the need to provide full AFP, or partial AFP, for some future programme commissions that it is trying to win, as clearly this requirement is now being imposed on independent TV production companies. In terms of Porters 5 Forces, the Broadcasters have high power because of the limited number of broadcasters within the UK, so VYP will have to respond to this new requirement if it is to remain competitive in this industry. Ultimately, VYP could lose further commissions and even fail to survive if it does not react and change to meet the changing demands imposed on them. 3.4 Fourth priority – Tom Harrison Tom Harrison’s behaviour is not acceptable for a senior member of the VYP management team. His recent request to double the level of bonus to 10% or to resign from VYP may be a serious threat to VYP. Whilst Tom Harrison has had good success at selling VYP’s programmes to other overseas TV broadcast companies, his current behaviour and levels of spending should not be allowed to continue. 3.5 Fifth priority – Proposal to buy new computer graphics package This has been placed as the fifth priority issue as it is not urgent and should be considered as a “nice to have” and could bring benefits to VYP. However, VYP can continue to use a mix of its existing computer graphics package and outsourced facilities. However, as there is an urgent need to replace the damaged VT editing equipment, VYP may not have sufficient cash to invest in a new computer graphics package now.

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Note: In exam conditions, some candidates may choose to prioritise, discuss and prepare recommendations on fewer than the above 5 issues. However, as this Case writer’s answer can be used as a teaching document all 5 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 made 121.3 hours of programmes in the year to March 2010 and it has now been commissioned to make 100 new programmes. This large new commission for over 43 hours of programmes is a substantial boost to VYP’s revenues and programme output. The company has experienced a serious problem with the damage to half of its in-house VT editing facilities and this will require the use of cash resources to replace the damaged VT equipment. VYP achieved sales of £1.3 million for the sales of its programmes internationally in the year to March 2010 and the company now has a challenge to retain, or possibly lose, its key member of staff, Tom Harrison, who has achieved this high level of sales. The TV industry is also “moving the goal posts” and there is a new trend for “advertiser funded programmes” (AFP) and this will require VYP to change the way it wins programme commissions for some of its programmes or stand the risk of losing out on further commissions in the future. One of the Joint MD’s Steve Voddil has proposed the purchase of a new computer graphics package. This would be a good addition to VYP’s programme-making tools and it would result in savings as VYP would not need to use outsourced computer graphics facilities. However, can VYP afford this equipment as it now has to incur the cost of damaged VT editing equipment? 4.2 – Damage to VT editing equipment The damage to the 2 VT editing suites has been done and VYP now has only 2 operational editing suites rather than 4. VYP programme directors need to ensure that this lack of in-house facilities does not affect the quality or delivery of completed programmes to the TV broadcast companies which commissioned them. VYP must maintain its good reputation. The choice of saving money and booking VT editing suites only for the days when they will be needed will cost £240,000, but this runs the risk of non-availability for the exact times that VYP requires VT editing facilities. The higher cost of £280,000, which is £40,000 more (17% higher) gives VYP assurance of 2 VT editing suites totally committed to the company for whenever it needs them. As VT editing suites are utilised for over 90% of VYP’s usual working hours, it is highly likely that these outsourced VT editing suites will be well used. This incident demonstrates a lack of control over employee’s “swipe cards” for access to VYP’s offices. This is due to poor management control. There should be one person responsible for the issue and management of all “swipe cards”. It will be necessary to undertake an audit of what cards are operational on VYP’s system and who has the cards. Any active cards that employees do not possess should be de-activated immediately. VYP’s management should ensure that only its employees are given access cards and that access cards are not issued or given to freelance programme-making people. © The Chartered Institute of Management Accountants 2011

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In order for the 2 damaged VT editing suites to become operational as soon as possible, work should commence immediately on repairs and specification of what new replacement VT editing equipment needs to be ordered. The book value of the damaged equipment should be written off immediately in the company’s accounts, and this will reduce profits in the current financial year. Janet Black needs to assess whether VYP has sufficient cash available for the forecast capital expenditure of £1.4 million for the replacement VT editing equipment. Perhaps a bank loan will need to be negotiated in order to fund the replacement VT equipment. This large payment for replacement VT equipment may also impact on the level of dividends to be paid out to shareholders. It is stated that VYP’s insurance policy will not cover this damage, as there was not a “break in” to VYP’s premises. Les Fisher or the Managing Directors should pursue this with VYP’s insurance cover to establish why the insurance company will not pay out for this damage. Additionally, VYP should consider changing its insurance cover to ensure that all damage to VYP’s equipment is fully covered, whether accidental or due to vandalism. This may result in higher insurance premiums, but it would ensure that VYP were fully covered in future. 4.3 - New daily entertainment programme VYP has just been commissioned to make a series of 100 programmes, which will be transmitted each weekday over a 20 week period, of a new daily entertainment programme. The commission for 100 programmes at £60,000 each equals commissioned revenues of £6.0 million. This single programme series commission represents over 20% of last financial year’s revenue and is a substantial volume of programme time. 100 programmes at 26 minutes each is 43.3 hours of programme time, which represents almost 36% of last year’s completed programme time (at 121.3 hours – per Appendix 3 of pre-seen material). The budget is very tight and Appendix 3 shows that each programme will incur costs of £55,440 including VYP Head Office overhead costs and a 10% contingency. This produces a margin of only 7.6% per programme. This compares to the average margin on entertainment programmes in the last financial year of 12% (per Appendix 4 of the pre-seen material. This is a substantial drop in margin. However, this is a large commission and has the possibility of future recommissions, so even at these slightly lower margins it is still profitable and contributes towards VYP’s overheads. As shown in Appendix 3 to this report, the total of 100 programmes could generate operating profit of £0.456 million, almost half a million. This comprises revenue of £60,000 less costs of £55,440 = £4,560 profit per programme x 100 programmes. This level of profit represents 17.7% of last year’s programme-making operating profit (£2.572 million per Appendix 4 of the pre-seen material) and therefore this re-emphasises how important this new series of programmes is to VYP. The challenge this commission raises for VYP is that it has never undertaken such a large contract before and the producer, William Pearson, though experienced has exceeded his budget on the last 2 series of programmes. Therefore, there is an urgent need to plan the budget for this programme and for one of Janet Black’s finance team to work with the producer, William Pearson, to ensure that the costs stay within the agreed budget. Costs and bookings need to be planned and closely matched to budget to ensure cost overspends do not occur. Therefore with the small margins on these relatively low cost programmes, it is necessary to closely monitor what is happening to prevent cost over-runs on this series. Many of the budgeted costs are costs that will be paid to external companies. VYP should prepare contracts for the fees payable with close liaison with Les Fisher, VYP’s Business and Legal Affairs Director. Perhaps some of the presenter’s fees should be a fixed price contract to limit VYP’s exposure to cost over-runs. Therefore bookings need to be controlled to ensure that budgets are not exceeded, before costs are committed. When each purchase order is raised, or any bookings made, it must be recorded © The Chartered Institute of Management Accountants 2011

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in the VYP’s database system or a spreadsheet for each programme to show the total amount committed against each of the cost headings. Detailed plans for each cost type must be made. For example, presenter’s fees are set at £10,000 per programme. This should not be exceeded and contracts need to be monitored and agreed to ensure that if 2 presenters are used, the total budget of £10,000 is shared between them. Another substantial cost item is studio usage. Studios are the single highest cost at £30,000 per day. The plan is to record 2 programmes each day and therefore the cost per programme would be £15,000 each. Run-through sessions or practice sessions should occur before the programme goes into the studio, as the implication of running out of time and recording only 1 programme in a studio day will mean making a loss on that programme, if the whole days studio cost of £30,000 were to be charged to 1 programme, which is only making a profit of £4,560 i.e. a loss of £10,440. The producer needs to ensure that there is sufficient time to record 2 programmes in 1 studio day and that everyone required, such as presenters and all programme participants are booked and are available. The Management Accountant therefore needs to work with William Pearson to track the cumulative studio days used as the 100 programmes progress. In a similar way, the significant cost per programme is for out-sourced programme-making people. The use of freelance people needs to be constantly monitored in terms of the two variables concerning the number of person days (estimated at 20 person days) and the average cost of £800 per day. There is a cost of £5,000 per programme for “other direct programme costs”. As this accounts for approximately 10% of the total costs (before contingencies) then it would be helpful to break this cost down for budgeting purposes, and to determine what is driving such costs – for example are they a function of time, or staffing costs or simply variable by programme. In respect of the relevance of overhead costs being allocated to this series of 100 programmes, there are 2 opposing views. These are: all programmes should be allocated some of VYP’s Head Office overheads these costs would be incurred anyway and using marginal costing principles, the overhead costs are irrelevant. If VYP’s Head Office overhead costs are not allocated to this new series of 100 programmes, then the programme cost reduces by £2,000 and the contingency by £200, resulting in a higher operating profit per programme of £6,760 and an operating profit margin of 11.3%. This exceeds the 10% target operating profit margin that John Young, one of the Joint MD’s would like to see achieved. However, VYP will still incur overheads as it is using VYP’s offices and bookings managers and whilst this programme contributes to overheads, there is no specific reason why it should not be charged an allocation of overheads. It is worth noting that most of VYP’s overheads are likely to be relatively fixed for the year, and therefore using a simplistic traditional overhead apportionment basis, as used here, will inevitably over-cost large projects (such as this one), and under-cost smaller one-off projects. It would be helpful to undertake some basic ABC analysis to determine which, if any, of VYP’s overhead costs can be largely attributed to this 100 programme commission. If, as is likely to be the case, most of these overheads are found to be organisation-wide sustaining costs, rather than project driven, then a case can be made for monitoring such costs at company, rather than project level. As a final comment on programme costs, for such a large commission VYP could expect to gain from experience. VYP has never been commissioned for such a large number of programmes in one series before, and could therefore reasonably expect to improve its efficiency in terms of studio and person days. As these two factors are the main drivers for programme costs then perhaps the costing provided may be overstated. For example, an 80% learning curve factor is commonly used for new and repeated jobs. This could result in some costs being overstated by 20%.

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4.4 – Advertiser funded programmes VYP has never had to find advertisers before to sponsor its programmes and its skills lie in making programmes. However, the TV industry is changing and VYP cannot ignore this new significant trend. It has already lost out on a commission for a documentary programme series to a rival company which had secured AFP funding. So whilst VYP has a good track record and a reputation for delivering high quality programmes to the TV broadcast companies which commission it, VYP requires commissioning revenue to make the programmes. From the TV broadcast company’s perspective, if a TV production company can deliver a full AFP funded series of programmes at no cost to the broadcast company, then this would be uncommercial to decline. VYP cannot ignore this new trend as it could lose future programme commissions. There are several large companies which sponsor programmes, including Honda cars, Carphone Warehouse (mobile phones company) and Tip Tree jams. Therefore, VYP needs to adapt to meet the new need to deliver some (and possibly a growing number of) AFP funded programmes. VYP would need to recruit experienced people to find and secure advertisers. As the company has a good reputation it should be successful in finding sponsors. Many TV production companies use AFP to secure sponsors and companies such as Honda are often seen advertising on the credits of programmes at the start and end of advertising breaks, before the “real” commercials. VYP needs to undertake market research to assess the extent of AFP funding and speak to TV broadcast companies to assess their view of this new trend. It will also be necessary for VYP to enhance and promote its brand name and it will need to have a more marketing orientated focus. A budget will need to be allocated and responsibility given to one of VYP’s directors to manage VYP’s research and management into AFP funded programmes. The director responsible needs to agree on the policy it wishes to take for AFP funded programmes. When this research has been undertaken, then the board of VYP needs to understand the implications of the changes that could occur and what programme genres will be affected. So far only documentaries have been directly affected for VYP – but what about other programme genres? It will probably be necessary to recruit at least one person to work for VYP in securing AFP funding. The task of finding sponsors is likely to be time-consuming and will be on-going. It would seem more sensible to “buy in” the necessary skills and expertise required. VYP could consider appointing a recruitment agency to find a suitable marketing manager, or perhaps the Board may already know of a potential candidate working in a marketing or advertising role for a company. Lastly, VYP needs to establish a timeframe for the changes so that it is not left behind its competitors. A suggested timeframe would be to be in a position to start securing AFP funding within 6 months for future programmes to be commissioned in the next financial year starting in April 2011. 4.5 – Tom Harrison Tom Harrison has only worked for VYP for 3 years and in the last financial year he generated sales of £1.3 million. Clearly he is achieving some degree of success. In terms of Mendelow’s stakeholder analysis framework he can be considered to be a key player. However, the current situation with Tom Harrison disappearing on trips, not staying in contact with his team and high level of expenses should not be allowed to continue. Additionally, international sales and operating profits increased by 43% and 60% respectively in the financial year to March 2010. In the year to 31st March 2011, sales are forecast to increase © The Chartered Institute of Management Accountants 2011

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further to £1.8 million, a very significant 38% increase. Relating to Ansoff’s matrix, international sales are an important market development strategy. Tom Harrison has requested that his bonus is doubled from 5% to 10% of international sales. In the year ended March 2010 his bonus was £65,000 (5% x £1.3 million). He is threatening to move to another independent TV company to sell their programmes, but is this an empty threat? Whether it is, or not, it is a threat and this is not how a senior employee should act. VYP’s management need to consider what would be the effect of losing Tom Harrison and how easily could he be replaced. It is unlikely that there is a succession plan in place and perhaps the members of his small team are too junior and inexperienced. However, VYP’s programmes are selling well and perhaps the quality of the programmes will help with future sales now that VYP is established with other overseas TV broadcast companies. Tom Harrison appears therefore to be quite a disruptive element. His bullying of a finance clerk demonstrates poor management behaviour. Therefore this is now an opportunity to let him go if he wants to. There is also no certainty that he will actually leave despite the other attractive offer he has apparently received. Also, if VYP were to agree to give him a 10% bonus, what if Tom Harrison comes back in say, 6 months time with further demands? If Tom Harrison were to decide to leave VYP he should be put on “gardening leave” immediately and should not be allowed to stay at VYP’s offices during his notice period. This would be to prevent him taking all of his contacts with him or him trying to persuade overseas broadcast companies to buy TV programmes from his new employer rather than VYP. Whilst VYP own the IPR’s to its own programmes to sell to overseas broadcasters, Tom Harrison has the “intellectual property” of all of the contacts that he has built up during his time at VYP. The Managing Directors should ensure that all of the accumulated knowledge that Tom Harrison has for overseas sales and those currently being negotiated are fully handed over to other colleagues at VYP so that his knowledge is not lost. If Tom Harrison should stay with VYP he must be managed better to ensure that his costs do not escalate and that he uses the agreed outsourced travel agency for all trips. He should have one manager (a director of VYP) who he reports directly to who is responsible for his trips and his sales. If this is unacceptable to Tom Harrison then he should be asked to leave and VYP should recruit a new international sales manager. There would obviously be implications for VYP’s other employees of changing Tom Harrison’s bonus. Whilst VYP could negotiate a separate deal with Tom Harrison, and attempt to keep this secret, would this be ethical and would it be realistic to keep such a deal secret? Other possibilities could be to broaden out the share ownership in VYP by offering shares to key players such as Tom Harrison. At present there are only 6 shareholders with Steve Voddil and John Young holding 60% of the shares. Clearly he is successful at selling VYP’s programmes internationally, and he needs to be incentivised. This could be done in 2 ways: sales bonus – either a fixed bonus or a sliding scale shares in VYP It is proposed that a sliding scale for bonus payments would provide an incentive for Tom Harrison to stay with VYP. It is suggested that the current 5% bonus is payable for sales up to £2 million each year, then a bonus of 7.5% for sales between £2 and 3 million each year with a top level of bonus of 10% for sales over £3 million. This could give Tom Harrison the 10% bonus he is seeking, but only for high levels of sales. With Tom Harrison’s behaviour and lack of control over expenses and threat to leave the company, it may not be the right time to offer him shares in VYP. More commitment over a longer period would be required before it is recommended that he should be given shares in VYP. VYP could also choose to allow Tom Harrison to leave VYP and to appoint a distributor to sell its programmes overseas. Distributors like BBC Worldwide sell TV programmes to a range of © The Chartered Institute of Management Accountants 2011

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broadcasters in a large number of countries worldwide. So perhaps sales could be even greater if this sales route were to be chosen. However, the distribution companies charge a higher level of commission, usually over 20%. So whilst the commission is higher than Tom Harrison is currently receiving, VYP would save the fixed salary costs for Tom Harrison and his small team and hopefully generate a higher level of international sales. 4.6 – Proposal to buy a new computer graphics package VYP is successful in gaining commissioned programmes to make and therefore it is important to continue to differentiate (Porter’s generic strategies). The use of high technology computer graphics is a good way for VYP to differentiate. VYP has the choice to procure 1 of the 2 alternative new graphics packages or to carry on outsourcing around half of its computer graphics requirements. The other half of its requirements are currently met using its existing, but increasingly out-dated, in-house computer graphics package. Appendix 4 to this report shows the following NPV results: The GPP computer graphics package, net of savings, is £3.109 million negative. The JJK computer graphics package net of savings is £2.644 million negative. Continuing to outsource would be £1.266 million negative. The cost of the GPP computer graphics package is £0.465 million more over 3 years, but if VYP considers that this package is superior and easier for their technicians to use (as they have used the previous GPP package) then this is not a significant increase over 3 years. VYP can continue to use its own in-house outdated computer graphics equipment and continue to outsource 200 man days each year. This would be the cheapest option with the NPV at only £1.266 negative. However, the use of outdated computer graphics could damage VYP’s reputation for making high quality programmes. If the computer graphics software is so outdated, will it affect viewers’ perception of the programmes or more importantly, the TV broadcast companies perception, as it is these companies which will (or will not) commission VYP to make further programmes in the future. Therefore a major strategic decision needs to be taken here as to whether the computer graphics packaged needs to be replaced now or whether it can continue to be used without damaging the quality of the programmes. Is this a necessary investment now or a “nice to have” but not vitally important now? As VYP forecast an increase in the volume of computer graphics usage, the option of continuing to outsource does not seem a sensible approach. The other factor to be considered is whether VYP has the cash to purchase the equipment following the unexpected need to replace the damaged VT editing facilities. However, the computer graphics package could be acquired using a loan or by lease.

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. Sacking of Roy Barton 2. Tom Harrison “bullying” finance staff to process his expense claims 3. Lack of effective management control over expense claims 5.2 Sacking of Roy Barton 5.2.1 Why this is an ethical issue © The Chartered Institute of Management Accountants 2011

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Paul Maas considers Roy Barton to be a hard working employee who was suffering from stress due to personal problems. Paul Maas had discussed Roy Barton’s recent arguments with work colleagues with one of the Joint Managing Directors, Steve Voddil, and therefore Steve Voddil was aware that Roy Barton was under stress. It was unethical for Steve Voddil to sack Roy Barton for editing a programme without giving Roy Barton the legally required written warnings and also for ignoring the stress problems that Steve Voddil was aware of. It is unproven, although likely, that Roy Barton has caused the extensive damage to the VT editing suites as a reaction to Steve Voddil sacking him on the spot and escorting him from VYP’s offices. If Roy Barton did cause the damage, it could be a further sign of extreme stress causing irrational and out of character behaviour. Steve Voddil, as a Joint Managing Director, has a responsibility as an employer to look after the welfare of his employees and this could include allowing employees with stress related problems to take time off work or to arrange medical assistance or counselling. What a responsible employer should not do is to ignore the problem and make the situation worse by sacking him. Even though Steve Voddil could not have foreseen the possible damage to the VT editing suites, the MD should have dealt with the situation differently and much more sympathetically. 5.2.2 Recommendations for this ethical issue It is recommended that VYP investigates and interviews Roy Barton to try to establish whether he was involved with the extensive damage to VYP’s property. It is recommended that Steve Voddil should apologise to Roy Barton for sacking him. As Roy Barton could cause bad publicity for VYP and probably be successful if his case were to be taken to an employment tribunal, it is recommended that VYP should offer him compensation for the lack of notice period but not re-employ him. VYP’s Joint MD’s should learn from this unfortunate experience and ensure that their staff are treated more respectfully in future, especially where they are aware that individual employees are experiencing personal problems. It is recommended that Ralph White, the HR Director, should draw up guidelines and that employees know who to go to if they are experiencing problems within the company. 5.3 Tom Harrison “bullying” finance staff to process his expense claims 5.3.1 Why this is an ethical issue The “bullying” of finance staff to process expense claims without querying them is not good business practice and he should be reminded that finance staff are only trying to do their job. 5.3.2 Recommendations for this ethical issue Tom Harrison should be formally reprimanded for bullying the finance clerk. This behaviour is not acceptable. Finance staff should have a direct way to report such behaviour directly to Janet Black, the FD.

5.4 Lack of effective management control over expense claims 5.4.1 Why this is an ethical issue Tom Harrison is clearly not following company rules with booking of flights and hotels and expenses of £120,000 for a 3 week trip sounds excessive. Expense claims have an ethical © The Chartered Institute of Management Accountants 2011

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aspect, as well as a business aspect, because of the potential for abuse or even fraud, when incurring expenses on VYP’s behalf. Employees should only be allowed to claim for legitimate and realistic expenses and VYP therefore needs to lay down clear guidelines on what kind of expenses it is prepared to reimburse. This is similar to the UK government’s practices on MP’s expenses which reflected badly on many politicians. 5.4.2 Recommendations for this ethical issue Janet Black, as Finance Director should lay down clear guidelines, with assistance from the Joint MD’s on what is considered realistic for employees to claim for. Excessive expenditure by employees, including Tom Harrison, should not be allowed and could reflect badly on VYP if the expenditure is construed to be a bribe. VYP must be seen to be operating ethically and be an example of good business practice. It is recommended that Janet Black and the Joint MD’s should remind all staff in writing, especially Tom Harrison, of the need to use the official outsourced travel agent for all future bookings. Additionally, an authorised purchase order for all flights must be completed before any future trips or bookings are made. The current attitude and behaviour of Tom Harrison is not consistent with a senior employee and he must not be allowed to ignore VYP’s rules any longer.

6.0 Recommendations 6.1 – Damage to VT editing equipment 6.1.1 Recommendation There are 4 aspects to the recommendations on this key issue: 1. The recommendation of this report is to block book 2 VT editing suites from an outsourced company in order to secure the booking, so that VYP’s programme directors and VT editors are not held up in finishing programmes for delivery to TV broadcast companies. 2. VYP’s Joint Managing Directors, Steve Voddil and John Young should appoint a manager within VYP who is responsible for security of VYP’s offices. 3. VYP should ascertain what equipment from the 2 damaged VT editing suites can be salvaged or repaired and what equipment needs to be ordered. VYP’s Joint MD’s should authorise the start of the repair work to get its 2 damaged VT editing suites operational as quickly as possible. 4. Insurance cover for VYP’s offices should be reviewed in the light of non-payment for this damage. 6.1.2 Justification VYP currently undertakes VT editing in-house and the equipment in 2 of its 4 VT editing suites has been damaged. This effectively reduces 50% of its in-house capacity. Therefore there is an urgent need to secure access to 2 outsourced VT editing suites in order for programmes that are currently being made, to be edited into their final finished format ready to deliver to the TV broadcast company which commissioned each programme. VYP must not damage its reputation for delivery of finished programmes on time. VYP needs to tighten its security at its offices as damage has occurred and the company’s insurance policy does not cover the damage. This will cost VYP £1.4 million to replace the equipment, which is a substantial amount for a small unlisted company and represents over 61% of last year’s profit after tax.

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Janet Black should review VYP’s insurance policy and perhaps change insurance company. She should obtain a range of competitive quotations to ensure that VYP is fully covered in future for all damage to VYP’s equipment and offices. Depending on the level of insurance premiums, compared to its current policy, the VYP Board needs to decide what level of cover the company should have. It is recommended that all items are fully covered for any damage, however caused. 6.1.3 Actions to be taken A senior manager at VYP should be appointed to be responsible for office security. This manager should be asked to tighten security access and conduct an audit of what “swipe cards” are operational and de-activate any that do not belong to current VYP employees. Janet Black should ensure that the book value of the damaged equipment should be written off and provision for the book loss should appear in VYP’s accounts for the current year. The Directors of VT editing, Paul Maas and Raj Shah should identify what new equipment needs to be ordered and what can be salvaged or repaired. An investigation, perhaps with police assistance, needs to be undertaken to try to discover who caused the damage and whether the sacking of Roy Barton resulted in him causing the damage. 6.2 - New daily entertainment programme 6.2.1 Recommendation It is the recommendation of this report that VYP’s management accountants should work closely with the producer, William Pearson, to ensure cost control is closely monitored to reduce the likelihood of budgets being exceeded. A programme budget of £55,440 should be set. There is a need to record 2 programmes in each studio day booked and this is a critical success factor and must be achieved. Improved planning and control of all programme costs and weekly meetings between the producer and his production staff and finance team is required. 6.2.2 Justification This new series of 100 programmes has a budgeted operating profit of £0.456 million and represents a large volume of programme output for VYP. It is necessary to tightly monitor activities and timings against budget to ensure cost overruns do not occur. The profit on each programme is less than £5,000 and costs could get out of control and result in some of these programmes making a loss. Therefore good project management is required to ensure that bookings are made for outsourced resources (people and facilities, especially studio time) only when required. Control and utilisation of studio time and the need to complete the recording of 2 programmes in each studio day is essential in achieving the planned profit per programme. 6.2.3 Actions to be taken In order to help ensure that budgets are not exceeded the following actions are recommended: fees to be paid to presenters and contributors fees should be on a fixed price contract where feasible. Outsourced programme making people and studio time should be monitored by programme against the budgeted costs the key timings of 2 programmes a day in outsourced studios, and William Pearson’s time of 2 days per programme, should be carefully planned and closely monitored. Improvements in © The Chartered Institute of Management Accountants 2011

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these times may be feasible as the company progresses towards completion of the 100 programmes. The cost of £5,000 per programme for “other direct programme costs” should be broken down and monitored for budgeting purposes. A weekly meeting should be scheduled to review progress against targets and actual costs against budget. This should involve Janet Black, Sara Mills and William Pearson. This weekly meeting can review in particular the studio utilisation for the programmes recorded that week. The cumulative and average cost per programme should be notified to the Board on a regular basis. It is recommended that VYP’s overhead costs at £1,000 per producer day (equal to £2,000 per programme) are treated as a variable cost and that they are charged to each programme. After all, VYP’s overhead costs have to be covered by the contribution that all of VYP’s programmes make, so why should this large run of 100 programmes be treated differently? However, for the future, Janet Black’s finance team should introduce some Activity Based Costing (ABC) analysis, in order to establish a fairer way to allocate overhead costs to each series of programmes. As most of these overhead costs are likely to be organisation-wide sustaining costs, rather than project driven, these costs should be controlled and monitored at company level, rather than by the amount allocated or charged to each programme. 6.3 – Tom Harrison 6.3.1 Recommendation It is recommended that the company makes every effort it can to retain the services of Tom Harrison. International profits are growing in importance for VYP and this is being driven by Tom Harrison. With the threat from the new trend for programme commissions (AFP funded programmes) it would be a high-risk strategy to allow Tom Harrison to leave now. If Tom Harrison were to decide to leave VYP, then it is recommended that he should brief colleagues and the Joint Managing Directors, so that his accumulated knowledge of overseas sales and his contacts in the broadcasting companies overseas are not lost. It is recommended that he should then be put on “gardening leave” and should not work out the rest of his notice period so that he cannot take any further knowledge with him. However, it is recommended that Tom Harrison’s request for an increase in his bonus to 10% is not agreed at the present time. Instead, it is recommended that step increases are put in his amended contract so when sales targets of £2.0 million or £3.0 million sales per year are achieved, high levels of bonus are payable. It is recommended that 7.5% is payable for sales over £2 million per year and 10% is payable for sales over £3 million each year. It is further recommended that Steve Voddil should be the line manager that Tom Harrison directly reports to and that Steve Voddil controls his travel plans and his work more closely. All expenses should be authorised by Steve Voddil and all travel should be booked through the recognised outsourced travel agency. More direct control is required. Additionally, Steve Voddil should start to plan a successor for Tom Harrison, in case he decides to leave VYP. 6.3.2 Justification Sales of international programmes are an important part of VYP’s revenues and profitability and VYP should try to retain Tom Harrison. Improved management control of Tom Harrison is necessary as he has demonstrated a lack of good management behaviour.

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6.3.3 Actions to be taken The Joint MD’s and Ralph White, the HR Director, should meet with Tom Harrison and offer him the proposed sliding scale of bonus payments leading up to the 10% bonus that he has requested. Tom Harrison should be given 1 month to make a firm decision of whether to stay with VYP or leave. If he chooses to leave then a suitable replacement needs to be headhunted as soon as possible. Assuming that Tom Harrison stays with VYP he should be better managed and should report directly to one of the Joint MD’s. It is suggested that this should be Steve Voddil. A weekly meeting / telephone calls should be started to ensure better control of Tom Harrison. All future travel bookings should be made by VYP’s appointed outsourced travel agent. 6.4 – Advertiser funded programmes 6.4.1 Recommendation It is the recommendation of this report that VYP should recruit a suitable experienced individual who can be targeted to attract sponsors for future programmes. It is also recommended that VYP should promote its brand more widely and the programme awards it has won over the last 7 years in order to make the company more visible for potential future sponsors 6.4.2 Justification It is necessary to recruit a person to secure AFP funding to ensure that VYP gets commissioned to make future programmes, and that the company does not miss out on being commissioned due to other independent TV production companies who have secured sponsorship. 6.4.3 Actions to be taken It is recommended that VYP buys in the necessary skills and expertise required. Ralph White, HR Director should appoint a recruitment agency to find a suitable marketing manager. It is also recommended that the VYP brand name should be more visible at the end of all of the programmes currently being made, in order to increase exposure to potential programme sponsors. 6.5 – Proposal to buy new computer graphics package 6.5.1 Recommendation It is the recommendation of this report that VYP puts off its purchase decision. In the meantime continues to use a mix of its old in-house computer graphics facilities and also hires some of its usage to outsourced computer graphics facilities. This will take the pressure off its cash flows in the 2010/11 financial year because of the need to replace the damaged VT editing equipment, which is not covered by VYP’s insurance policy.

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6.5.2 Justification Whilst Steve Voddil prefers the GPP software on programme quality grounds, this is the most expensive option in terms of the capital outlay required and it has the highest negative NPV. Whilst VYP’s clients are at present obviously satisfied with their programmes, VYP must ensure that the use of its outdated computer graphics package doe not impact on programme quality or VYP’s reputation. VYP has the option of continuing with its current mix of its in-house computer graphics facilities and supplementing this with the use of outsourced facilities. By continuing to use a mix of inhouse and outsourced facilities, this will take the pressure off its cash flows in the 2010/11 financial year because of the need to replace the damaged VT editing equipment 6.5.3 Actions to be taken Continue to use the outdated in-house computer graphics package where this is acceptable and would not affect the finished quality of the programme content, and to supplement this with the use of outsourced computer graphics facilities. It is further recommended that VYP should develop a plan to procure the new version of the GPP graphics package in the next financial year.

7.0 Conclusions VYP is a profitable company which is facing some important challenges. With VYP’s good reputation it is likely that it will be able to secure AFP funding when it has put someone in place to identify and negotiate with suitable sponsors. VYP needs to take care with its HR matters, so that it does not lose Tom Harrison and that the problems with Roy Barton are not repeated. Clearly cost control in this industry is becoming more important as margins are squeezed and the new commission for 100 entertainment programmes give VYP’s finance team an opportunity to work closely with the production team to help control and monitor costs and activities. The future looks promising for VYP but it needs to ensure that costs are properly controlled and that VYP becomes more innovative to ensure that new industry trends are identified as early as possible.

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Appendix 1 SWOT analysis for VYP Strengths Successful and fast growing company Experienced programme-makers Profitable company Large numbers of programmes made each year 4 genres of programme made Won awards for documentary programmes Good team spirit and low staff turnover in senior management team 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 make 100 new entertainment programmes worth ÂŁ6.0 million in commissioned revenue To acquire sponsors for AFP funded programmes Opportunity to purchase a new computer graphics package which could give VYP a competitive edge

Weaknesses Control of programme budgets could be improved Lack of IT solutions to make the business more efficient Dependent on outsourced people and facilities Weak security for VYP offices as VT equipment has been damaged Poor management of Tom Harrison Lack of management control over employees demonstrated by Tom Harrison bullying of finance staff Lack of succession planning for key personnel

Threats Possible loss of Tom Harrison and probable reduction in sales revenues from international sales of VYP programmes Damage to VT equipment could cause delays to completion of programmes Broadcast companies reducing the level of commissioned revenue Reduced profitability Possible loss of some future programme commissioning unless VYP can find a sponsor to provide AFP funded programmes Without a new computer graphics package VYP could lose its competitive edge and lose possible future programme commissions

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.

ÂŠ The Chartered Institute of Management Accountants 2011

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Appendix 2 PEST analysis Political/Legal Increased pressure on small companies such as VYP to reduce their carbon emissions New employment laws which increase VYPâ&#x20AC;&#x2122;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 Competition from Advertiser Funded Programmes (AFP) Social Changes in fashion and taste for programmes Viewersâ&#x20AC;&#x2122; 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 Need to update technology on a regular basis such as requirement for new computer graphics package New high technology facilities available to enhance the effects of sequences in TV programmes 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)

ÂŠ The Chartered Institute of Management Accountants 2011

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Appendix 3 Evaluation of the new daily programme

Cost heading

Studio time VYP producer’s costs Outsourced programme-making people Presenter’s and contributor’s fees Other direct programme costs VYP’s Head Office costs

Cost per unit £

Relevant units

Per programme £

Total 100 programmes £ million

30,000 1,200 800

0.5 2 20

15,000 2,400 16,000

1.500 0.240 1.600

5,000 1,000

1 2

10,000 5,000 2,000

1.000 0.500 0.200

50,400 5,040

5.040 0.504

Total programme costs

55,440

5.544

Commissioned revenue

60,000

6.000

Operating profit

4,560

0.456

Return on commissioned revenue

7.6%

Effect if VYP Head Office overhead costs are not charged: Total programme costs as above Less: Head Office overhead costs Less contingency on overheads

55,440 (2,000) (200)

5.544 (0.200) (0.020)

Total costs excluding overheads

53,240

5.324

Commissioned revenue

60,000

6.000

6,760

0.676

11.3%

Sub total Contingency

10%

Operating profit

Return on commissioned revenue

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Appendix 4 Proposal for new computer graphics package Year 0 GPP computer graphics package Capital cost $ million Exchange rate

Year 1

Year 2

Year 3

(7.000) 1.60 £ million

£ million

(4.375)

0.500 0.500

1.000

0.917

0.842

0.772

Discounted cash flows

(4.375)

0.459

0.421

0.386

Cumulative DCF

(4.375)

(3.916)

(3.495)

(3.109)

Capital cost Other costs Savings: 200 person days @ £2,500/day Total cash flows Discount rate @ 9%

£ million (4.375)

NPV

JJK computer graphics package Capital cost $ million Exchange rate

(3.109)

(6.000) 1.60 £ million

£ million

(0.063)

(3.750)

0.500 0.437

1.000

0.917

0.842

0.772

Discounted cash flows

(3.750)

0.401

0.368

0.337

Cumulative DCF

(3.750)

(3.349)

(2.981)

(2.644)

Capital cost Other costs – training 100 days @$1,000/ day @ 1.60 Savings: 200 person days @ £2,500/day Total cash flows Discount rate @ 9%

£ million (3.750)

NPV

Difference between GPP and JJK

(2.644)

+£0.465 m

Continue to outsource Outsource 200 person days at £2,500 /day= £0.500 million Cumulative discount rate for 3 years = 2.531 NPV

(1.266)

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Appendix 5 Part (b): Email on whether to try to retain Tom Harrison To: Steve Voddil and John Young, Joint Managing Directors VYP From: Management Accountant Date: 1 September 2010 Re: Whether to try to retain Tom Harrison Advantages of retaining Tom Harrison: 1. Tom Harrison is a valuable member of VYP and has achieved a high level of sales of VYP programmes to overseas TV broadcast companies. 2. No succession plan. Disadvantages of retaining Tom Harrison: 3. His current behaviour to VYP colleagues and his poor communication with his support team has created problems. 4. He has also asked for a large rise in his bonus and he could demand more in the future and this could upset other VYP employees. Financial and other factors that should be considered: 5. Need for Joint MD’s to meet with Tom Harrison to ensure that he is fully committed to staying with VYP and that he should report directly to Steve Voddil. 6. All overseas trips must be approved before he leaves and the purpose and anticipated outcome explained and he should report to Steve Voddil each Monday (by telephone if he is away). 7. Sales targets for each year – these must be set and agreed between Steve Voddil and Tom Harrison (the forecast for this year is £1.8 million, a rise of 38% from last year). 8. Bonus arrangements – propose that 5% bonus will continue for all sales up to £2 million per year, then a new higher bonus will be payable at 7.5% for sales between £2 and £3 million and a higher bonus level will be payable for all sales over £3 million each year. 9. Steve Voddil should establish a successor for Tom Harrison irrespective of whether Tom Harrison chooses to stay with VYP or not, and as the quality of VYP’s programmes is now known internationally, perhaps VYP does not need someone at Tom Harrison’s level to sell the programmes. 10. I recommend that Tom Harrison should be retained if possible and he should be rewarded on a sliding scale of bonus payments, with a 10% bonus only payable for sales over £3 million each year. Best regards

Management Accountant

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

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