t4 case analysis_workbook_may_2011

Extract from Kaplan’s

T4 Case Study

Case Analysis Workbook

BeeZed Construction Services (BZCS)

March / May 2011

Planning your answer: Minicase scenariosChapter learning objectives

By the end of this chapter you will:

• Be aware of the different issue types you may be presented with in the exam

• Know how to deal with each type

• Have practised a process to plan for the different issue types

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1 Practice makes perfect

At Kaplan, we believe that the secret of success in the case study exam is to practise using mock exams. However, sitting your first mock exam can often be quite daunting. Almost like learning to drive, there seems to be so many things to remember and everything has to be done at the same time.

So, to help break you into your stride for a full exam, this chapter contains a number of minicase scenarios. Each one replicates a potential section out of the unseen material and gives the sort of information you would expect to be provided.

By working through these scenarios, you will feel more equipped to tackle multiple scenarios at once, within an exam environment.

2 Issue types

Within the unseen you will be told of a number of events (often grouped under bold headings). In order to produce a report that delivers value to the reader, you must focus not on the event but on the issue that arises from that event.

Broadly speaking issues can be classified as either problems or opportunities. A problem issue is best analysed by evaluating the alternative solutions. To analyse an opportunity you will need to identify the advantages and disadvantages to the company.

Whilst this may provide you with some useful subheadings for your report, it does not necessarily help to drive your commercial thought process. Analysis of past TOPCIMA and T4 exams performed by Kaplan shows that issues will fall into one of seven different types. Although the details within the event / issue will alter, there will be some common threads that can be used to help drive your thoughts within the exam. The seven different issue types are:

• A corporate governance issue: This will usually be a problem for the business, for example, a senior director or crucial staff member might be leaving or could be “distracted” from their job. This sort of issue will raise questions over stakeholder confidence, and can lead to concerns with both short and long term operations.

• A threat to competitive advantage: A definite problem, an issue of this type is all about the core and threshold competencies and the idea of the “slip”. For example, problems at one of the call centres that means customers can't get through. You will be dealing with an issue that threatens the means by which the company achieves success and as such is it will usually be a high priority. Your analysis will need to focus on the impact of the issue and how the company can limit any damage.

Planning your answer: Mini-case scenarios

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• A threat to the ability to deliver results: Again, a problem, this is quite a common issue where the company concerned is a plc. For example, the company has a published five year plan that it is not meeting due to market pressures. It is often linked with a threat to competitive advantage. This will be a significant issue for shareholders and you will be expected to consider ways in which performance could be improved. This sort of issue can be presented in two different ways. In some scenarios, you are given a range of potential solutions to analyse. In others you will be given more of a "free rein" to suggest potential solutions.

• A threat to the future survival of the business: A definite problem. If such an issue arises, it will always be a high prioirity. In a recent postexam guidance issued by the examiner, it stated "The most crucial of all issues affecting a company is maintaining its very existence". Such an issue will require detailed advice on how to resolve the situation. The sort of issue that comes under this heading would be a take over of the company or something that threatens going concern

• The implementation of an agreed strategy: Depending on the specifics of the company and the strategy, this can either be a problem or an opportunity. As an agreed strategy, the issue is often more about managing the change process. Such an issue is usually given a lower priority.

• An event that alters business strategy: Again, this can either be a problem or an opportunity. For example, the company could face a problem if a new competitor entered the market or could have an opportunity if new legislation opened up new markets. Either way, its business strategy will need to change. You will be expected to analyse the potential changes that could be made.

• A strategic proposal: Always an opportunity, the majority of proposals presented in the exam will need to be evaluated. You will need to consider both the advantages and disadvantages as well as thinking about the availability of resources and questioning the strategic logic of any potential project.

Each of the scenarios presented here can be classified as a different issue type. By working through them all you will be aware of the key things to think about as you plan your answer.

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3 Approach to planning

To help provide more structure for you in the exam, we would suggest you follow a 6 step approach to your planning:

Each of the scenarios has a detailed answer. The aim of these is to demonstrate the thought process and range of ideas you should be aiming for when planning your answer. They should also help to develop your judgement and commercial reasoning.

They are not presented as the "correct" answer to your planning and you should not attempt to write out your planning in this way. You simply won't have time in the exam! Instead your planning should consist of brief notes that can later be used to help structure and write your report.

Within the 20 minutes reading time: Step 1 Read about and identify the eventStep 2 Consider what the issue isStep 3 Evaluate the impact of the issue. Who is affected,

by how much are they affected and what would happen if no action was taken?

Within the 20 minutes planning time: Step 4 What are the alternative courses of action?Step 5 Identify the advantages and disadvantages of each

(including resourcing needs and implications)Step 6 Decide on your recommendations thinking about

who should do what, by when and how

Commercial Director of Infrastructure Projects Division resigns

Mike Kitchen, Commercial Director of the Infrastructure Projects Division, has just handed in his notice to the MD of BZCS. He has been offered the chance to run a bigger division in a rival company. His new position will offer a better salary, a more prestigious position and the chance to manage projects across the spectrum of construction. Mike has a six month notice period (longer notice periods are common in construction).

He is a close personal friend of Gary Walton, who is the Commercial Director of the Sports Facilities Division. Gary feels that his role in the winning of the 2012 Olympics bids has never been fully recognised. Gary also has a six month notice period.

Requirement

Plan an answer dealing with the issues this will raise.


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Mini Case Scenario 1 Director resignation

Staffing problems

Following a heated conversation between Susan Deates, the Commercial Director of the Energy Projects Division, and Jason Parkins, the Project Manager (PM) of the Strate power station project, Jason has submitted his resignation. In the letter he has cited unrealistic expectations imposed on him by BZCS as a key reason for resigning.

Having previously occupied the Bid Manager position for Strate power station project, Jason was aware of the tightly negotiated contract and the pressure to control costs while meeting the completion deadline. However, he feels that the recently completed restructuring within BZCS has compounded the pressure as the project staffing levels were subsequently reduced by 12% making it near impossible to meet the quality criteria agreed with the client. In addition, the teething problems with the setup of the centralised Procurement Department, although now resolved, meant that some materials for key stages of project construction were delivered late, making Jason look incompetent in the eyes of the client and contributing to the breakdown of PMclient relationship.

Susan Deates responded to Jason’s resignation by agreeing that he is to take a twoweek holiday after which the matters raised above will be discussed. Whilst she believes that a cooling off period would be sufficient to persuade Jason to stay, she is concerned that his feelings are symptomatic of a wider problem amongst project managers within the organisation. Therefore a longerterm solution is necessary to reconcile the expectations of the company, its clients and employees.

Following the recent restructuring, the productivity of BZCS employees has improved in line with expectations and the staff turnover currently stands at 2%, an historically low level. Yet, BZCS's HR Director is wary of taking this as a positive development, having reviewed appraisal documentation of several other Project Managers she expressed an opinion that staff are overstretched which is starting to have a negative impact on their ability to cope with the work requirements.

Requirement

Prepare your plan for this issue.

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Mini Case Scenario 2 Staffing problems

Expansion strategies

The Board of BeeZed have become concerned that the return obtained from their construction subsidiary (BZCS) is lower than required by the group overall. BeeZed normally expect a return on assets of 15%; BZCS did not make this target in 2009 or 2010. They have therefore informed the BZCS Board of their intention to divest the subsidiary, possibly to a competitor.

However, selling the division means obtaining an expected sale price; given that BZCS’s shares are not traded there is no clear market valuation for the company. Similar companies to BZCS have a P/E ratio of 9.

The Finance Director of BZCS would like you to calculate the actual return on assets being obtained by BZCS, an indicative sale price and then comment on the alternative courses of action open to the BZCS Board.

Requirement

Complete your planning, together with the calculations requested by the Finance Director. then write out your answer to this issue. You should include:

(1) Your statement on the issue and its impact

(2) Your analysis of the alternative proposals

(3) Your recommendations



MiniCase Scenario 3 Sale of BZCS

Preparing a tender

Within BZCS, all of the accounting for each construction project is accounted for on a project basis. This enables the company to monitor its costs carefully against budget (vital where the contract is on a fixed fee basis), and also to gauge the profitability of each project.

All direct costs are allocated to the respective project, including salary and associated costs for all of BZCS’s employees working on each project, as well as subcontractor costs. All nonproject based overhead costs are allocated to projects using activity based costing techniques, based on appropriate cost drivers.

BZCS’s Infrastructure Projects Division is currently tendering for a contract to build a new airport terminal in Madrid. The operating profit margin for this type of work is an average of 4.6%, and the company is keen for this to be maintained.

Preliminary analysis shows that the direct costs of this project are expected to be €440 million.

The 2011 budget in respect of indirect costs contains the following:

You have already done some work on this tender, and have estimated the following:

• Procurement costs. It is expected that the new centralised procurement department will incur overhead costs of €30 million in 2011, and process 600,000 purchase orders.

• HR costs. The budget for the HR department is €5 million for the year to 30 September 2011. This department looks after all aspects of HR across the company, which currently has 10,100 employees.

• IT costs. The IT department has a budget of €6 million for 2011, and is expecting to undertake 300,000 hours of IT work in that period.

• Commercial Director costs. The Commercial Director for the Infrastructure Projects Division likes to visit each project that her division is working on every quarter. Salary, travel and accommodation costs in respect of this are budgeted at €500,000 for 2011. The infrastructure division has 5 projects planned for 2011.

• The contract will take 4 years to complete.

• In total, 40,000 purchase orders will be necessary per annum throughout the 4 year period.

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MiniCase Scenario 4 Costing a project

Requirement

• An average of 400 people will work on the construction of the terminal for each of those 4 years.

• The IT Department will spend 12,000 hours each year on the project.

• The Commercial Director is to continue her policy of visiting each project undertaken by her division once every quarter.

(a) As a management accountant working for BZCS, you have been asked to suggest a proposed fee for this project, based on achieving the typical operating margin, and using the 2011 budget as typical for the next 4 years. Ignore inflation and tax.

(b) Describe how your answer would differ if you were also provided with a breakdown of employees by department? For example, you could be told that the procurement department employs 1,500 staff and the IT department employs 200 staff (provide an illustration but do not perform a recosting of the project).

(c) You have also been asked to suggest how target costing may be of use in determining an appropriate tender figure (giving an illustration).



Lease v buy

The Environmental Projects Division has recently won a contract to construct a new, highly sophisticated water treatment facility in Kuwait.

Due to technology involved in the building, and given it's location in such a hot climate, BZCS needs to acquire a new specialist drilling machine in order to complete the contract. The machine is so specialised that at present, it could not be used on any other project. However, this area of specialism is one in which BZCS hopes to focus, and if this project is successful, the Commercial Director is hopeful that further contracts could be won.

A decision needs to be made over whether to lease or buy the specialist machine. Relevant details are as follows:

(1) The machine will be required for a period of 24 months during the first phase of construction.

(2) The cost of the machine is €100 million.

(3) The machine could be sold at the end of two years for an estimated €25 million.

(4) Alternatively, if a further contract was won, it could be utilised for another period of up to two years, after which time the scrap value would be nil.

(5) Maintenance costs would be €10million per annum (posttax) in the first two years, rising to €15million per annum (posttax) in years 3 & 4 if the asset was retained.

(6) If bought, capital allowances at the rate of 25% reducing balance could be claimed on the asset with a balancing allowance or balancing charge arising on disposal. The asset would be bought on the last day of the accounting period.

(7) Alternatively, the asset could be leased for a two year period at a cost of €45million per annum, payable in advance. If the lease was extended for a further two years, the payment would increase to €55million per annum. The lease payments include all maintenance expenditure.

(8) BZCS pays tax at an effective rate of 20% one year in arrears.

(9) BZCS appraises all investments at their estimated cost of capital of 10%. The relevant posttax cost of borrowing is 5%.

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MiniCase Scenario 5 Lease v buy

Requirement

(a) Prepare calculations to assess whether the asset should be leased or acquired depending on whether the asset was needed for two or four years.

(b) Note down any other factors which should be taken into account when making the decision.

(c) Now assume that the Commercial Director considers there to be a 60% chance of a further contract being secured. Use you calculations from part (a) to reach a decision on whether the asset should be leased or purchased.



Problems on a prestigious contract

For the purposes of answering this question assume it is 1st March 2011.

In 2008 the Office Division of BZCS won a very large and highly prestigious building project for the delivery of a state of the art office block in Amsterdam. Work commenced on the project at the end of 2008 with an opening date of the 1st May 2011.

From the beginning of the contract there were a number of problems; the Project Manager identified that time schedules were tight and the site selected for the office block was in an area susceptible to flooding; this increased the time required to stabilise the footprint area, although once this was sorted progress was rapid and lost time was made up in subsequent stages.

In line with company policy, the Project Manager has presented financial and operational issues to the senior management groups on a monthly basis; all of these have been by video conferencing.

But in recent weeks the project has not been going well. Therefore the Board called an emergency meeting with the Project Manager at the head office as additional reports indicate that the opening date is looking extremely unlikely. Information from the client includes that there has been no onsite management from the Project Manager in the last three weeks, non completion of change requests and in some instances poor quality work, all of which have resulted in a complete breakdown in communication between the client and the Project Manager.

At the meeting, the Project Manager identified that in the last three months the number of changes requested by the client increased and in some cases required a complete rework. The Post Completion Manager for the Office Division is now on site; he estimates that the change requests will result in additional costs in the region of €5m (€2m of which have already been incurred).

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MiniCase Scenario 6 Problems on a big project

Below is the extract of the management accounts for the office block project as at 1st March 2011.

Requirement

Complete your planning, then write out your answer to this issue. You should include:

€ million

Revenue (as originally quoted) 102

Costs (as originally expected) 95

Cumulative costs (actual to date) 98

Forecasted costs to complete (based on latest revisions and rectification of quality issues)

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(2) Your analysis of potential solutions




The Board of BZCS met recently to discuss the impact on the company of the current economic situation. Recovery is slow and governments across Europe have made cutting public spending a priority as they attempt to address their budget deficits. Whilst BZCS have maintained their success rate at winning bids, the number of European public sector contracts being offered for tender in the three months to December 2010 has fallen by 60% on the previous year. The cuts have mainly affected the Infrastructure, Community and Energy divisions, most of their projects being in the public sector.

The Managing Director has put forward three proposals to resolve the issue:

Requirement

Complete your planning, then write out your answer to this issue. You should include:

(1) Merge the Infrastructure, Community and Energy divisions to create one Public Sector Projects division. The merger would result in operating synergies of €10million, mainly as a result of 500 job losses and integration of back office systems.

(2) Make further redundancies across all divisions. The Human Resources director has identified a further 1,000 jobs which he believes could be lost while retaining BZCS’s ability to fulfil its current projects and remain competitive in winning bids. This option would save an estimated €18 million of costs. UCATT, the construction workers’ union, has let it be known that it considers further redundancies on top of those already made in 2009/10 to be unacceptable, and that it would ballot its members on strike action were any more redundancies proposed.

(3) Undertake speculative building projects. To fill the gap left by the public sector cuts, the Commercial Director of the Community Projects division has suggested speculative building. Speculative building is construction for which no buyer has been identified. A construction company engaged in speculative building assumes the risk that a completed project will be difficult to sell at an acceptable price. The Commercial Director argues that in the current sensitive political climate, BZCS will always be able to find a buyer for buildings such as schools and hospitals.


(2) Your analysis of potential solutions


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MiniCase Scenario 7 Reduced public sector spending

CSR reporting error

Corporate social responsibility awareness and reporting has increased significantly in recent years in the construction industry. Six months ago the BZCS Managing Director was interviewed by the BBC investigative TV programme Panorama. The programme was investigating whether the CSR disclosures made by construction companies on their websites and in annual reports were reliable and fair. BZCS was approached by the programme production team to provide an example of a company with an excellent commitment and track record in this area.

Earlier this week the BZCS press office received a call from the Panorama programme producer to advise them that the programme was now completed and due for screening in 2 weeks time. The producer also advised that they had obtained information that suggested that the widely publicised BZCS site waste non landfill disposal/recycle figure of 62% was overstated. The producer advised that this information had only recently been received and was not included in the current programme content although she would not give any categorical assurances that it would not be included in the final edit. The producer asked whether BZCS would like to make an official response to the allegation before the programme is screened.

An immediate BZCS internal investigation has confirmed that the true site waste non landfill disposal/recycle figure is just below 50% with the over reporting due to a number of administrative calculation errors by a major waste management contractor that were not checked by BZCS before publishing. Senior management are keen to provide a response before the screening of the programme in two weeks time but are unsure whether to fully disclose the outcomes of the internal investigation.

Requirement

Complete your planning then write out your answer to this issue as it would appear within the ethics section of your report. As an ethical issue you should include:

(1) Your statement on the issue that should clearly explain the ethical nature of the problem

(2) Some potential solutions with brief analysis




MiniCase Scenario 8 Environmental waste

Test your understanding answers

Step 1 Read about and identify the event

The event is the resignation of Mike Kitchen and the possible risk that Gary Walton will also resign.

Step 2 Consider what the issue is

This is a corporate governance issue plus the strategic issues caused by the loss of key managers.

Step 3 Evaluate the impact of the issue. Who is affected, by how much are they affected and what would happen if no action was taken?

Mike Kitchen currently runs the biggest and most profitable of the BZCS divisions (representing almost 29% of sales and 48% of operating profit). It is possible that a large part of BZCS’s reputation for quality and safety may rest with Mike and his key team members.

If Mike encourages Gary to move to the competitor as well, that could also damage the performance of the Sports Facilities Division (which accounts for another 11% of sales and almost 10% of operating profit).

In addition, Mike (and possibly Gary) could be an integral part of current bids and a conflict of interest exists if the rival company is bidding for the same work.

Step 4 What are the alternative solutions?

Issues of this type are best thought of in terms of short term and long term solutions. Although the comments relate to Mike, the solutions could equally apply to Gary if Mike headhunts him.

Short term

Initially, the BZCS Board must consider whether they should try to convince Mike to stay. Assuming they decide to let him go, they must find someone who can fill the role on a temporary basis as finding a long term replacement could well take time. Options will include another Commercial Director, a senior member of Mike's team or an external consultant. In addition the Board will need to decide whether to allow Mike to work his notice period or instead put him on gardening leave.

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Mini Case Scenario 1 Director resignation

Long term

A permanent replacement will need to be found. The options can be divided between internal or external recruitment.

Step 5 Identify the advantages and disadvantages of the proposals (including resource requirements and implications)

Short term proposals

The Board could attempt to convince Mike to stay with BZCS. However, this option is rarely successful as once a resignation has been tendered others may doubt Mike's commitment to the company. Attempts could be made to renegotiate Mike's contract if the higher salary on offer is the key reason for his resignation. Alternatively, if it is the more prestigious role/greater variety which is the key attraction, BZCS cannot change this for Mike without considering a major review of organisational structure which will have far reaching impacts on others.

The risk that Mike could steal sales away from BZCS is reduced due to:

However the risk is that BZCS may lose its preferred supplier status with some clients if they have allegiances with Mike and transfer the status to the competitor.

If a permanent replacement cannot be found within six months then a temporary replacement must be found. An internal candidate will have the advantage of knowledge of the business as well as being a quick solution. However, care must always be taken as this person already has responsibilities in their current role which will need to be covered. The Board could try to find a Commercial Director that can cover both their own and Mike’s role but this could result in suboptimal performance in both divisions as well as demotivating the individual concerned.

• the nature of sales being longterm and contractually binding meaning all current contracts are safe

• the regulation by OFT which means that bidding for future contracts having to comply with a fair and transparent bidding process. The winning bid must demonstratively be the best bid removing the importance of “relationships”



You should also question whether a suitable candidate does exist. BZCS clearly believe that specialism in project areas is key, hence the current structure (so it is not necessarily the case that another Commercial Director can automatically fill this role due to its specialist nature). That would imply a member of the Infrastructure Projects Division itself (perhaps a highly skilled Project Manager) filling the position. Finally, if an internal candidate were to 'step up' temporarily, there could be implications on their motivation levels if they were not then given the role on a permanent basis.

An external consultant solves the problem of sharing responsibilities. However, the person selected will know little about BZCS, their contracts etc so would take a while to get fully up to speed. It will also cost more.

Long term proposals

With similar arguments to the above, an internal candidate will likely be cheaper, quicker and easier to find. However, a suitable candidate may not exist. If one does exist, it will be motivational for both that individual and others around them, to see internal promotion opportunities being made available. This would be particularly true in BZCS, which has a flat management structure with limited opportunities for promotion.

An external candidate may help to bring new blood and fresh ideas to the company. There are no indications within the preseen material that BZCS is in need of fresh ideas although there is a distinct lack of information detailing ongoing strategies so we can't rule out that appearing within the unseen.

Finding a suitable external candidate could take up to a year or more and may involve head hunting from a competitor, particularly at this senior level.

Step 6 Decide on your recommendations and think about who should do what, by when and how

To score well for your recommendations, you will need to give plenty of detail on who, what, when and how, provide justifications for what you are recommending and consider the implications (including resources required) of your suggestions.

Given the brief information in this scenario, it is not clear whether there is a strong candidate from within the Infrastructure Division. An external candidate may be the best long term solution.

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As a result of this decision, the short term replacement becomes more of an issue. Mike should be made to work his notice period, although he should not be involved in any bids that are expected to last for longer than this. This at least will provide the Board with six months grace. If a longterm replacement cannot be found after this time, an external consultant would appear to be the best option. This will at least ensure the role is given sufficient attention for any intervening period.

In terms of the who, what, when and how, the Human Resources Director should prepare a job specification in consultation with the BZCS Managing Director. The job vacancy should be announced immediately and interested parties should be sent the job specification. Interviews should be arranged within the month and should principally be conducted by the Managing Director.




The event is the falling morale and motivation amongst project managers leading to 'burnout'.


The issue is a threat to competitive advantage as the project managers are key to the delivery of BZCS's critical success factors of quality, safety and completing projects on time.

Step 3 Evaluate the impact of the issue. Who is affected, how are they affected and what would happen if no action was taken?

BZCS's reputation rests on its ability to deliver projects on time and to high quality standards. If these are undermined in the pursuit of a short term gain by overworking staff and cutting corners, the company might find it more difficult to win future business. As a large organisation, BZCS is not reliant on an individual worker or even a Project Manager. However, the continuity amongst the management team creates indepth understanding of the client needs and helps the company to learn valuable lessons as to how difficult client requests can be approached.

The scenario tells us that productivity has recently improved and staff turnover is at an historically low level. You may therefore be forgiven for thinking that this issue isn't that significant. However, in recessionary times it is common for the staff turnover level to decrease as people see fewer opportunities to find alternative employment, especially in the construction industry which has been hit hard by the financial crisis. As the economic climate starts to improve, BZCS may find itself facing severe staffing problems as employees, who have been forced to put in “discretionary” efforts and achieve more with less, start actively looking for new jobs. In extreme circumstances, burnout at work could even lead to suicide such as 11 workers of Taiwanese manufacturer Foxconn who took their lives due to the company imposing excessively rigorous rules on employees which prompted Foxconn’s biggest customer Apple to review their supply arrangements. BZCS could be equally facing a public relations scandal if overstretched employees are involved in an accident on site.

Step 4 What are the alternative courses of action?

As a problem type issue, you must address what can be done to resolve the issue. A problem such as this can be tackled in any number of ways and providing your suggestions are sensible, practical, and justified, you will score. Perhaps of greatest importance here is that you cover actions that will reveal the true nature of the issue as well as how to resolve it.

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Mini Case Scenario 2 Staffing problems

Actions to reveal the nature of the problem might include:

Actions to resolve the issue might include:

Don't forget that technical models can often be a very effective way to identify potential courses of action. For example, here we could use motivation theories to explore the potential ways to resolve the issue (based on whether the problem is with hygiene factors or motivating factors). We could also suggest that a balanced scorecard approach is taken to develop a range of measures across the four perspectives.


For every solution you suggest, you must evaluate it in terms of its advantages and disadvantages. You must also consider the practicalities of the proposal who would need to do what and when in order to implement the plan, and is this feasible? Let's look at a couple of the suggestions made above to show how this can be done.

Introduction of counselling services

A counselling service would allow staff to raise any areas of concern they may have and would therefore allow the HR department to assess the extent of the problem and design some solutions. Perhaps the first practicality to address is who would perform the counselling. Someone from within the company may be the cheaper option but is unlikely to be as effective. Employees may be more open if they speak to an independent and impartial individual about their problems, rather than their line manager. But if an external advisor was used then a feedback mechanism would need to be established to ensure BZCS were still able to capture the information on the nature of the problem to enable corrective action to be taken.

Another key question is whether the expense can be justified at a time

• Oneonone interviews between project managers and HR / Commercial Directors

• Introduction of counselling services

• Review of exit interviews and minutes of appraisal meetings to identify key trends or grievances

• Payment of bonuses

• Introduction of more flexible working practices and use of technology (e.g.smartphones)

• Introduction of a mentoring scheme



when BZCS are trying to control costs? A good technique would be to raise this question in the main analysis section of your report and then answer it within the recommendations section as part of the justification you provide.

Introduction of a mentoring scheme

A mentoring scheme would perhaps make the Project Managers feel like they have someone to share their work problems with, thereby reducing the stress associated with them. It would also be a very effective way of developing the skills of the PMs, preparing them for future promotion and increasing their loyalty to the company.

However, such an initiative would greatly increase the administrative burden for senior staff while not necessarily being able to accommodate the needs of all employees due to the variability of individual circumstances. Perhaps one way to resolve this practical resource constraint would be to only invite some PM's onto the mentoring scheme; those that were felt to have the greatest potential, those new to the job or those who were felt to be most vulnerable. Although this would reduce the burden, it could result in the demotivation of those who were left.

Top tip: Don't try to give this level of analysis for every alternative course of action you can think of. If you do, you will overrun on earlier issues and will fail to complete your report. Instead, try to pick two courses of action that you feel are most feasible and focus your analysis on these. Then, for any other suggestions you have, you can perhaps provide some brief analysis depending on your timings and capabilities on the day.


Your recommendations would ideally cover three main things; the recommendation itself, the justification for it and the specific actions to be taken. Feel free to use these as subheadings if it helps.

For example you might want to write:

Recommendation

It is recommended that each Commercial Director meets in private with each of the Project Managers in their division to discuss causes of stress and worklife balance.

Justification

This will enable a complete understanding of the nature of the problem to be obtained firsthand, thereby meaning a quicker reponse to the problem can be developed if required. Project Managers are essential in the delivery of BZCS's critical success factors and a suspected

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problem like this must be treated seriously.

Actions to be taken

The HR Director should draft an email that can be sent to all PMs from their Commercial Director requesting the meeting, explaining the concerns and outlining the purpose of the meeting. All meetings should be completed within the next two weeks and should be followed by a meeting of the Commercial Directors, along with the HR Director, where the findings can be discussed.

Don't forget, as well as the actions to identify the nature of the problem, you will also be expected to make some suggestions on how the problem can be resolved. This will be a little harder in this scenario since your earlier recommendation acknowledges that the full extent of the problem is not yet known. All you can do is go on the basis of the information you've been provided with.

Suggestions such as the mentoring scheme or providing smartphones for all PMs are generic enough that regardless of the cause of the problem, providing a mechanism to bounce around ideas or work more effectively will always be relevant.




The event is the potential sale of BZCS.


The issue is a threat to the future survival of BZCS and the impact that any sale would have on the strategy and operations of the business.

Note that you have been asked to address some specific areas, namely the calculation of actual return on assets and an indicative sale price. This occurs quite frequently within T4 exams and you must ensure you address these areas if you are to score well.

Step 3 Evaluate the impact of the issue. Who is affected, how are they affected and what would happen if no action was taken?

If BeeZed were to divest of the BZCS subsidiary there would be a potentially significant impact on the future strategy and structure of BZCS as a company. Any purchaser may look to merge the operations into an existing business, possibly leading to job losses at all levels of the organisation. They may choose to change the strategic direction to focus on different geographic regions or on different aspects of construction. There may also be a change in culture.

The exact impact would be dependent upon who acquired the company.

Step 4 What are the alternative courses of action?

An initial option to put forward is to do nothing. BZCS could simply accept the decision of BeeZed and react to any potential purchaser when the deal is done.

A further option recognises that the two scenarios facing BeeZed are straightforward; whether to sell or to retain BZCS. BZCS could therefore try to convince the BeeZed Board not to sell.

A further option would be to consider a management buyout or to convince BeeZed to complete a spinoff.


Accept the decision

A ‘strawman’ option is one that is presented but is unlikely to be adopted. Despite this, it is still worth outlining the option in order to

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MiniCase Scenario 3 Sale of BZCS

argue why it should not be pursued. An alternative of ‘do nothing’ is often regarded as a strawman option.

In this situation, this would be a very risky strategy for BZCS given the potential significant impact that a new owner could have. It could however, be argued that a new owner may revitalise the company, and could have big expansion plans that would be positive in the longerrun.

Convincing the BeeZed Board not to sell

The return obtained by BZCS over the last two years has been around 11% using ROCE as a measure. This is below the hurdle rate of 15% expected by the Board and has been a key driver in their proposal to sell. See working below.

However, the construction industry is highly capitalintensive by nature and so a lower ROCE will be expected compared to say consultancy where the main assets are the people within that subsidiary; the asset base is correspondingly lower generating normally higher ROCE. The use of a target ROCE figure common to all subsidiaries may be inappropriate and this argument could be presented to BeeZed. It is also likely that the ROCE figures are not 100% accurate given the allocation of revenue under PFI contracts between the three subsidiaries.

Furthermore, the value generated within the consultancy and maintenance subsidiaries often derive from or go handinhand with the original construction contract. There is a risk that if BeeZed cannot provide the construction facilities then property management and consultancy contracts will be more difficult to obtain.

Regarding the value of BZCS, this is difficult to obtain because there is no market for the subsidiary’s shares and BZCS has not remitted any dividends to BeeZed for at least the last two years. Using an asset valuation (appropriate for a capitalintensive industry), the Statement of Financial Position indicates that BZCS is worth €186 million. This is the minimum figure that is required to compensate

2010 2009

Profit before interest and tax (€m) 34.7 35.2

Capital employed (total assets less current liabilities) (€m)

434.5123.5 = 311

436.4127.3 = 309.1

ROCE 11.1% 11.4%



BeeZed for their ongoing investment in BZCS.

However, using a P/E ratio of 9, BZCS is worth €197 million (that is profit for 2010 of €21.9m multiplied by 9).

If the BeeZed Board could be convinced to retain BZCS this would obviously maintain the status quo. However, their desire to divest may indicate something more significant, such as a need for a cash injection, which may mean further investment in the division would be unlikely. This could restrict BZCS ability to implement future strategies.

Management buyout / Spinoff

A management buyout would enable the Board to continue to operate the business in the same way. It would protect jobs and maintain the culture, although there may be a decline in profitability and some centrally provided services (from BeeZed) have to be funded directly by the company.

Perhaps the biggest barrier to a management buyout (MBO) would be the availability of finance. With the construction market expanding 28% year on year (CNInsight), and BZCS’s order book of €2,400m (30% higher than one year ago) investment in such a venture would be attractive. However, given the current economic climate, and in particular the availability of capital, it will be difficult to fund an investment of this size from traditional sources of MBO finance.

A potential alternative would be for the BeeZed Board to spinoff BZCS by listing the company on the stock exchange. This would transfer the ownership of BZCS directly to the shareholders of BeeZed rather than a subsidiary relationship. This would allow the management team to remain in place, and would also enable them to become shareholders in the company if they wished.

The acceptability of this course of action to BeeZed would depend upon their motivation for the sale. This option would not raise any cash for BeeZed although it may improve overall shareholder value, as was seen when AOL spunoff from Time Warner in 2009.

Finally, by spinningoff BZCS, BeeZed are more likely to maintain a strong working relationship, allowing them to access the construction facilities required in order to win consultancy and maintenance contracts.


It is recommended that BZCS try to convince BeeZed to retain the construction division. Although the market conditions appear conducive to sale, the impact on sale on the other subsidiaries of BeeZed needs further analysis. There is the risk that if BeeZed cannot offer a construction service then the company will not win contracts in property

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management or consultancy.

The Managing Director of BZCS should request a full contract analysis breaking down the allocation of revenue under PFI contracts between the three subsidiaries. This may reveal a different, more accurate set of ROCE figures on which to base a decision.

If the Board of BeeZed are committed to divestment, it is recommended that BZCS propose a spinoff from the parent. Given the information presented, and assuming there is not a requirement for a cash injection, this would appear to mitigate many of the risks for both BeeZed and BZCS, whilst still delivering the results required.

The Board of BZCS should request a formal meeting with the BeeZed Board where they should outline the benefits of this approach. If acceptable, professional advisors should be appointed to assist with the transaction.



Part a Calculations

Costings for Madrid airport terminal project :

The above calculations suggest that, after considering direct costs, apportioned indirect costs, and a required operating margin of 4.6%, a suitable tender figure is around €472 million.

This has been arrived at by considering the costs that are likely to be incurred first, then deciding a profit figure based on those costs, and letting the revenue be the balancing figure. It is very much an “inside out” approach to pricing the project – looking internally to consider costs and required profit, then externally in imposing a project value.

Part b Apportioning costs

If a breakdown of employees by department was provided, some of the overhead costs that related to the HR department could be apportioned to the other support departments (using a sensible basis) before each department’s total costs (both those originally allocated and the ones that have been apportioned from HR) were allocated to projects based on appropriate cost drivers.

So, for example, if 1,500 of the 10,100 employees worked in the procurement department, we could apportion approximately €743,000 (1,500 ÷ 10,100 × €5m) of the HR costs to the procurement department. When allocating the costs of the procurement department to projects using cost drivers, the total cost being allocated would be (€30m + $743,000) €30.743m, resulting in an overhead absorption rate based on the number of orders cost driver of €51.2 (€30.743 ÷ 600,000 order) rather than the original €50.

€mDirect costs 440.0Procurement (€30 m/600,000) × 40,000 × 4 years

8.0

HR (€5 m/10,100) × 400 × 4 years 0.8 IT (€6 m/300,000) × 12,000 × 4 years 1.0 Commercial Director (€500,000/5) × 4 years 0.4 ––––– Total costs 450.2Operating margin required (€450.2m × 4.6 ÷ (100 – 4.6))

21.7

––––– Suggested tender bid 471.9

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MiniCase Scenario 4 Costing a project

Part c Target costing

Target costing would reverse the process. Under this method, BZCS would consider the tender figure that is likely to be successful; this means looking at the bids likely to be put forward by other parties invited to tender, and also the amount that the customer is likely to be prepared to pay.

Having determined an appropriate tender value, BZCS would then look at the level of profit required (presumably 4.6% of the revenue), and the costs that the company must work within would then be the balancing figure.

For this reason, target costing is more of an “outside in” approach – look at the environment you operate in first, then work backwards to identify the level of costs that can be incurred.

For example, it may be that €470 million as a tender bid is unlikely to be successful; €450 million is more competitive. The results using target costing would then be (in € millions):

The company must now identify means of keeping costs within the €429.3 million identified. This will focus BZCS’s attentions on cost control and efficiency.

For example, direct costs (currently €440 million) would need to be reduced. Perhaps cheaper construction labour from other parts of the EU could be used (obviously without compromising on quality, employment legislation or health & safety).

Procurement could be reviewed to see if it could be conducted more efficiently. Each purchase order currently incurs an overhead cost of (€30 million/600,000) €50 – could a lower number of orders be placed for the Madrid terminal?

(Note what many construction companies do in reality is subcontract areas of work and make the subcontractor responsible for all purchasing relating to that area).

€mTender bid 450.0 Required profit (4.6%) (20.7) ––––– Target costs 429.3



(a)

(W1) Calculation of the tax relief on WDAs if asset bought and sold at T2:

Note: The asset is bought at time t=0 at the end of the accounting period. This means the first capital allowance will also be awarded at t=0 and given the oneyear time lag on the tax, the first tax effect is at time t=1.

Year Narrative Written down value

Tax saved at 20%

Timing of tax flow

€m €m0 Cost 100.000 CA 25.00 5.00 1

–––––– 75.00

1 CA 18.75 3.75 2–––––– 56.25

2 Balancing allowance

31.25 6.25 3

–––––– Disposal proceeds

25.00

––––––

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MiniCase Scenario 5 Lease v buy

(W2) Calculation of the tax relief on WDAs if asset bought and sold at T4:

Year Narrative Written down value

Tax saved at 20%

Timing of tax flow

€m €m0 Cost 100.000 CA 25.00 5.00 1

–––––– 75.00

1 CA 18.75 3.75 2–––––– 56.25

2 CA 14.06 2.81 3–––––– 42.19

3 CA 10.55 2.11 4–––––– 31.64

4 Balancing allowance

31.64 6.34 5

–––––– Disposal proceeds

0.00

––––––



Cost of borrowing to buy for 2 years:

Cost of leasing for 2 years:

* or AF 2–3 = 2.723 – 0.952

The cost of leasing is €10.44m lower than the cost of buying when the asset is only used for two years.

Time 0 1 2 3 €m €m €m €m

Asset (100.00) 25.00Tax relief on CAs

(W1)

5.00 3.75 6.25

Post tax maintenance costs (10.00) (10.00)

–––––––

(100.00)

–––––––

(5.00)

–––––––

18.75

–––––––

6.25PV factor @ 5% 1.000 0.952 0.907 0.864PV (100.00) (4.76) 17.01 5.40NPV = €(82.35m)

Timing Narrative Cash flow DF @ 5% PV €m €m

0–1 Lease payments (45.00) 1+ 0.952 = 1.952 (87.84)2–3 Tax savings 9.00 1.859 × 0.952* = 1.770 15.93

––––– NPV (71.91)

–––––

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Cost of borrowing to buy for 4 years:

Cost of leasing for 4 years:

* or AF 2–3 = 2.723– 0.952

and AF 4–5 = 4.329– 2.723

The cost of leasing is €24.99m higher than the cost of buying when the asset is used for four years.

Time 0 1 2 3 4 5 €m €m €m €m €m €m

Asset (100.00) Tax relief on CAs

(W2)

5.00 3.75 2.81 2.11 6.34

Post tax maintenance costs

(10.00) (10.00) (15.00) (15.00)

–––––––

(100.00)

–––––––

(5.00)

–––––––

(6.25)

–––––––

(12.19)

–––––––

(12.89)

–––––––

6.34PV factor @ 5% 1.000 0.952 0.907 0.864 0.823 0.784PV (100.00) (4.76) (5.67) (10.53) (10.61) 4.97NPV = €(126.60)m

Timing Narrative Cash flow DF @ 5% PV €m €m

0–1 Lease payments (45.00) 1+ 0.952 = 1.952 (87.84)2–3 Tax savings 9.00 1.859 × 0.952* = 1.770 15.932–3 Lease payments (55.00) 1.859 × 0.952* = 1.770 (97.35)4–5 Tax savings 11.00 1.859 × 0.864* = 1.606 17.67

––––– NPV (151.59)

–––––



(b)

Other factors that should be considered in addition to the financial analysis include:

(c)

The Commercial Director considers there to be a 60% chance of a further contract being secured. This means the expected saving / (cost) if the leasing option is taken would be:

0.4 × €10.44m + 0.6 × – €24.99m = (€10.82m). The financial analysis would therefore suggest that the asset should be purchased

Alternatively:

If the lease option is chosen, the cost incurred will be €71.91m in the first two years. In the subsequent two years, there will be 40% chance of there being no further cost, and a 60% chance of a further €79.68m (€151.59m – €71.91m). The expected cost is therefore:

€71.91m + 0.4 × 0 + 0.6 × €79.68m = €119.72m.

However, if the purchase option is taken, the cost incurred will be €82.35m in the first two years. In the subsequent years, there will be a 40% chance of there being no further cost, and a 60% chance of a further €44.25m (€126.6m – €82.35m). The expected cost is therefore:

€82.35m + 0.4 × 0 + 0.6 × €44.25m = €108.90m

• The risks of ownership will apply if the asset is purchased. This will include accidental damage, insurance, higher maintenance costs than have been estimated etc

• Technological advancement may mean the asset becomes obsolete before the end of four years. The leasing option would permit a more advanced machine to be utlised if available

• The estimate of the probability of winning further work is crucial to the calculation of the expected costs. In reality, further work with either be won or lost, and the costs incurred will never be the expected cost. If the asset is purchased and no further work is obtained, BZCS would have incurred an additional €10.4m of expense unnecessarily.

• Other variables in the calculations such as the scrap value are only estimates and are not guaranteed

• Ownership of the asset may provide BZCS with a competitive advantage, allowing them to differentiate and make it more likely that further work will be won.

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The expected cost of purchasing the machine is €10.82m lower than the leasing option.

Tutorial comment: Whilst each of the elements of this minicase scenario (capital allowances, tax adjustments, delayed annuities, advanced annuities, discounting and expected values) could appear within the exam, it would be unlikely that they would all appear within the same calculation as illustrated here. This scenario has been presented to enable you to revise a number of techniques at once.



Below is an illustration of what you could have written as your answer to this issue. The planning guidance has not been given.

1. Issue and impact

With the application of Porters Generic Strategies BZCS follows a differentiation strategy whereby customers are won and kept satisfied through the achievement of delivery deadlines, quality work and maintenance of high levels of health and safety. However; BZCS operates in an industry with low margins, (2010 gross profit margin for BZCS was 4.5% (W1)) and therefore needs to maximise quality but continually address the issues surrounding cost to ensure that expected margins are maintained. The office block project had an expected gross profit of €7m, a margin of 6.8% (W2) and could represent as much as 12.3% (W3) of total gross profit for the company; it therefore is a key project within the current portfolio as it makes an above average contribution.

There are a number of implications: the financial impact is the loss of €2m assuming that all the forecasted costs are realised and revenues remain unchanged. But the issues relating to poor project management and failure to deliver on time have more serious ramifications for BZCS including reputational damage, loss of client confidence due to the implementation of change requests and ultimately the risk that the client may not sign off and accept the building. As part of the contract details, penalty clauses are likely to have been stipulated for non delivery that would potentially increase the losses.

2. Analysis of potential solutions

Solutions will be required to tackle both the potential reputational damage and the financial loss.

Consultancy services – due to the complete breakdown of the project, the services of an external consultancy could be employed to review the existing situation and manage the client interface. This has the benefit of communicating to the client the importance of the problem by providing additional expertise. However there will be an associated cost, which will further increase the loss incurred on the contract.

Appoint another Project Manager – senior management could also consider removing the current Project Manager and replacing with another PM or indeed handing the project directly to the Post Completion Manager given the small amount of time remaining on the project. Once in place, the new manager could perform an internal investigation of costs and timings in order to ensure the project is completed to the client’s satisfaction. Although this would help to restore client relations, it would take time for the replacement manager to get up

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MiniCase Scenario 6 Problems on a big project

to speed with the operations of the project. But by reviewing internally BZCS would be able to identify any procedures not followed which in turn would help to develop best practice documents and help to assure quality management.

Negotiate with the client to ensure additional revenue is obtained for the change requests made. Such a negotiation will be difficult at this stage; best practice would ensure additional costs and revenues are agreed with the client prior to any changes being implemented. It could also further damage client relations. However, it would be unreasonable for the client to not expect a revision to the contract as a result of the changes; this point could be stated and used as part of the negotiations to ensure the project is delivered on time.

3. Recommendations

It is recommended that the senior management team instruct an immediate internal review along with the removal of the current project manager; the Post Completion Manager should lead the review as many of the issues relate to changes and revisions which are within the Post Completion Manager’s expertise.

A meeting should be set up between the Post Completion Manager and the client along with a representative from the Finance Department. The aim of the meeting should be to identify and document all of the current issues and establish the priority of tasks to ensure that the deadlines can be achieved. This will improve the relationship with the client and ensure that BZCS has all the information they need to rectify the project failure. At this meeting, negotiations with the client should begin over additional revenue to be paid for the changes made. BZCS should aim to secure all €5m of the additional costs but should be prepared to settle at €3m, being the costs still to be incurred. The changes that have yet to be implemented should not be made if the client does not agree to additional revenue at this level.

In addition to this, it is recommended that an investigation of the forecasted costs takes place. The current estimate is €6m, yet the centralised procurement system may indicate supplier sources where further economies of scale can be achieved or where contractual relationships could be used to help to reduce the costs.

There may also be opportunities of reworking the activities to improve the speed of delivery therefore a recommendation is to use the project management software to determine if any remaining or reworked activities can be scheduled in a parallel format to reduce the overall timing. It is vital that during the remaining stages of the project frequent communication is maintained between both the client and senior management; it will be necessary for the Post Completion Manager to report weekly to all stakeholders face to face.

As the final stages of the project are completed additional management



resources should be seconded to the project with a view to not only help to reduce time and costs, but also document successful actions which can be implemented in other projects, hence reducing the potential of such a problem occurring in the future. A policy of negotiating additional revenues before any changes can be made must be strictly adhered to by all Project Managers.

4. Appendix

Assumption all based on year ended September 2010

W1 Gross profit margin = 56.7/1267 = 4.5%

W2 Expected gross profit margin office block = 7/102 = 6.8%

W3 Expected profits as a % of 2010 = 7/56.7 = 12.3%

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Below is an illustration of what you could have written as your answer to this issue. The planning guidance has not been given.

1. Issue and impact

Assuming the quarterly trend continues throughout the 2011 financial year, it is estimated that the slowdown in European public sector contracts might lead to an 18% fall in revenue (€230m) and a 17% fall in operating profit (€6m) (see appendix A). As a subsidiary of a listed company the markets in general and BeeZed investors in particular will be concerned at such a decline in performance. Shareholder may dispose of their shares leading to a fall in the BeeZed share price. Equally, the company may find it harder to raise future finance. This may cause BeeZed to change its strategy regarding BZCS, potentially limiting the finance available or even reconsidering the future of the subsidiary.

2. Analysis of potential solutions

1. Merge the Infrastructure, Community and Energy divisions

The merger would have the obvious financial advantage of realising operating synergies of €10million almost immediately, which would more than alleviate the predicted fall of €6million in operating profit discussed above. It would also seem to make strategic sense to merge the three divisions heavily reliant on public sector work, as the critical success factors of lobbying and tendering in the public sector would seem to have considerable overlap. Furthermore, the merger has the advantage of requiring fewer job losses than the fully fledged redundancy programme.

Nonetheless, the merger as proposed does cut 500 jobs and runs the risk of angering UCATT, raising the threat of strike action. Strike action across the board for any significant length of time would seriously delay all of BZCS’s current projects, and the resulting cost overruns and contractual penalties could have a severe impact on BZCS’s financial results and reputation. The merger would also necessitate redundancy payouts, which for 500 employees could be considerable.

2. Make further redundancies across all divisions

Extending the redundancy programme across all divisions would have an immediate financial advantage of cutting costs by €18million, more than compensating for any reduction in profit. It could be argued that BZCS owes an obligation to its shareholders to be as efficient and competitive as possible, and cutting excess capacity in employee numbers goes some way to achieving this. A further advantage would



MiniCase Scenario 7 Reduced public sector spending

be that the employees who remain would consider that the pain had been spread across the company as a whole, preventing resentment from staff who consider their division to have been singled out for cuts. By cutting excess capacity BZCS puts itself in a better position to win contracts, as there may be more room to reduce the bid price while maintaining operating margin.

The major disadvantage of the redundancy programme will be an elevated chance of strike action compared to the merger option discussed previously. UCATT are more likely to win a strike ballot if the number of employees sacked is larger. In addition to the costs of redundancy payouts, a lengthy and high profile strike will have a larger downside in terms of cost overruns and penalties, as well as detrimental effect on BZCS’s reputation for reliability. This may well put potential customers off and reduce the chances of BZCS winning bids.

3. Undertake speculative building projects

Commencing speculative building would have the advantage of maintaining the need for all current employees to be retained, with no redundancies required. This proposal also maintains the possibility of BZCS maintaining its financial results for revenue and operating profit.

Speculative building is extremely risky, despite the Commercial Director’s opinions. BZCS would be investing huge amounts of time and money into speculative projects with no guarantee of a sale on completion. Even for politically sensitive buildings like schools and hospitals, the end customer would have a huge advantage in negotiating power, with BZCS unlikely to make a profit on the project. In 2010 the new Coalition Government in the UK cancelled the new schools building programme, citing the need to make public sector spending cuts. It is likely that all European governments will also be unwilling to pay high prices for new public buildings. With only €23million in cash held at 30 September 2010, it is likely that one or two unsold speculative projects could threaten BZCS’s going concern status.

3. Recommendations

It is recommended that BZCS merge the Infrastructure, Community and Energy divisions. The estimated cost savings of €10million will more than compensate the fall in operating profit and should go some way to reassuring the markets and investors. While the job losses are regrettable, they are not as severe as the full scale redundancy proposal. When the European economy begins to recover, BZCS will be in a better position to increase capacity back towards previous levels. The costs of the redundancy packages will also be more manageable.

The Human Resources director should engage UCATT at the earliest opportunity in the process to avert any industrial action. With fewer job cuts under the merger option, it is possible that the reductions can be achieved through voluntary redundancy and natural wastage, which

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should placate the union’s concerns. It should be noted that without these job cuts it will be likely that even more employees would be likely to lose their job in the longerterm.

The risks associated with speculative building are too high and could jeopardise the company’s future. Therefore this option is not recommended.

Appendix A Calculation of the financial impact of the reduction in spending

2010 Revenue of Infrastructure, Community and Energy projects: €709million (€365.2m + €213.6m + €129.9m) 2010 Operating Profit: €19m (€16.8m + €1.3m + €0.5m)

Proportion of total revenue from Europe: 54% (€690m/€1,267m)

Assuming that the proportion of total revenue from Europe is consistent within these three divisions, the estimated revenue fall from public sector cuts is €230m (€709m x 54% x 60%)

Again, assuming a consistent geographical mix and a standard operating margin, the estimated operating profit fall would be €6m (€19m x 54% x 60%)

Therefore, if no action is taken, BZCS might be expected to suffer an 18% fall in revenue (€230m/€1,267m) and a 17% fall in operating profit (€6m/€34.7m).



Errors in site non landfill waste disposal/recycle figures

Why is this an ethical issue?

BZCS has made a material error in the reported non landfill waste disposal/recycling figure that it publishes as part of its corporate social responsibility disclosures. The error has been identified by a BBC current affairs programme and it is possible that it will be made public in a current affairs programme in 2 weeks time. The BZCS senior management wish to preempt any negative publicity or comment by issuing a statement before the programme is screened.

The ethical issue is how transparent BZCS should be about the reasons for and size of the error.

There are several possible actions that BZCS could take:

Recommendations for this ethical issue

It is not ethical to ignore this problem and therefore it is recommended that a statement is issued to the BBC and wider public before the screening of the Panorama programme.

True corporate social responsibility requires a company to consider its impact on stakeholders as it makes business decisions and takes actions. It is underpinned by many fundamental principles including transparency, fairness and trust. BZCS takes CSR very seriously and therefore it is recommended that it should make as full a disclosure as

• BZCS could issue a detailed and fully transparent explanation of the actual error that occurred, including disclosure of the actual waste disposal/recycle figure, and any remedial actions that have been or will be taken to ensure this does not happen again.

• BZCS could ignore the issue and not provide any response to the allegation that has been put to it by the Panorama programme. There is no guarantee that the Panorama programme knows the true waste disposal/recycle figure or that it is going to make reference to it during its programme or in the future. By preempting the programme with a response BZCS may be creating a problem that may otherwise not occur.

• BZCS could issue a short statement that highlights that an error has been identified in its CSR disclosure relating to site waste management but keep all details brief and vague. The statement could be drafted using such language to reinforce to stakeholders the high regard and commitment BZCS has towards CSR and that it has taken steps to ensure its future CSR reports will be materially accurate.

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MiniCase Scenario 8 Environmental waste

possible of the issue including the true level of non landfill waste disposal/recycling in order to comply with the spirit of CSR. Any statement should also include details on the background to the issue to ensure stakeholders are aware that this was a genuine error rather than a deliberate falsification of information.

The full disclosure will allow BZCS to reinforce its commitment to CSR and may well be taken positively by many stakeholders as BZCS will be seen to be holding itself to account.

Although CSR reporting is voluntary there is a risk that if it doesn’t fully disclose the matter now and it subsequently is reported that BZCS withheld information it may well do significant damage to its reputation in this area which could negatively impact its ability to win future contracts or to secure future finance.



t4 case analysis_workbook_may_2011

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