T4 Part B Case Study Examination

For examinations on Tuesday 26 February 2013 and on Thursday 23 May 2013

PRE-SEEN MATERIAL, PROVIDED IN ADVANCE FOR PREPARATION AND STUDY FOR THE EXAMINATIONS IN MARCH AND MAY 2013 INSTRUCTIONS FOR POTENTIAL CANDIDATES This booklet contains the pre-seen case material for the above examinations. It will provide you with the contextual information that will help you prepare yourself for the examinations. The Case Study Assessment Criteria, which your script will be marked against, is included on page 17. You may not take this copy of the pre-seen material into the examination hall. A fresh copy will be provided on the examination day. Unseen material will be provided on the examination day; this will comprise further context and the examination question. The examination will last for three hours. You will be allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you will not be allowed, under any circumstances, to either begin writing or using your computer to produce your answer or to use your calculator during the reading time. You will be required to answer ONE question which may contain more than one element. For PC examinations only: Your computer will contain two blank files a Word and an Excel file. Please ensure that you check that the file names for these two documents correspond with your candidate number.

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Contents of this booklet: Pre-seen material BVS Fleet maintenance case Pre-Seen Appendices Case Study Assessment Criteria 2 12-16 17

The Chartered Institute of Management Accountants 2013

T4 Test of Professional Competence Part B Case Study Examination

BVS Fleet maintenance case

Industry background
Many companies worldwide operate and manage a fleet of vehicles, irrespective of whether they are leased or owned vehicles. The types of vehicles they operate range from executive cars to large articulated trucks and lorries. Within most companies, the vehicle fleet is managed by its own in-house fleet management department, although this can be out-sourced. The fleet management department is responsible for all aspects of the vehicle fleet. This includes vehicle acquisition and de-fleeting, vehicle financing, vehicle maintenance, driver management, speed management, fuel management and health and safety management. Therefore, fleet management is a function which companies undertake in order to reduce the risks and the costs associated with a range of activities including vehicle investment, improving the efficiency of their fleet and providing compliance with respective regulations on vehicle safety and road-worthiness. All vehicles need to be maintained in order to meet regulations as well as to maintain operational efficiency and to reduce running costs. A well maintained vehicle will breakdown far less often and therefore provide a greater degree of operational efficiency. With the pressure on companies to reduce operational costs and to increase efficiency, it is more important than ever for vehicle fleet costs to be better managed. Within Europe alone, the number of commercial vehicles deployed in company fleets is forecast to grow to four million vehicles by 2014. Many companies operate their own in-house fleet management department but choose to outsource the maintenance of their vehicles to one, or more, specialised fleet maintenance companies.

Fleet maintenance
This case study concerns fleet maintenance specifically and does not encompass the many other aspects of fleet management, such as the cost and selection of vehicle acquisition. Fleet maintenance is crucial in order to run a safe, efficient and cost effective transportation operation. The penalties for a company failing to meet regulations, which are becoming increasingly more complex, are severe. For this reason most companies choose to outsource their fleet maintenance requirements to specialised fleet maintenance companies, which are able to deliver a one-stop service to meet all their needs. These needs are typically routine servicing of vehicles, mechanical repairs and tyre replacement. There is a range of large multi-national companies which operate their own fleet maintenance departments. Some of these large companies offer a maintenance service to other companies. In addition, there are many specialised fleet maintenance companies which offer services to small fleets of 30 or fewer vehicles, as well as to larger fleet operators with over 5,000 vehicles.

Background on JAR Fleet Maintenance (JAR FM)

A large telecoms company, JAR, was a state-owned industry in its home European country until it was privatised in 1994. JAR then established separate fully-owned subsidiary companies for the various parts of its business. To support the telecoms business, JAR owned and operated a large fleet of vehicles. JAR had always managed its own in-house fleet which was then split into two separate subsidiary companies. One was fleet procurement and the other was fleet maintenance. The fleet maintenance subsidiary company, called JAR FM, operated a large number of vehicle workshops throughout this European country and it also outsourced a small proportion of its maintenance to a range of smaller workshops in certain areas of this country. JAR FM had been loss-making for many years, as its facilities were under-utilised and badly managed. JAR FM maintained only JARs own fleet of vehicles at this time. As part of the March & May 2013 2 T4 Part B Case Study

re-structuring of JAR during 2005, and in order to improve company-wide profitability, all of JARs subsidiary companies, including JAR FM, were given profit targets to meet over the 5year period ending 31 March 2010. Despite the operating profit targets that had been set for JAR FM, the level of operating losses continued at around the same level as previously. This prompted the main Board of JAR to recruit a more experienced Chief Executive for JAR FM. Toby Baum was appointed to this role in August 2007. Toby Baum had been recruited from outside the JAR group as he had extensive knowledge of the fleet maintenance industry. He started a review of business activities and made changes in the way the company operated. He was trying to improve the quality of the service the workshops provided to JARs fleet of vehicles. However, he met much opposition and was unable to reduce headcount, due to opposition from trade unions. Therefore, he considered that if he could not cut costs in the short-term, he needed to increase the revenues for JAR FM. He was instrumental in marketing JAR FMs vehicle maintenance facilities in order to generate revenues from new customers. By 31 March 2008, JAR FM had reduced its operating losses to 3.0 million, the lowest level for many years. At this stage JAR FM had just 2 new fleet maintenance customers, in addition to the JAR fleet of vehicles. During the year ended 31 March 2009, Toby Baum was able to secure vehicle maintenance contracts with a further 6 vehicle fleet operators, which helped to improve workshop utilisation levels and generate substantial revenues. Additionally, the business had closed some of its workshops. Operating profit for the year ended 31 March 2009 was 0.5 million. This was the first time JAR FM had been profitable for many years. The Board of JAR was under pressure to increase group profits and to concentrate on its core activities. This led to the Board of JAR making the decision in June 2009 to sell off, or close, a number of its subsidiary companies, including JAR FM. The Board of JAR wished to dispose of the selected subsidiary companies within 9 months, by 31 March 2010. The Board of JAR announced in June 2009 that it would be seeking a trade buyer for JAR FM. Employee reaction in JAR FM to this news was one of disbelief, particularly after the significant improvements that had taken place over almost 2 years since Toby Baum was appointed. All employees feared that they would lose their jobs and some of the administration staff sought to transfer to another company within the JAR group. At 30 June 2009 JAR FM employed almost 1,500 employees, including Head Office staff and employees based at the 260 workshops across its home country. During the year ended 31 March 2010 some further contracts were signed with new customers, bringing in maintenance work for a further 2,800 vehicles, offset by a fall in JARs fleet size. This resulted in an end of financial year (31 March 2010) figure of 47,500 vehicles being maintained.

Management Buy-Out in April 2010

Toby Baum was not totally surprised at the JAR Boards decision to sell off the fleet maintenance business and he considered that this would be a good opportunity for a Management Buy-Out (MBO) by some of the current management team of JAR FM. However, Toby Baum considered that a particular area of weakness was the lack of management information and financial control of the business due to a weak and ineffective Finance Director who had worked in JAR FM for many years. However, he had confidence in Leo Willems, Operations Director and the newly recruited Sales and Customer Support Director, Phillip Beck. He discussed his ideas of a MBO with his 2 key operational colleagues, Leo Willems and Phillip Beck, and received confirmation from both colleagues that they would be prepared to go ahead. They also agreed that the new company (post MBO) would require a new Finance Director with strong financial skills. Toby Baum identified an experienced accountant, through a recruitment advisor, and appointed her as a consultant, to work for him personally, in order to help to prepare a business plan and to try to identify a private equity provider. Toby Baum also informally approached some of the members of the Board of JAR to establish whether it would be receptive to a MBO for JAR FM, or whether it had already identified a trade March & May 2013 3 T4 Part B Case Study

buyer for the JAR FM business. He was informed that no buyers had yet been found, due to the history of losses, and that a MBO would be possible, providing that the required finance could be raised. Following approaches to, and negotiations with, banks and private equity providers in late 2009 and early 2010, a deal was finally reached. Raising funds for a MBO was especially difficult during this period due to the economic environment and restrictions on lending. The new MBO company was to be called BVS. Toby Baums business plan for BVS, together with his confident charismatic personality, persuaded a private equity investor, PIE, to take a 60% stake in the company. A summary of BVSs key personnel is shown in Appendix 1 on page 12. Negotiations took place with JAR on the valuation of the business, its assets and employee liabilities. Toby Baum knew the company well, which is always a distinct advantage with MBOs, and had already identified which assets, workshop facilities, and which staff he wished to employ in the new company. After much negotiation an agreement for a valuation of the JAR FM business was reached. The agreed valuation was 4.0 million. This net valuation included: 120 specified workshops that would be transferred and managed by BVS (some owned workshops and some leased). Liabilities for 860 employees that would transfer to the new MBO company. Inventory of materials and spare parts.

A 5-year maintenance agreement was also agreed for JARs fleet of vehicles. The agreement was to be at a fixed price per vehicle, based on vehicle type. The price would vary by the size of JARs fleet, which was forecast to reduce over the 5-year business plan period. There was also a clause for the fixed price to be index linked to inflation each year. The 5-year maintenance agreement for JARs fleet had benefits for both parties. JAR was able to reduce its total fleet maintenance costs and BVS would commence trading with a guaranteed 5-year contract for JARs fleet of vehicles, which covered 34,100 vehicles at 1 April 2010. JAR FM had operated 260 workshops at 30 June 2009. However, Toby Baum did not want BVS to be overly burdened with the employee and other running costs associated with operating such a large number of workshops. BVS chose to acquire only 120 workshops from JAR FM, as it planned to outsource the remaining volume of the maintenance work to a range of carefully selected outsourced workshops, which met its quality and customer service requirements. JAR was responsible for the closure costs of the other 140 workshops that BVS was not acquiring. JAR was also responsible for all of the remaining employees of the JAR FM subsidiary company, who were not employed by BVS. News of the impending MBO was announced in January 2010 to all employees in JAR FM. Negotiations then took place as to which employees would transfer into BVS and which employees would transfer elsewhere within JAR or be made redundant. BVS would be totally responsible for all future staff costs and liabilities for the 860 employees transferred into BVS.

Structure of BVS
BVS is a private limited company and not listed on any stock exchange. It has 400,000 shares in issue, each of 0.50 par value. The company has an authorised share capital of 1,000,000 shares. When the company was established, at 1 April 2010, a share premium of 4.50 was agreed. All shareholders purchased shares at a cost of 5.00 per share. Each of BVSs 4 executive directors purchased their shares in cash and all of them had to raise personal loans secured against their homes to generate the required level of financing for the MBO. Therefore they are all personally very committed to making a success of BVS and to see the company grow and achieve the business plan. March & May 2013 4 T4 Part B Case Study

The shareholdings are as follows: Number of shares held at 31 March 2012 Toby Baum Leo Willems Phillip Beck Annika Larsen PIE (private equity provider) Total 70,000 30,000 30,000 30,000 240,000 400,000 Percentage shareholding % 17.5 7.5 7.5 7.5 60.0 100.0

The Board of BVS has not yet declared any dividends. The agreed acquisition price was 4.0 million, payable to JAR in 4 instalments: 2.5 million on the date of acquisition, 1 April 2010. 3 further instalments of 0.5 million each, of which 2 instalments were payable on 31 March 2011 and 31 March 2012, and the last instalment is payable on 31 March 2013.

Once PIE was signed up for its 60% equity stake, Toby Baum was able to negotiate and obtain a bank loan for 1,400,000, at an interest rate of 12% per year. This loan is secured against the assets of the company. The bank loan is repayable on 31 March 2015. The bank also agreed to an overdraft facility to help meet the peak demands in working capital. The overdraft interest rate is 14% per year. Therefore, the overall structure of the book value of finance provided at 1 April 2010 was as follows:

Management 0.8 million

PIE private equity 1.2 million

Bank loan financing 1.4 million

The business plan

The business plan was to grow the existing vehicle fleet maintenance business and to expand its geographical coverage of maintenance workshops to two neighbouring European countries. Underpinning BVSs plan is for BVS to provide a seamless one-stop service to fleet managers operating vehicle fleets across three countries. The Board planned to deliver this service through the use of managed and outsourced workshops which would all deliver a high quality of service, excellent customer care as well as the provision of management information on the fleet vehicles through BVSs new IT systems.

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The principles behind BVSs business plan are shown in the following diagram:

Develop the strategy Vision Strategic analysis Business strategy

Monitor performance Profitability analysis Strategy reviews Operating reviews Customer responses

Operational planning Sales planning Resource planning Capacity limits Planned improvements Adapt and change

The business plan includes a growth in revenues from 84 million to almost 140 million by 31 March 2015. Toby Baum, Managing Director, considered that this is challenging, but achievable. Extracts from BVSs business plan are shown in Appendix 2 on page 13. The core business that BVS offers to its customers is a fixed annual price, per type of vehicle, for vehicle servicing. The price per vehicle varies depending on the type of vehicle and its expected mileage. BVSs customers require that their vehicles are serviced on time, so as to minimise the risk of breakdowns and failures, and the associated risk to its fleet safety. Furthermore, they require that BVSs maintenance work should be of a high standard and that quality replacement parts should be used, particularly for safety-critical elements such as brakes and tyres. BVSs customers have differing requirements for the frequency of vehicle servicing, depending on the mileage and type of vehicle. Other factors include the vehicle manufacturers recommended service frequency and the need for more frequent servicing in different geographical regions and for harsher environmental conditions, such as during winter months. Revenues are generated from four streams, which are: 1. Fixed price maintenance service (for which minor parts are not chargeable to customers) 2. Mechanical repairs, for which BVS charges its customers based on labour time as well as the cost of bought in parts, with a small mark-up on parts. BVS does not provide vehicle crash repairs at its own, or its outsourced, workshops. 3. Replacement tyres. BVS also makes a charge for the labour costs associated with replacing tyres and balancing the vehicles wheels to ensure safe and accurate steering of all vehicles. 4. Additional fleet management services, as detailed on the next page.

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Additional fleet management services offered by BVS

BVS also offers a range of administrative services to help its customers manage their fleets. These additional services are at an extra cost to customers, but many fleet managers want to outsource them to a specialised company. BVS offers the following additional services: Fleet administration services and provision of vehicle management information. Management of vehicle road testing certificates. Accident management and arranging for vehicle repairs at specialist repair facilities. Management of vehicle insurance claims. Breakdown recovery service. Reporting of vehicle mileage and carbon emissions.

Toby Baum recognised that many company fleet managers wanted to outsource much of their fleet operational work and BVSs customer were under pressure to control and reduce their fleet operating costs. Furthermore, market research and contact with potential customers identified that they were seeking a one-stop outsourcer which could not only service and maintain their vehicles, but also provide key management information on each vehicles operating efficiency. This includes data on mileage, operating costs, tyre usage and carbon emissions. This information can be gathered using new telematic technology. A telematic device is defined as a piece of electronic equipment which is installed in each vehicle which allows the vehicles fleet management department, and its outsourced maintenance supplier (such as BVS), to gather a range of data on each vehicles operation. This information is far more sophisticated than merely providing information on vehicle location, as it can also provide data on how the vehicle has been driven. For example, it can report on whether speed limits have been observed, how aggressively a vehicle has been driven round corners and the usage of brakes. The flow of data to the fleet manager, and also to BVS, generates information on all vehicles, the mileage driven and helps BVS to plan its customers vehicles maintenance requirements. This enables BVS to ensure that its customers fleet vehicles are maintained to minimise breakdowns and to ensure that all vehicles meet all of the legal and safety requirements. An added opportunity exists for the use of data from vehicles fitted with telematic devices, as BVS is able to monitor and report to its customers fleet managers on carbon emissions for those customers who have selected to subscribe to this additional fleet management service.

Current operations of BVS

The majority of BVSs work is generated from vehicle servicing, vehicle repair work and tyre replacement. However, the additional fleet management services are a growing area of BVSs revenues. Furthermore, these additional services have been instrumental in BVS winning several large fleet maintenance contracts from competitors over the last few years. Fleet managers are under increasing pressure to reduce their operating costs but also to meet increasingly demanding vehicle safety compliance measures, especially in respect of the 3 key areas of vehicle safety, concerning brakes, lights and tyres. BVSs Fleet Maintenance IT system, FLIS, (see page 9) helps provide information to BVSs customers fleet managers for them to closely monitor their fleet vehicles. This IT system identifies the need for regular checks to be undertaken and provides reports on vehicles that are due for any safety related maintenance work. Some of BVSs customers fleets include vehicles which use alternative fuel sources. These include vehicles which use a mix of fuels including bio-diesel, electric vehicles and hybrid vehicles, which are capable of running on electric power or alternative fuel. Therefore, BVS has had to adapt to the changing needs of its customers fleet vehicles and offer a wider range of maintenance services. This has enabled BVS to expand its skills and it has provided training for some of its employees in the maintenance work required for these alternative vehicle types. These services are currently offered at workshops located near major cities.

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Outsourced suppliers
Leo Willems was responsible for selecting and appointing a range of outsourced workshops to undertake BVSs customers vehicle maintenance in the geographical areas where BVS did not retain its own managed workshop. Only 120 workshops were retained by BVS after the MBO and with BVSs expansion into two neighbouring countries, it was necessary to appoint reliable outsourced companies which have the vehicle capacity and experience to meet BVSs strict criteria for maintenance and repair work. BVS has appointed 5 outsourced suppliers for vehicle maintenance. By 31 December 2012 these 5 outsourced suppliers undertake maintenance work for BVSs customers vehicles at over 320 locations. These outsourced suppliers are independent chains of garages and workshops which have spare capacity, or can provide increased capacity, to undertake maintenance work which meets the strict criteria for quality of work and spare parts fitted as well as excellent levels of customer service. These outsourced suppliers are presented to BVSs customers as BVSs partners. These outsourced workshops have BVSs signage and BVSs logo on all paperwork. This ensures that BVSs customers would not necessarily be able to distinguish between any of BVSs own managed workshops and an outsourced workshop. BVSs contracts with these outsourced suppliers are based on BVS paying an agreed fixed hourly rate plus an agreed mark up on parts bought and used for customers vehicles. These outsourced costs are invoiced to BVS at the end of each calendar month, and are analysed by vehicle and by outsourced workshop. As BVS is utilising a significant proportion of the 5 outsourced companys total workshop capacity, the contracted hourly rate with BVS is lower than these outsourced companies charge their other customers. Additionally, all work undertaken by all of the outsourced workshops is updated on BVSs Fleet Maintenance IT system, FLIS, (see page 9). This IT system therefore reflects all of the work that has been undertaken for all of BVSs customers vehicles irrespective of whether the work occurs at an outsourced workshop or in one of BVSs managed workshops. Toby Baum chose to acquire only 120 workshops from JAR in April 2010 and to outsource the remainder of the maintenance work to gain greater flexibility. The volume of work allocated to outsourced workshops depends on a number of factors. These include: Geographical location. Customers selection of the workshop, or workshops, in which they choose to have their vehicles maintenance work undertaken. Availability and utilisation levels at BVSs 120 managed workshops. The overall number of vehicles BVS is responsible for maintaining.

BVSs customers want their vehicles off the road for the shortest possible time and they choose where to book their vehicles for maintenance and repair work. The business plan assumed that the 120 managed workshops would have utilisation levels of 90%, rising to 92% by Year 5. However, the business plan included a high growth in the number of vehicles being maintained, and much of this increased volume of work was planned to be undertaken by its outsourced workshops. The number of vehicle hours planned to be outsourced was forecast to rise from fewer than 300,000 hours in the year ended 31 March 2011 to over 1,000,000 vehicle hours forecast in the year to 31 March 2015.

BVSs new IT systems

Toby Baum recognised the lack of operational and management information provided by JAR FMs IT systems, which had not been updated for many years. The first task that he undertook when the MBO was approved was to appoint a global IT consultancy company to select and implement new IT systems for BVS. However, until these new IT systems were operational, at various dates during BVSs first year of trading, JAR allowed BVS to use its existing IT systems for a small licence fee. By selecting the best available software solutions and integrating these systems together, BVS was able to reduce the implementation time for these new systems. BVS

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now incurs annual software licencing fees of 0.24 million each year. This is included in administrative expenses. BVSs new IT systems include: a multi-currency nominal ledger including integrated sales and purchase ledgers and a fixed assets register. a fleet maintenance IT system, called Fleet Information System (FLIS). a cash flow forecasting modelling system.

The Fleet Maintenance IT system, FLIS, provides management information tailored for the needs of workshop managers, Head Office staff, the senior management team as well as for BVSs customers. FLIS is installed at all workshops, both BVSs managed workshops and outsourced workshops. It provides BVSs customers with improved reporting on fleet repair costs, vehicle downtime, mileage data and more. FLIS incorporates detailed reporting with the capability to track the maintenance needs for all of BVSs customers vehicles. FLIS holds statutory data, including vehicle taxes, mileage and maintenance and repair data as well as carbon emission monitoring data. FLIS also provides a range of management information reports, analysed by vehicle, by customer, by each engineer, and by managed workshop or outsourced workshop. FLIS can also be remotely accessed by BVSs customers for them to book their vehicles for maintenance and repairs and to access information on vehicle status whilst in for servicing or repair. This allows a seamless interface for customers, irrespective of whether the vehicle is maintained by one of BVSs managed workshops or by an outsourced workshop. The planned implementation cost for all of these new IT systems was 2.0 million, for both hardware and software licencing costs. However, the final cost was 2.3 million, which was charged in full (in Administrative expenses) against profits in the year ended 31 March 2011. This cost was net of the agreed payment received from outsourced suppliers, for installing FLIS at all of the outsourced workshops. Jonas Kral, PIEs representative on the BVS Board, was not happy with this cost over-run, but was re-assured by Toby Baum that the IT systems were robust and that they were all fully operational by the planned completion date. During the year ended 31 March 2011, all employees and outsourced workshop personnel were trained extensively in the use of these new IT systems. Additionally, they all receive regular annual training in respect of FLIS system updates and any new features it offers.

Customers fleet profile

BVS maintains four categories of vehicles, which are: Vans. Cars. Articulated lorries. Other vehicles, for example street lighting trucks and earth-moving plant vehicles. The majority of the vehicles maintained are vans and cars, with less than 10% of the total vehicles that BVS maintains being articulated lorries and other vehicles. Phillip Beck has been actively involved with meetings and presentations to many fleet managers. He has been promoting the services that BVS offers to its customers, its quality of service and maintenance standards as well as the range of management information that BVS can provide to help each fleet manager run his or her fleet as cost effectively and efficiently as possible. Phillip Beck has had a real challenge to achieve the high growth in new sales, to meet the agreed business plan vehicle and sales revenue targets. When BVS commenced operations on 1 April 2010, it was responsible for 47,500 vehicles. This comprised 34,100 vehicles in JARs fleet and 13,400 vehicles for other customers fleets. At 1 April 2010, these 13,400 vehicles comprised: March & May 2013 9 T4 Part B Case Study

10 customers, each of which operates a fleet size of more than 300 vehicles, including 1 large fleet operator with 4,500 vehicles. 84 different customers, each of which has a fleet size of 300 vehicles or fewer.

The forecast for 31 March 2013 is that other customers fleets will have grown to comprise 33,200 vehicles (see Appendix 5 on page 16). BVS does not offer any maintenance services to the general public. JAR had signed a 5-year contract with BVS for maintaining its entire vehicle fleet, which included 34,100 vehicles at 1 April 2010. This 5-year contract gave JAR assurances that its vehicle fleet would continue to be maintained (as it had been previously by JAR FM) and it also generated a large revenue stream for BVS. However, JARs fleet size is forecast to reduce, as part of JARs planned cuts and efficiency improvements, to 26,000 vehicles by 31 March 2015, as included in BVSs business plan. Over the first 2 years of trading, Phillip Beck was pro-active in speaking to company fleet managers to win new business. He considers that BVS offers a competitive service, clearly priced with good levels of service and quality of work. BVSs geographical expansion to cover 2 neighbouring countries, as well as its home country, also enabled it to attract fleet managers who were looking for a single outsourced fleet maintenance company across these 3 countries. Phillip Beck has worked closely with regional and central government departments in BVSs home country over the last year in order to try to win the fleet maintenance work for some of the governments fleet of vehicles, including emergency vehicles such as police cars. A contract for 20,800 vehicles was signed with the central government department in June 2012, and maintenance work commenced from 1 October 2012. The contract was for a rolling annual contract with the possibility for a further 12,000 vehicles to be added in future.

Procurement
Leo Willems is responsible for all areas of procurement, including negotiations of prices with outsourced suppliers as well as procurement contracts with a range of suppliers of vehicle parts and tyres. The speed of delivery of spare parts for repairs is of great importance as the down time of customers vehicles whilst being repaired is crucial for its customers businesses. Therefore, BVS has in operation a large number of contracts with large, as well as small, vehicle parts suppliers. These suppliers are normally able to meet the time-critical demands for getting spare parts delivered to BVSs managed and outsourced workshops in the shortest possible time, which is usually the same day as the order is placed. BVS also has contracts in place with a range of specialist tyre manufacturers. BVS fitted over 500,000 tyres in the year to March 2012 for its customers. BVS considers that the cost, as well as the quality of these tyres, is very important. Some customers specify which manufacturers tyres they require to be fitted, whereas other customers leave the choice of tyre to BVSs expertise based on quality and value for money. BVS has a contract with a large European tyre manufacturer which attracts a good volume discount. The reduced tyre cost is passed onto BVSs customers, giving them a reduction in their fleet maintenance costs.

BVS employees
BVS took on responsibility for 860 employees at 1 April 2010. By 31 December 2012, employee numbers had grown slightly to 890 employees, due to additional work carried out by Head Office staff, in order to provide an efficient service to its customers. The split of employees between BVSs 120 managed workshops and Head Office is as follows: Workshop based: 724 employees. Head Office: 166 employees.

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Toby Baum and the rest of the BVS Board recognise the important role all employees contribute towards the companys success and the need to deliver high quality of service to customers. Each of BVSs customers has an account manager as a point of contact, who has a small support team. The account manager and the team provide support and management information on their customers vehicles and they try to ensure customer satisfaction. Some of BVSs account managers provide support to many customers, especially those customers which have small vehicle fleets. Regular customer surveys are carried out and the general feedback is positive. BVS has not lost any of its customers to date. In order to try to ensure goal congruence and to help BVS to succeed, Toby Baum established performance related pay (PRP) for all employees from 1 April 2010. PRP is linked to the achievement of different, specific objectives which are: 1. All employees the achievement of the annual business plan operating profit. 2. Workshop based employees the achievement of a satisfactory, or better, assessment of the quality of work carried out within each of BVSs managed workshops based on customers assessment of their maintenance work at each workshop. 3. Sales employees and customer account managers the achievement of high levels of customer satisfaction as well as the number of new customers vehicles for which BVS acquires the maintenance work for each year. Therefore, if BVS meets, or exceeds, the business plan annual operating profit, then a proportion of the annual profits will be paid to all employees, assuming that the assessment of their work has shown them to be satisfactory or better. Any employee with a poor assessment will not receive any PRP. PRP based on operating profit was not paid for BVSs first year, but it was paid in respect of the year ended 31 March 2012. Most of BVSs managed workshops met the satisfactory assessment requirement and the employees at these workshops received PRP. Additionally, all of the sales and customer account managers received PRP for the higher than planned levels of new customers vehicles to be maintained by BVS, although there are some customer service issues still to resolve. It is forecast that PRP will be paid in respect of the current year ending 31 March 2013. PRP relates to BVSs employees at the 120 managed workshops only.

Financials
The planned level of operating profit was for 1.2 million in the year ended 31 March 2011 rising to 10.0 million by the year ended 31 March 2015. In its first year of trading, BVSs operating profit was lower than planned at 0.5 million. However, in its second year, operating profit was higher than planned at 4.4 million, an increase from plan of 0.6 million. An extract from BVSs accounts for the year ended 31 March 2012 is shown in Appendix 3 on page 14. BVSs Statement of cash flows for the year ended 31 March 2012 is shown in Appendix 4 on page 15. The latest forecast for the year ended 31 March 2013 has higher than planned operating profit at 6.6 million due to an increase in the vehicle numbers compared to the business plan. This also includes revenues and costs relating to the new government contract, which commenced halfway through the current financial year. The latest forecast for the year ended 31 March 2013 is shown in Appendix 5 on page 16, compared to the business plan for this year.

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Appendix 1 BVSs key personnel

Toby Baum - Managing Director, BVS (since 1 April 2010) Toby Baum, aged 48, was recruited as the new Chief Executive of JAR FM in August 2007 to try to improve profitability. He had previously worked as the Fleet Maintenance Operations Director of a smaller, but highly profitable, fleet maintenance company. Despite reducing the losses that the subsidiary company made, the JAR Board decided to sell off JAR FM. He was instrumental in preparing the business plan and for identifying an interested private equity investor, PIE, in order to establish BVS on 1 April 2010. He borrowed funds to invest in 17.5% of the shares in BVS. Leo Willems - Operations Director Leo Willems, aged 55, has spent his whole career in the vehicle industry. He has worked for several companies in middle management positions involved in fleet management and also fleet maintenance. He joined JAR in 2005, when the company recruited a number of senior managers to improve operational efficiency and profitability. He borrowed funds to invest in 7.5% of the shares in BVS. Phillip Beck - Sales and Customer Support Director Phillip Beck, aged 40, was recruited in November 2007 by Toby Baum to identify new external customers and to market and sell JAR FMs fleet maintenance services. He had previously worked as a fleet manager for eight years, responsible for a large fleet of vehicles. In his previous role he had been dissatisfied with the outsourced maintenance service and had changed the outsourced service provider twice. As a fleet manager, he knew what service he wanted to provide, and his previous experience of running a fleet helps him understand the needs from a fleet managers perspective. He has brought in, and retained, many large customers with fleets of thousands of vehicles. This has helped generate large levels of revenues with a relatively small impact on fixed costs. He borrowed funds to invest in 7.5% of the shares in BVS. Annika Larsen - Finance Director Annika Larsen, aged 40, is a qualified accountant. She was recruited by Toby Baum initially as a business consultant to help him arrange and establish the MBO. She had previously worked in an international business consultancy firm, but had held senior finance roles in the retail and distribution industries. She had no specialised knowledge of the vehicle maintenance industry but Toby Baum considered that her financial skills were excellent. Whilst working directly for Toby Baum as a consultant, she was offered, and accepted, the role of Finance Director in the newly established company. She borrowed funds to invest in 7.5% of the shares in BVS. Jonas Kral - Non-executive Director PIEs representative Jonas Kral, aged 45, was selected to be PIEs representative on the BVS board. He is extremely experienced in helping newly established businesses and MBOs to achieve their business plans. He has undertaken a Board representative role many times before and brings management experience to BVS. It is his role to ensure that BVS delivers the levels of cash flow and profitability that are included in BVSs business plan. It is also his role to steer BVS towards a flotation so that PIE can exit and realise its investment. PIE owns 60% of BVSs shares. Jan Grein - IT Manager Jan Grein, aged 32, was recruited by Jonas Kral in April 2010, immediately after BVS was established, in order to help implement and manage the newly created IT systems. Jan Grein previously worked as an IT manager in a competitors fleet maintenance company and understands the business well. He has also established good relations with many of the workshop managers, who consider that he is approachable and helpful when they experience IT problems or are confused about any aspects of the new IT systems. Carmen Kemp - Human Resources Manager Carmen Kemp, aged 55, was recruited to the newly established company in April 2010 and was given a remit to ensure that all employees understood the importance of creating value in the business and to deliver outstanding levels of customer service. March & May 2013 12 T4 Part B Case Study

Appendix 2 BVSs Business Plan

Year ended 31 March 2011 31 March 2012 31 March 2013 31 March 2014 31 March 2015

Business statistics: No. of vehicles End year: JAR Other customers Total vehicles No. of vehicles average for year Utilisation level at managed workshops Outsourced vehicle hours 000 hours Financial plan: Revenue Cost of sales Gross profit Distribution costs Administrative expenses Operating profit Finance costs Profit before tax Profit after tax

32,100 18,600 50,700 49,100 90.0% 274 million 84.0 64.9 19.1 0.2 17.7 1.2 0.2 1.0 0.7

30,100 24,800 54,900 52,800 90.0% 385 million 92.2 71.6 20.6 0.2 16.6 3.8 0.2 3.6 2.5

28,100 32,200 60,300 57,600 91.0% 516 million 102.6 79.7 22.9 0.2 17.6 5.1 0.2 4.9 3.4

27,000 42,600 69,600 64,950 91.0% 736 million 118.1 91.9 26.2 0.3 18.7 7.2 0.2 7.0 4.9

26,000 55,000 81,000 75,300 92.0% 1,034 million 139.8 109.5 30.3 0.3 20.0 10.0 0.2 9.8 6.9

Business Plan - Number of vehicles - End year

Number of vehicles (end year)

90,000 81,000 80,000 69,600 70,000 54,900 60,300 60,000 47,500 50,700 50,000 40,000 30,000 20,000 10,000 0 Mar Mar Mar Mar Mar Mar 2010 2011 2012 2013 2014 2015

Business Plan - Operating profit

Operating profit ( million)

12.0 10.0 10.0 8.0 6.0 3.8 4.0 1.2 2.0 0.0 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 5.1 7.2

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Appendix 3 Extract from BVSs Statement of Comprehensive Income, Statement of Financial Position and Statement of Changes in Equity
Statement of Comprehensive Income Year ended 31 March 2012 million 93.9 72.8 21.1 0.2 16.5 4.4 0 0.2 4.2 1.3 2.9 As at 31 March 2012 million million 3.2 Year ended 31 March 2011 million 84.9 66.2 18.7 0.2 18.0 0.5 0 0.2 0.3 0.1 0.2 As at 31 March 2011 million million 3.4

Revenue Cost of sales Gross profit Distribution costs Administrative expenses Operating profit Finance income Finance expense Profit before tax Tax expense (effective tax rate is 30%) Profit for the period

Statement of Financial Position

Non-current assets (net) Current assets Inventory Trade receivables Cash and cash equivalents Total current assets Total assets Equity and liabilities Equity Issued share capital Share premium Retained earnings Total Equity Non-current liabilities Long-term loan Liability for acquisition (to JAR) due over 1 year Current liabilities Liability for acquisition (to JAR) due within 1 year Bank overdraft Trade payables and other liabilities Tax payables Total current liabilities Total equity and liabilities

1.6 17.8 0.3 19.7 22.9

0.9 13.1 0.1 14.1 17.5

0.2 1.8 3.1 5.1

0.2 1.8 0.2 2.2

1.4 0

1.4 0.5

0.5 0 14.6 1.3 16.4 22.9

0.5 0 12.8 0.1 13.4 17.5

Note: Paid in share capital represents 400,000 shares of 0.50 each at 31 March 2012. Statement of Changes in Equity For the year ended 31 March 2012 Share capital million 0.2 0 0 0.2 Share premium million 1.8 0 0 1.8 Retained earnings million 0.2 2.9 0 3.1 Total million 2.2 2.9 0 5.1

Balance at 31 March 2011 Profit Dividends paid Balance at 31 March 2012

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Appendix 4 Statement of Cash Flows

Year ended 31 March 2012 million Cash flows from operating activities: Profit before taxation (after Finance costs (net)) Adjustments: Depreciation Finance costs (net) 4.2 million

0.4 0.2 0.6

(Increase) / decrease in inventories (Increase) / decrease in trade receivables Increase / (decrease) in trade payables (excluding taxation)

(0.7) (4.7) 1.8 (3.6)

Finance costs (net) paid Tax paid

(0.2) (0.1) (0.3)

Cash generated from operating activities Cash flows from investing activities: Purchase of non-current assets (net) Cash used in investing activities Cash flows from financing activities: Payment of instalment for acquisition Dividends paid Cash flows from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 31 March 2011

0.9

(0.2) (0.2)

(0.5) 0 (0.5) 0.2 0.1

Cash and cash equivalents at 31 March 2012

0.3

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Appendix 5 Latest forecast for year ended 31 March 2013 compared to Business Plan
Year ended 31 March 2013 Forecast Business statistics: No of vehicles - end year JAR Government contract (from October 2012) Other customers Total vehicles - end year No of vehicles - average for year Utilisation level at managed workshops Outsourced vehicle hours Financial plan: Revenue Cost of sales Gross profit Distribution costs Administrative expenses Operating profit Finance costs Profit before tax Profit after tax (000 hours) Year ended 31 March 2013 Plan

28,100 20,800 33,200 82,100 69,000 91.5% 851 million 122.9 98.5 24.4 0.2 17.6 6.6 0.2 6.4 4.5

28,100 32,200 60,300 57,600 91.0% 516 million 102.6 79.7 22.9 0.2 17.6 5.1 0.2 4.9 3.4

End of Pre-seen material

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ASSESSMENT CRITERIA Your script will be marked against the T4 Part B Case Study Assessment Criteria shown below.
Criterion Analysis of issues (25 marks) Technical Application Diversity Strategic choices (35 marks) Focus Prioritisation Judgement Ethics Recommendations (40 marks) Logic Integration Ethics Total 30 5 5 100 5 5 20 5 5 15 5 Maximum marks available

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T4 Part B Case Study