Case Study: Sioca PLC
Sioca PLC started life as a regional electricity generating company in Ampland, a European country. Such regional companies were nationalized by the Ampland government in 1945 in order to safeguard the reliability of service provision. There was, how• ever, concern that the nationalized electricity service was being operated inefficiently and that costs to the consumer had spiralled upwards. There was a governmental decision in 1990 to reprivatise such service providers in order to motivate them to produce better value for money through the mechanisms of customer choice and competition between providers.
Sioca PLC has been the licensed provider of electricity in the South East Ampland area since 1991 and, during the intervening period, it has responded to relaxations in gov- ernment regulations such that it now supplies water and gas services to the same geo- graphical area. The nature of Sioca PLC's business activities has thus evolved significantly since the early 1990s. While Sioca PLC still provides electricity to its consumers, it does so via a network of smaller, privately owned generating companies. These companies are entirely separate from Sioca PLC and are dealt with by Sioca PLC on an ‘arm's length' basis. In order to supply its customers, Sioca PLC uses the electricity cable network owned by K-Bel PLC, for which it pays a two-part fee which comprises a fixed annual charge and a variable charge based on usage.
Sioca PLC supplies water and domestic gas to its consumers by similar mechanisms. Sioca PLC effectively acts as a licensed ‘wholesaler' whereby separate water and gas companies sell their output to Sioca PLC which then sells it to the end-users. In doing so, Sioca PLC must pay the owners of the water and gas supply networks for the use of their distribution networks.
Competition exists within Sioca PLC's operating environment in that, while it is essen- tially an electricity company which also trades in water and gas, other companies exist which operate in the same markets within the local area. Hydra PLC, the company orig- inally licensed to supply water in the South East Ampland area, now offers electricity and gas supplies, amongst other products, in competition with Sioca PLC.
In addition to the competitive activity which exists for the supply of power and water, several of Sioca PLC's competitors have now widened their product portfolios to include the financial services area, offering personal loans, mortgages, insurance, and so on. While Sioca PLC has not moved into these activities as yet, it is giving serious consider- ation to including such operations in the near future.
The increasing level, and increasingly diverse range, of competition has had many side effects within Sioca PLC. The advent of competition led to the need for intense market- ing activities in order to maintain Sioca PLC's market share. Legislation has made it easy for consumers to change suppliers whenever they decide. There has been a need to attempt to differentiate products and to convince consumers of the quality of the services provided. Pressure to maintain the reliability of the services provided has also increased. Continuous downward pressure on prices to consumers has resulted from two sources: competitors' tactics and government watchdogs' moves to limit excessive prof- iteering and large price rises.
The cost pressure on Sioca PLC has led to a need for rationalisation, and the com- pany has recently completed the first stage of its ‘re-engineering' project, which has resulted in the redundancy or forced retirement of approximately 300 staff. Many of the redundancies, however, were carried out on a last-in, first-out basis, with the result that a large proportion of the remaining staff have worked within the industry for quite some time and originate from the period when the company's main line of business was the generating of electricity. Significant staff retraining has been necessary and Sioca PLC has been enlisting the help of several local educational institutions to run training courses on an ad hoc basis as skills shortfalls have become evident. Such training courses have proven to be very expensive and Sioca PLC's board is not yet convinced of their effectiveness.
There has been a considerable amount of movement of senior staff between Sioca PLC and its competitors as the market for capable senior managers has heated up.
Sioca PLC's profits have fallen considerably, year-on-year, during the past five years although it has managed to maintain its dividend yield to date. Its share price has fallen gradually over the same period. It is estimated that, if current trends were to continue, Sioca PLC would have difficulty in stabilising profitability. Given the need for sustained investment in technology in its business environment, the directors of Sioca PLC are becoming concerned about the company's ability to obtain financial backing in future years. Additionally, the government is maintaining a programme of monitoring the qual- ity of services to customers with which Sioca PLC will need to comply. The board has not yet been able to obtain a clear answer from its management team as to whether a service quality shortfall exists in this respect.
Since privatisation, Sioca PLC has developed a large range of sophisticated and complex tariff systems for the purposes of charging its customers in the domestic and commercial sectors. Sioca PLC has developed a far wider choice of tariffs than its com- petitors in an effort to become more attractive to consumers. Sioca PLC also offers a 24-hour telephone helpline service to all its customers and the majority of its work- force have been equipped with pagers or mobile phones in order to ensure their ‘around the clock' availability. Last year, Sioca PLC's board decided to make a one off payment to employees to reward them for their increased commitment to the company.
All managers within Sioca PLC have been given delegated budgets, and managers are expected to control the costs within these budgets strictly. Middle managers receive an annual bonus based on the total savings made during the control year, while senior man- agers receive bonuses in the form of Sioca PLC ordinary shares. The senior managers' bonuses are calculated in relation to Sioca PLC's after-tax profit levels for the previous year.
Sioca PLC has recently experienced some trouble in dealing with customer complaints because of higher than previous levels of absenteeism and sick leave. It has also suffered some poor publicity recently related to its responses to customer queries and complaints. Complaints from customers have covered a range of matters including slow responses to call-outs, failure to complete repairs satisfactorily first time, unprofessional or abrupt telephone manner of helpline staff as well as matters such as frequent power cuts or surges, water shortages and gas pressure falls.
Sioca PLC's managing director, Joules Van Den Graaf, has spearheaded a number of investigations in recent months in an effort to sort out some of the company's problems. In investigating the problem of the poor publicity mentioned above, he was informed by the company's senior managers that the appearance of adverse articles in the local press was the first that these managers had known about the customer complaints problem.
They were, they argued, too busy managing the physical provision of electricity, gas and water services to be able to allocate time to such problems.
The company's middle managers complained that they had more than enough work with which to fill their time, given the complex nature of their day-to-day tasks and the need to control their budgets. Several such managers commented that much of their time was spent poring over their weekly budget reports, arguing with Sioca PLC's accountants about the amount of overheads with which they had been charged and looking for ways to reduce their overhead costs. Most middle managers seemed to have little idea about how the overhead costing system really worked. There was a common attitude amongst middle managers that there was little to be gained from questioning the validity or reliability of the costing system as the Sioca PLC accountants (the ‘budget police' as they were called by these managers) made it very clear that a clear understanding of the company's complex costing system required an accountant's mind. Many of these managers seemed to have reached the point whereby they had given up attempting to discuss such matters.
In the course of his investigations, managers at all levels within Sioca PLC had complained to Mr Van Den Graaf that they had insufficient information to manage effec- tively. This Mr Van Den Graaf found puzzling. He had been made aware of the comprehensive budget reports received by managers each week. Indeed, it had taken him more than two hours to make sense of one such report, although he had put this down to his lack of experience of the detailed complexities to which the report had related. Van Den Graaf had queried why this weekly report contained so many esti- mated figures. The accountant responsible for producing the report had replied that the fault lay with the manager of the cost centre to which the report related. There was a general problem, the accountant explained, that managers did not seem to be able to understand or take an interest in the company's accounting systems. Many of these systems were well proven, he argued, having been established in the company's early days and having been expanded and further sophisticated as time had passed. Although many detailed forms were sent out to managers every month, so that they could enter the details required to allow the calculation of accurate apportionments and so on, managers seemed to have little commitment to the system. This lack of commitment had, the accountant explained, been the main reason why no attempt had been made to computerise the data entry process.
In an attempt to air these problem, and possibly move towards alleviating some of them, Mr Van Den Graaf had called several joint meetings of accountants and man- agers. On each occasion it had been difficult to stick to the agenda, as the meetings tended to degenerate into unproductive slanging matches. Neither the management nor accounting parties seemed to be able or willing to see the other's viewpoint. Managers complained that accountants used the costing systems to ‘confuse and demoralise the managers and to increase the power of accountants', while accoun- tants argued that such systems were ‘in existence to protect the investors, not to support the managers' ailing departments'.
Mr Van Den Graaf had done his best to discharge the atmosphere at the meetings but was left feeling that he needed to generate some powerful new ideas in order to move the company forward and to give it the potential to succeed.
1. Analyse the implications of recent changes in Sioca PLC's operating environment which are likely to affect the effectiveness of its management accounting infor- mation systems (MAIS).
2. Identify the principal MAIS components which Sioca PLC would require in order to achieve its immediate and longer-term control and decision-making objectives.
3. Discuss the behavioural, motivational and ethical aspects of Sioca PLC's activities, and of the MAIS which you have specified in your answer to question 2.
Additional Information for the Period from February 2003 to August 2003. The board of Sioca PLC made a decision in March 2002 to move into the financial services markets in order to compete effectively. Among its initial developments in the financial services markets were:
· the provision of personal loans to private individuals.
· home buildings and contents insurance.
· consumer goods repairs insurance (on such goods such as personal computer systems, ‘white goods' etc).
Additionally, the company has commenced acting as a management consultancy organisation although, in this respect, it acts as a middle-man whereby it sub-contracts educational organisations and small firms of accountants and other professionals to carry out consultancy and training activities for it, under the Sioca Consultancy name. Apart from initiating the contracts with, and paying fees to, the sub-contracting bodies, Sioca PLC has little direct involvement in these activities.
Similarly, Sioca PLC's new activities in the loan finance and insurance markets are, in reality, largely delegated to banks and insurance companies already operating within these fields. The fees paid to the banks and insurance companies consist of a fixed man- agement fee, fixed in advance and based on estimated business volume, plus a variable commission based on amounts of loan/insurance raised.
Staff morale problems have intensified within Sioca PLC over the past 6 months. The company has been taken to court by several employees on the grounds of its allegedly having placed employees under excessive stress. Many of its longest serving employees have sought early retirement recently and a considerable number of intelli- gent but inexperienced young staff have been recruited to replace those staff who have left.
To a large extent, the majority of Sioca PLC's staff are involved in administrative, marketing and public relations activities and the already heavily criticised weekly budget reports are seen, by most staff, to have become even less useful than before. A number of managers have created their own unofficial management accounting systems and therefore tend to ignore the official system. Indeed, several managers have argued strongly that they should no longer be charged with the costs of the official system and this has resulted in a higher charge being levied upon the remaining system users, halfway through the budgeting year. The remaining system users have been criticised heavily for their failure to control overhead costs.
The training of the new young managers has concentrated on the use of the exist- ing reporting systems although some of these managers have commented that they need to be involved in the design of a new management information system The accounting department has argued that the new managers lack sufficient experience to enable them to make a meaningful input and that thus the management infor- mation system should remain the province of the accounting department for the time being.
Given the wide range of Sioca PLC's activities, an Assistant Director position has been created to head up each of the company's main activities, e.g. electricity services, water services, insurance services etc., and each of these activities is to be treated as an investment centre (even though all major investments must be authorised by Head Office). Each assistant director is responsible for the return-on-capital of his/her activity and for developing new markets and products. Several of the new assistant directors have already complained that the existing budgeting system does not help in the latter respects.
The accounting department has warned that the degree of uncertainty experienced in many of the company's newer markets will lead to less frequent reports being available, if reporting accuracy is to be maintained.
A bonus system for both assistant directors and key staff within their activities has been introduced whereby bonuses are based upon the overall turnover generated by the activities. This seems to have had some positive effects in increasing turnover.
At a recent meeting of the board of Sioca PLC, concern was expressed that, despite Sioca PLC's having expanded its range of activities greatly, its profitability had continued to decrease.
In relation to the additional information provided subsequent to January 2003:
1. Critically analyse the events which have occurred within Sioca PLC since January 2003 and the management accounting information systems related problems that have resulted.
2. Discuss the extent to which Sioca PLC's new products and markets might affect the nature of the management accounting information it will require in future.
3. Write a brief report to Sioca PLC's managing director which provides an action plan designed to overcome the problems which exist, or may exist in future.
Be specific about what needs to be done and who will be involved.