GER Case Study

GER

Case History:

GE railways operate a passenger train service in Holland. The directors have always focused solely on the use of traditional financial measures in order to access the performance of GER since in commenced operations in 1992. The director wants assistance with the help of balance scorecard to measure the performance of the GER.

REQUIRMENT NUMBER 1:

Using only the above information, prepare a statement which flow goals, measures and statistics for each of the four perspectives of the balance scorecard in respect of GER.

The balance scorecard is a strategic planning and management system use to align business activities with the vision and strategy of the organization, improve internal and external communication, and monitor organizational performance against strategic goals. The balance scorecard system recognized that financial performance is just one part of the larger picture of organizational performance, customer, internal processes and work force learning and development.

BENEFITS OF BALANCE SCORECARD:

Focusing the whole organization on the few key things needed to create breakthrough performance	A balance scorecard might show that an organization is only weak in a couple of areas but that these areas are impeding its overall success. By focusing everyone in the organization on improving both areas, overall performance gets better.
Helping to integrate various corporate program (like quality and customer service)	Looking at different organizational program or units from different perspectives can be a way of getting everyone singing from the same song sheet. If the balance scorecard shows customer service to be weak, focusing on everybody’s customer service performance behavior will lead to small improvements in each department or unit.
Breaking down strategic measures to lower levels of the organization, so managers and employees both know that is required to achieve excellent overall performance	All organization might have overall goals to increase productivity by 5%, for example: by breaking down its productivity measures to granular levels of the organization as part of a balance scorecard, every member of the organization will have clear targets that support the overall goals.
Positive techniques	Using management techniques based on the balanced scorecard can also have the positive impact on an organizations people, as it will recognized strength and weaknesses of different people in different areas. People can feel value in ways not recognized by traditional measurement approaches. At the same time, an organization can use its peoples strength to their greatest effect while working to improve their areas of weakness.

LIMITATIONS IN BALANCE SCORECARD:

• INTERNAL FOCUS:

The balance scorecard largely ignores development of the external business environment. It selectively focuses on shareholders and customers and fails to consider the activities of competitors and interest groups such as suppliers.

• RELIANCE ON BALANCE:

Although the balance scorecard is praised for balancing financial and non-financial matrix, it has nonetheless been criticized for being only focused on balanced information. If the scorecard fails to include financial and non-financial objectives, it loses its value as a strategic tool. This limitation is worst by the fact that balance scorecard donor define an acceptable balanced between two.

• CONTINUOUS REVIEW:

As the key drivers of the organization changes, the balance scorecard must be continuously updated to reflect such changes. This requires time, resources and labor which could act as a limitation for smaller organization.

REQUIRMENT NUMBER 2:

STATEMENT SHOWING GOALS, MEASURES AND STATISTICS FOR THE FOUR PERSPECTIVES OF THE BALANCE SCORECARD.

Perspective Measure 2007 2006

1. Financial goals

Survival (w1) cash flow ($’000) 2,930 not

Success net profit ($’000) 6,600 5,280

2. Customer

New products (w2) % revenue from new routes 24.0 20.0

Responsive supply % on-time stops {10,000-200/10,000} 98.0 97.0

3. Internal business

Service excellence (w3) cost per route ($’000) 413 488

Introduction of new routes planned v actual % {6/4, 4/6} 150.0 66.0

4. Innovation and learning

Employee training & skills (w4) training hours per employee 8.5 8.0

Product range number of routes producing 80% of sale 20 24

WORKING

1. Cash flow (2007)

$’000

Net profit 6,600

Add: depreciation 3,300

9,900

Movements in working capital

Inventories (6,610-4,950) (1,660)

Receivable (2,560-3,550) 990

Payables 660

Cash from operation 9,890

Spending on noncurrent assets (6,960)

Net cash flow 2,930

2. $7,920/$(7,920+25,080)=24.0%

3. For 2007 this is (in $’000) 14,850/36 = 413

For 2006 this is (in $’000) 14,652/30 = 488

4. 2,59/254 = 805

This is worked out (in $’000):

$’000

NBV 31 may 2007 33,160

NBV 31 may 2006 29,500

Less depreciation charged in 2007 (3,300)

33,160-26,00 = 6,960 26,200

HLP

CASE HISTORY:

In the country of strife land, the Harding Law Partnership (HLP) gives legal service to commercial clients. All the employees who work in it are specialist in the provision of legal service, in which only one category work from property, commercial and litigation. The HLP offered an advisory protection scheme in which clients will pay a fixed annual fee which entitled them to priority service.

MAS’ income statement for year to 31 may 2007

HLP HLP MAS

BUDJET ACTUAL ACTUAL

$’000 $’000 $:000

Revenue (w1)

Consultations

Property 1,281 1,515 750

Commercial 1,800 2,028 1,533

Litigation 480 750 429

3,561 4,293 2,712

Annual fee (APS) property 900 900 1,080

Commercial 1,200 1,200 1,500

2,100 2,100 2,580

Total revenue 5,661 6393 5292

Costs

Salaries 1,300 1,400 1,560

Indemnity insurance 250 250 100

Subcontract costs

Commercial 144 7

Litigation 300 7

Other operating expenses 3,000 2,600 2,032

Total costs 4,550 4,694 3,706

Net profit 1,111 1,699 1,586

Net profit margins % 19.6 26.6 30.6

WORKING:

REVENUE:

• Note 1: of the question give the level of fees charge per consultation for each type of work for HLP. To work out the consultation fees, take these fees and multiply them by the activity levels in appendix 1.1 for example, if we take actual property fees for HLP in the year the calculation would be $75 * 20, 200=$1,515,000. Remember to add chargeable consultation undertaken by sub contractors in the fees for commercial and litigation work.
• Note 2: states the annual fees charge for clients entering into the annual fees arrangements for HLP. Take these fees and multiply by the number of clients giving in appendix 1.1 to get the annual fees. As an example, take the annual fee for property of $1,500 per client and multiply by 600 clients to give $900,000.

COST:

Salary for HLP is simply the salary level of $50,000 from note 3 multiply by the number of advisors. Subcontractor costs are payment per note 4 multiply by the number of chargeable consultation undertaken by contractors listed as appendix 1.1.

b) Financial performance of HLP and MAS:

(I) Over all client fees. The first table combines APS and consultations fees to get overall fees. The second table gives the fee per consultation.

HLP (revenue) HLP (revenue) MAS (revenue)

BUDJET ACTUAL ACTUAL

$’000 $’000 $’000

Consultations type

Property 2,181 2,415 1,830

Commercial 3,000 3,228 3,033

Litigation 480 750 429

HLP HLP MAS

Fee per consultation Fee per consultation Fee per consultation

Budget Actual Actual

Consultation type $ $ $

Property 75 75 60

Commercial 150 150 150

Litigation 250 250 200

For HLP actual fees were higher than budgeted across all of its consultation types. The respective defenses are 10.7%, 7.6% and 56.3%. These are clearly due to an increase in activity levels compared to budget as the fee per consultation has remained unchanged. HLP’s net margin improved from 19.6% to 26.6% as fees increased by 12.9% or $732,000 on budget whilst cost saw a much lower rise by $144,000 or 3.2%.

The increase in activity comes from the larger number of chargeable consultation across all three consultation types. Thus property consultations were up by 3,120 or 18.3%, commercial by 1,200 or 10% and litigation by 480 or 25%.

If we compare HLP with MAS, both companies charge the same for commercial consultation but different fees for the other two types of consultation and for APS work. So it is difficult to compare like with like at this aggregate level where different fee types are included.

MAS earn lower fees at $5,292,000 but also have lower cost than HLP. Overall, MAS has a higher net margin than HLP at 30% which suggest it is more efficient than HLP at containing cost or generating revenues.

(ii) ADVISORY PRODUCTION SCEME CONSULTATION’S UTILISATION LEVELS:

One significant factor is profitability is the uptake of consultations under the APS. The APS made-up 33% of HLP gross revenues and 48% of MAS gross revenues in the year.

It is also likely than the MAS would have a higher profit margin from this area of work. We cannot actually quantify this as we don’t know the variable cost per consultation.

What we can also compare is the actual revenue per APS consultation. Figures are in the table below. HLP budgeted for average revenue of $100 and $300 across its two services. It only acieheved $90.90 and $167 compare to MAS which made $120 and $250.

HLP (budget) HLP (actual) MAS (actual)

Property

Consultation per APS agreement (w1) 12,000 12,000 18,000

Actual consultations (w2) 9,000 9,900 9,000

Percentage take up 75% 82.5% 50%

Revenue per consultation (w3) $100 $90.90 $120

Commercial

Consultation per APS agreement (w1) 8,000 8,000 12,000

Actual consultations (w2) 4,000 7,200 6,000

Percentage take up 50% 90% 50%

Revenue per consultation (w3) $300 $167 $250

WORKINGS:

1. Number of consultations (note 2) * number of clients. So for budgeted property consultation for HLP, this would be 20 * 600 = 12,000.
2. Level of uptake shown in appendix 1.1.
3. Take annual fees from APS per the income statement above and divide by uptake figures in appendix 1.1.

c) Comparison of performance for HLP and MAS.

1) COMPETITIVENESS is a dimension of Fitzgerald and moons buildings blocks which looks at service companies and focuses on factors such as sales growth and market share.

The following table showed the growth in HLP business by consultation activity.

Budgeted consultations Actual Increase on % Increase

APS and others consultations budget on budgeted

Property 26,080 30,100 4,020 15.4

Commercial 16,000 20,720 4,720 29.5

Litigation 1,920 3,000 1,080 56.3

2) SERVICE QUALITY is a dimension of the building blocks which considers aspects such as reliability, courtesy and competence. We can take out aspects of several qualities of the data in appendix 1100.

If we look at the number of successful consultations, MAS had a rate of 95 % (38000/40000 from appendix 1100 and 1200) compared to 85% of HLP which suggest a rate 15% unsuccessful consultation for HLP. While considering unsuccessful performance, the number of clients complains received for HLP was 670/54000 (appendix 1100 and 1200) or 1.2% total consultations with 3 successful claims against the company. The equivalent figures for MAS are 135/40000 or 0.4% and nil. The successful claims may will have a knock on effect in later years on the reputation of the business and the cost of its insurance premiums.

d) Statement of the managing partner:

There are number of ways looking at the managing partner’s statement

1. Financial performance as we have seen, HLP has outperformed budget and has grown from nothing to net profit of nearly $1.7million in just 6 years. It may be that there is capacity to grow further although we don’t know which the year on year growth figures are and weather things have begin to slow down. Increase in the proportion of time build will reduce non chargeable time and improved revenues.
2. The advisors don’t have the resources to cope with the extra requirements. The managing director’s statement suggests that only 5% of ours will not be billed to clients. At present, 15% consultations are successful and so already more than 5% of ours cannot be legitimately build to clients assuming and approximate relationship between consultation and ours.
3. Quality and service levels are an issue as discussed above the need to be resolved before advisors take on more work o charge higher fees. The actual average number of consultation per advisor has grown considerably in the year on budget as the table shows. The increase of nearly one third for commercial work is particularly large. This steep rise in activity is very possibility affecting the ability to deliver services satisfactorily and on time. The current option of sub contracting work is expensive and quality cannot always be guaranteed.

Budgeted Actual Increase/(decrease) Increase/(decrease) %

Property 2,173 2,508 335 15.4

Commercial 1,600 2,058 458 28.6

Litigation 480 400 (80) (16.7)

In summary, the managing director may be focusing on one measure of success at the expense of other and in that case is suffering from tunnel vision.   

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