Activity

Activity 2C

According to Wenger’s community of practice elements, there are three elements which are involved: There must be a domain, community and practice.

Learning takes place in specific environment and it has benefits. A learning environment is like a community and there must be the three elements if community practice to ensure that learning takes place effectively (Oxford, 2016). In a learning environment, there must be a domain which is the main subject of learning, a community which consist of the learners who interact and a practice which guides the learning process. The inclusion of the three elements of community of practice makes the exchange of information among the learners simpler and the

Activity 2D

  1. Expectancy of motivation refers to an intrinsic motivation which is based on the expected results. An individual gets motivated to carry out specific tasks based on the expected results.
  2. My response to the proposed monthly awards is that the motivation through wards should include all sectors of the company and not only the manufacturing team (Galindo, 2014). A holistic training is crucial in ensuring that the progress of the company is upheld.
  • An effective feedback is an information which a manager gets from the clients or staff which suggests areas of improvement or appreciation of the products. A good learning which I can do is to do a good management such that the required resources are put in place. The feedbacks are supposed to be arranged in such a manner that the significant changes are analysed and made better.

Activity 3A

Part A

  1. Transfer of learning: An employee shows the ability to employ the transfer of learning skills based on the ability to train others and give instructions to those who do not know.
  2. Knowledge, expertise and competence to be developed: A student must have the ability to apply what is learnt in class to practical life. The signs of absorption and synthesis of what is learnt in class is the practical ability of the learned activity.
  • Learning methods and styles: Learning methods depends on the IQ of the learner and the ability to absorb what is in the classroom environment. It is of good use to assess the learners’ potential and know the best intervention which can be used to promote learning.
  1. Problem solving: If a learner does not demonstrate learning, an analysis of the methodology of learning and intelligence quotient should be put into analysis to ensure that a better approach is given to the students.

Part B

To determine that learning has taken place, an approach is given to the students through a perfect performance analysis which include the following elements: Good practice, showing the signs of absorption of the knowledge and the practical skills (Galindo, 2014).

 

Activity 3B

  1. When a learner applies the knowledge learnt in class into practical. That is an enough evidence to assess the effectiveness of the change in the learning methods. The application of the learned activities to practice is crucial in the assessment.
  2. After learning, I would wait for 24 for an effective feedback since the time span is enough for a student to feel a change in the method of learning
  • This form of feedback is informal since the student verbalizes the change in the effect of learning and not the change itself expressed in a written format.
  1. In case of a negative feedback, exploration into the needs of the learner is essential so that the change in the requirements is implemented.

Activity 3C

Individual goals and personnel needed for training

  • Time management: This goal is focused at reducing the time used in the performance of the activities in learning (Entwistle & Ramsden, 2015). An expert to be consulted is an effective activity planner.
  • Quality teaching skills: Technical expert is a tutor.
  • Management skills and a quality technical personnel is a technical expertise in the human and resource management.

Activity 3D

It is important to take a record of training since it helps in the future reference and the planning on the trainings which have not been completed.

The records should include the date of activity, the place of activity, activity type and the trainer.

 

 

 

References

Entwistle, N., & Ramsden, P. (2015). Understanding student learning (Routledge revivals). Routledge.

Oxford, R. L. (2016). Teaching and researching language learning strategies: Self-regulation in context. Routledge.

Galindo, I. (2014). Flip Your Classroom: Reach Every Student in Every Class Every Day. By Jonathan Bergmann and Aaron Sams. Alexandria, Va.: The Association for Supervision and Curriculum Development, 2012. ix+ 112 pages. ISBN 978‐1‐56484‐315‐9. $13.57. Teaching Theology & Religion17(1), 82-83.

 

 

 

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The Advantages and Disadvantages of Outsourcing Services in Healthcare

Introduction

Outsourcing of healthcare services is fast growing. In almost every country, healthcare providers are increasingly facing serious economic as well as social pressures that affect their services budgets and ultimately their ability to deliver quality health care services. Just like other businesses, healthcare providers also have to deal with pressures of industry competition. In the world of today, achieving sustainability even in the healthcare sector means that a healthcare organisation has to do everything possible to remain competitive and attractive. This is why many hospitals today find outsourcing as an attractive approach for health care provision. Roberts et al. (2013) emphasize that a major undertaking that hospitals have to consider is outsourcing. Carr and Nanni (2009) define outsourcing as the assignment of core services or operations of an organisation to another organisation or vendor that specialises in that area of service or operation. Hsiao, Pai, and Chiu (2009) simply define outsourcing as contracting another company or person to perform a particular function. In most cases, hospitals do not outsource their core services because their core function or service is diagnosing and treating patients. To this end, healthcare organisations focus on achieving two primary goals, which are: delivering excellent patient care in terms of quality of healthcare service and maximizing staff efficiency. Not many healthcare organisations outsource their core functions though. In fact, core services, like medical care and nursing care, which involve direct patient care delivery are never outsourced (Martin, 1996). They mainly outsource some of their non-core operations so that they can concentrate on their core functions and services.

Guimaraes and de Carvalho (2011) investigated outsourcing in the healthcare sector in Germany, the US, the UK, Australia and New Zealand and Greece and realized that healthcare organisations outsource many activities/functions, including both clinical and non-clinical services. The clinical services outsourced are medical and technical services such as laboratory (pathology and microbiology), pharmacy, radiology, dialysis, magnetic resonance imaging, nuclear medicine, mental health services, physiotherapy and rehabilitation, speech and language therapy, occupational health therapy, medical tourism, and home delivered high-tech healthcare. Non-clinical services outsourced include information technology services (electronic health records (EHR) integration and management, medical billing services, and cloud hosting), facility management (cleaning, maintenance and laundry), sterilization, meals, patient transport, procurement, security, pest control, waste management, and so on. According to Hsiao et al. (2009), the most outsource functions in the healthcare sector are services related to information technology, medical billing, and support services in that order.

According to Lee et al. (2000), outsourcing is mainly done to acquire economic, technological, as well as strategic advantages. As opportunities for outsourcing increase, clients’ interest in understanding framework of service outsourcing is also growing. Clients also want to understand the benefits and demerits of outsourcing so that they can weigh whether indeed the benefits outweigh the disadvantages of this model of doing business (Foxx, Bunn & McCay, 2009). According to Roberts et al. (2013), before outsourcing, the executive management of the hospital or healthcare organisation has to consider (a) reasons why outsourcing is necessary for the organisations, (b) challenges that the organisation might face in the course of outsourcing, (c) best practices of outsourcing, and (d) the implications for the hospital’s management. According to Sanders (2004), hospitals mainly outsource to allow them to concentrate on their core function of managing patients’ illnesses while others (Hsiao, Pai & Chiu 2009; Moschuris & Kondylis, 2007; Roberts et al., 2013) view hospitals’ decision to outsource support services as a strategic move for lowering their cost of operations. Many scholars concur that with appropriate management, outsourcing can provide healthcare organisations with viable strategy for controlling the cost of operations as well as for maintaining quality patient care (Haley et al., 2004; Hsiao et al., 2009; Roberts, 2001; Roberts et al., 2013).

Hodge (2000) estimated the average cost saving due to outsourcing to be around 6-12%, which shows that outsourcing can be a good model of hospital management. However, this estimation only looked at the economic perspective without take into account associated non-economic impacts. Despite the hype around cost savings associated with outsourcing of functions, Allen (2000) and Mobley (2000) warn that sometimes the cost of delivering the service through a vendor or contracted organisation may not represent the actual cost. For example, savings from low-cost wages may not outweigh costs incurred due to high turnover and service delivery quality issues that result from inexperienced, poorly trained, as well as unstable workforce. For example, Siganporia et al. (2016) found outsourcing of support services at provincial healthcare services in British Columbia to have resulted in non-significant decreases in injury rates as well as days lost per injury. This means that decision on whether to outsource or not and to what extent should always be based on careful consideration of both the advantages and disadvantages associated with outsourcing the particular function (Braut, 2016) as well as the legal and regulatory implications (Hsiao et al., 2009).

Problem Statement

The primary reason why hospital executive management choose to outsource support services or non-core functions is to lower operating costs (Roberts et al., 2013; Sunseri, 1999). Outsourcing vendors carry out the non-core services allowing a healthcare organisation to focus on the core function of serving patients. This is believed to improve efficiency in healthcare delivery and lower the cost of operations such as the cost of administration. Hospitals are struggling to improve patients’ health care experience, from check-in to medical outcome or recovery and to release because this is what gives patients a reason to return or to recommend the hospital others. As a result, hospital managers tend to go for outsourcing if the outsourced service promises to provide the needed advantages. However, according to Roberts et al. (2013), this speculative desire is only achieved if the outsourced service delivers on stated promises as at the time of signing the contract. Many hospital managers still remain skeptical about outsourcing their hospitals’ functions. As a result, they choose to retain the services/functions in-house because they belief that their present staff have the ability to perform the duties as well as or better than an outside organisation or vendor can. Some hospital managers are also concerned about risks associated with outsourcing such as potential breach of information confidentiality, loss of flexibility due to excessive reliance on outside organisations, among other significant risks. These managers tend to believe the real cost of outsourcing in healthcare organisation context may outweigh its benefits. This is because no study has conclusively investigated the real costs and benefits of outsourcing. Most studies have focused on understanding the extent of outsourcing in the healthcare sector, drivers of outsourcing, models for decision-making process, the impact of outsourcing, and future trend of outsourcing in the healthcare sector (Braut, 2016; Foxx et al., 2009; Guimaraes & de Carvalho, 2011; Hsiao et al., 2009; Karimi, Agharahimi, & Yaghoubi, 2012; Moschuris & Kondylis, 2007), but have failed to compare disadvantages/costs with the benefits to establish whether indeed outsourcing creates value to healthcare organisations. This has not helped hospital managers in deciding to outsource activities at their organisations.

 

 

Purpose of Study

The purpose of this study is to investigate the advantages and disadvantages of outsourcing in the healthcare sector. In particular, the study seeks to investigate whether the outsourcing has the potential to increases efficiency of operations in healthcare organisations and improve the quality of health care service delivery. It also seeks to investigate whether outsourcing has the potential to lead to real cost saving after considering all the costs associated with outsourcing, including the cost of the contract, monitoring costs, and the total risks involved. This is a major focus of the study. Thus, the study also extends to investigate the risks involved in outsourcing in the healthcare sector because risks can have a huge impact on the desired cost savings. The real cost saving can only be determined once monitoring costs and the costs of risks, such as legal risks, quality risks, delays, inaccuracies, and so on are factored in the cost of outsourcing.

Theoretical Framework

Outsourcing involves contracting of operations and/or responsibilities of a business function or process to a third-party service provider, replacing in-house services or operations with labour and technology from an outside organisation (Tas & Sunders, 2004). This business management practice was originally associated with manufacturing firms, which outsourced large parts of their supply chain processes. Today, businesses across all sectors of the economy engage in outsourcing. The conceptual framework for understanding drivers for as well as advantages and disadvantages for outsourcing can be best explained by theory.

Rudner (1966) defines theory as “a systematically related set of statements, including some law like generalizations, that is empirically testable” (p. 10). On the other hand, Bacharach (1989) broadly defines theory as “a system of constructs and variables in which the constructs are related to each other by propositions and variables in which the constructs are related to each other by hypotheses. The authors generally agree that theory is developed to increase scientific understanding through a systemized structure that can explain and predict phenomena (Cheon, Grover, & Teng, 1995). As such, theory gives us knowledge of expected outcome, which in this case advantages and disadvantages of outsourcing, and helps us understand the mechanism underlying the relationships among the variables of interest.

The present outsourcing research is based on the agency cost theory formulated in the 1970s by Ross (1973), Mitnick (1975, 1986), and Jensen and Meckling (1976). The theory explains the underlying reasons for principal-agent relationships as well as the problems inherent in such relationships (Cheon et al., 1995). The principal (service/project owner) in this case is the organisation contracting another to perform functions on its behalf while the agent is the organisation contracted to perform the functions. Jensen and Meckling (1976) define an agency relationship as “a contract under which one or more persons (principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent” (p. 308).

The theory seeks to explain the most efficient contract that governs the relationship between a principal and an agent. It argues that the decision on whether to provide the services or perform functions in-house or to outsource depends on the agency costs, which are the total costs that are to be incurred as a result of discrepancies between the objectives of the principal and the agents. This means that agency costs are “the sum of the monitoring costs by the principal, the bonding costs by the agent, and the residual loss of the principal” (Cheon et al., 1995, p. 214). Monitoring costs on the principal’s side come from the cost of retaining supervisor(s) to consistently monitor the performance of the agent and correct the agent whenever necessary; bonding costs on the agent’s side is incurred in assuring the principal of ‘his’ capability and commitment; and residual loss is the loss due to having an agent perform the function/task instead of using in-house resources.

The theory offers a good framework for evaluating the relative advantages of outsourcing versus use of in-house resources to perform tasks. An agency cost perspective of services outsourcing provides a model for investigating factors that influence the magnitude of agency costs. The assumption here is that healthcare organisations base their outsourcing decisions on factors that impact agency costs. The factors that impact agency costs are:

outcome uncertainty due to government policies, economic climate, technological change, competitor actions and so on; risk aversion of the outsourcing receiver (or provider); programmability or the degree to which appropriate behaviour by the outsourcing provider can be specified in advance; outcome measurability or the extent to which outcomes can be easily measured; and the length of the agency relationship. (Cheon et al., 1995, p. 215).

The theory suggests that the agency costs, measured in terms of monitoring and bonding costs as well as residual loss, are relatively higher in outsourcing relationships characterised by high uncertainty, high risk aversion, low programmability, low or complex outcome measurability, as well as longer length of relationship. On the other hand, agency costs are lower in outsourcing relationships characterised by low uncertainty, low risk aversion, high programmability, high outcome measurability, as well as short length of relationship.

Assessing advantages and disadvantages of outsourcing must therefore take into account the factors that influence agency costs. Outsourcing that creates value to a health organisation must be one that leads to cost saving, increases efficiency in operations, and improves quality of health care delivery after considering the total cost of outsourcing resulting from monitoring costs, bonding costs, risks involved, and residual loss. This means that just looking at cost savings on the face value may not give a clear picture of the value created by working with the third-party provider. One of the biggest risks of outsourcing in the healthcare sector, especially in outsourcing IT services, is leakage of patient data. This is part of the monitoring costs and can be very high if patient data leaks because the patient(s) may choose to sue the healthcare organisation. Problems of quality can also arise especially if it turns out that the provider does not have proper processes and/or has inexperienced/unstable staff. In some cases, the provider serves several clients at the same time. This causes risk of delays as well as inaccuracies in the work output. Meanwhile, the outsourcing organisation loses control over operations as well as deliverables of the outsourced activities making it difficult to synchronize the deliverables. As such, these disadvantages also have to be considered when evaluating the benefits of the outsourced activities.

Research Questions

This study seeks to answer the following questions:

  1. What are the advantages and disadvantages of outsourcing in the healthcare sector?
  2. What are the risks associated with outsourcing in the healthcare sector?
  • Does outsourcing lead to increased efficiency of operations in healthcare organisations?
  1. Does outsourcing lead to improved quality of health care delivery?
  2. Does outsourcing lead to real cost saving in the healthcare sector?

Nature of the Study

This study explores the advantages and disadvantages of outsourcing in the healthcare sector taking into account the impact of risks and other costs associated with outsourcing. The purpose is to provide a comprehensive understanding of the impact of outsourcing in the healthcare sector. To gain deep understanding of the impact of outsourcing in the healthcare sector, the researcher seeks to conduct a case study of Metropolitan Healthcare Services located in Herndon, VA. Case study research design involves conducting an in-depth study of an issue by collecting data from various sources. Our study requires data from the various sources to answer the research questions. As a result, the study will adopted mixed research method to achieve the objective of the study. Mixed research method involves the use of both qualitative and quantitative research approaches to explore the issue under investigation. This allows for detailed investigations into a complex entity that emphasize the uniqueness of the case and are valuable for making a theoretical contribution in strategy and management research (Ridder, Hoon, & McCandless, 2009). This allows researchers to gain a deeper understanding of the issue under study. Such a research is also called abduction research method, which Reichertz (2010) praised as “the only truly knowledge-extending means of inferencing” (p. 17). Since abduction research approach integrates both deductive and inductive research approaches and qualitative and quantitative research methodologies, it helps come up with a logical inference and provides profound insight into the issue being investigated.

Qualitative research method is a research strategy that emphasizes words as opposed to quantification in the collection as well as analysis of data (Bryman, 2012). Exploring this issue requires adopting qualitative inquiry research method because it is important that we get detailed views as well as experiences and interpretation of the impact of outsourcing. It is important that we adopt an interpretive approach to this issue so as to acquire data with great depth and breadth that allows us to get deep understanding of the business management practice. Adopting qualitative research method will allow the researcher to explore the views and experiences of the hospital staff who are involved in the administration and those who depend on the outsourced services in their service delivery. That way, it is easy to understand how they interpret and make sense of their experiences of outsourcing at their organisations or departments. Quantitative research method on the other hand involves explaining phenomena by collecting numerical data, which are analyzed using statistical methods (Muijs, 2004). Quantitative research methodologies are essential in explaining phenomenon that is particularly suited to being answered using quantitative methods generated from numerical data. In particular, survey questionnaires will be administered to staff across the departments in the healthcare organisation.

Interview data collection method will be adopted in the qualitative research. This method of data collection is chosen based on the specific objectives of the research and the main question that the study seeks to answer. For example, one of the objectives of the study is to establish the advantages and disadvantages of outsourcing in the healthcare sector. This objective can only be achieved by investigating the experiences of those who supervise or directly rely on the outsourced services/activities such as heads of departments, nurse managers, clinical officers, and so on. A major advantage of interviews is that it allows the researcher to obtain information derived from organisation context experiences. This can provide new information or different angles to the research question (Burton, 2000). In particular, semi-structured interviews will be used in this study. Semi-structured interviews use a predefined set of questions and the interview process is usually much more casual and open-ended with the aim of getting qualitative information that may not be possible with a set of questions alone (Robson, 2002).  Therefore it allows for more exploratory research on the topic of investigation.

The quantitative research will involve administration of survey questionnaire and collection of secondary data from the hospital’s administrators/managers. Survey questionnaires will be administered to the hospital’s healthcare and support/administration staff who either make use of or supervise the outsourced activities or services. The secondary data will comprise summary of the costs from all the aspects associated with the contract and the management of the contract and performance reports based on the organisation’s defined performance metrics. It will also include the costs of risks experienced throughout the contract management period.

Significance of the Study

The present study undertakes a deeper look into the impact of the outsourcing in the healthcare sector by examining the benefits of outsourcing taking into account the total costs and risks involved. Few studies have explored aspects of outsourcing from a broad perspective even though outsourcing has been widely studied. The present study explores the impact of outsourcing in the healthcare sector by taking a broader look at the concept “impact”, which is based on the agency cost theory. The theory emphasizes that the advantages or impact of outsourcing should be assessed by taking into account the contract cost, administration and monitoring costs, residual loss, as well as the cost of risks associated with contracts.

Most studies which have investigated this issue have either reported advantages and disadvantages or the cost-savings without considering the costs of the contracts or even the risks involved. As such, this study seeks to provide a more complete understanding of the advantages of outsourcing to healthcare organisations. An important feature of this study is that it makes use of interview data, survey data, as well as secondary data on the organisation’s performance and costs reports. Use of data from all these sources will improve inferencing when making conclusions about the advantages and impact of outsourcing. This will bridge the existing literature gap on the impact of outsourcing on the business management of healthcare organisations. It will also help test the agency cost theory in real organisation context and as a result, advance the theory’s propositions on the drivers of outsourcing, factors that determine the magnitude of the impact of outsourced activities/services, and cost-saving due to outsourcing.

The study is also of great significance to hospital administrators and managers as well as administrators and managers of other business organisations. It will provide deep insight into the impact of outsourcing on quality of health care service delivery, efficiency of operations, as well as cost savings. Most proponents of outsourcing sell the concept claiming that it creates value to the organisation especially by enabling the organisation to save on cost of operations as well as administrative costs. However, this claim has not been properly evaluated to establish whether indeed outsourcing leads to cost-saving. This may not be true in some cases, or may not be true at all. Thus, the study will help hospital managers and administrators make better decisions when choosing to make use of in-house resources to carry out organisation functions or to outsource services from outside organisations. Managers of hospitals and other healthcare organisations will have contextual information on the pros and cons of outsourcing, meaning that they will be able to relate it with their situations. Besides, the study will provide unbiased information which can be relied upon unlike the campaign information often presented by proponents of outsourcing.

The study is also expected to impact policy. Policy makers in the healthcare sector seeking to draw guidelines on outsourcing in the healthcare sector or for their own healthcare organisations can rely on information generated from this study as a basis for their guidelines.

Limitations of the Study

A major limitation of this study is study is that it will rely on self-reports by adopting interviews and survey data collection methods. Being a case study, there is a risk of organisation staff becoming defensive, consciously or unconsciously, to negative answers during interviews and surveys. People tend to be proud of where they work, making them defend the efforts and activities of the organisation. This may cause bias in the results and therefore inaccurate conclusions.

 

Definition of Terms and Concepts

Advantage      Any trait, feature or aspect that gives an individual, entity or any other thing a more favourable opportunity for success (Business Dictionary, n.d.).

Bonding costs             The cost incurred by the service provider while assuring the service receiving organisation of their capability and commitment.

Disadvantage Drawback, weakness (Business Dictionary, n.d.).

Monitoring costs         Costs incurred by the service receiving organisation to retain supervisor(s) to consistently monitor the performance of the service provider and correct the agent whenever necessary

Outsourcing    Contracting another company or person to perform a particular function on behalf of or the organisation.

Outcome measurability The extent to which outcomes can be easily measured

Programmability          The degree to which appropriate behaviour by the outsourcing provider can be specified in advance

Residual loss               The loss due to having a service provider perform the function/task instead of using in-house resources.

Risk                             Exposure to danger, harm or loss

Total risk                     The overall potential for harm or financial loss that is associated with a certain practice or course of action

Risk cost                     The cost of managing risks as well as the cost of incurring losses. The total cost of risks include administrative costs, uninsured losses as well as loss due to adjustments to expenses or contract costs, risk control costs, and so on.

Summary

Outsourcing of healthcare services is fast growing. Healthcare providers are increasingly facing serious economic as well as social pressures that affect their services budgets and ultimately their ability to deliver quality health care services. As a result, many healthcare organisation today find outsourcing as an attractive approach for health care provision. Outsourcing is simply defined as contracting another company or person to perform a particular function. To this end, healthcare organisations focus on achieving two primary goals, which are: delivering excellent patient care in terms of quality of healthcare service, maximizing staff efficiency, and saving on operations costs. It also allows healthcare organisations to concentrate on their core function of managing patients’ illnesses while others.

Most studies have focused on understanding the extent of outsourcing in the healthcare sector, drivers of outsourcing, models for decision-making process, the impact of outsourcing, and future trend of outsourcing in the healthcare sector, but have failed to compare disadvantages/costs with the benefits to establish whether indeed outsourcing creates value to healthcare organisations. As a result, the study seeks to investigate the advantages and disadvantages of outsourcing in the healthcare sector. In particular, the study seeks to investigate whether the outsourcing has the potential to increases efficiency of operations in healthcare organisations, improve the quality of health care service delivery, and lead to cost savings. A major focus of this study is to determine whether outsourcing has the potential to lead to real cost saving after considering all the costs associated with outsourcing, including the cost of the contract, monitoring costs, and the total risks involved. Thus, the study also extends to investigate the risks involved in outsourcing in the healthcare sector because risks can have a huge impact on the desired cost savings. The study is based on agency cost theory and will adopt a mixed research design, making use of interviews, survey and secondary data to explore the impact of outsourcing.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reference List

Allen, S. (2000). Outsourcing services: The contract is just the beginning. Business Horizontal, 43, 25-39.

Bacharach, S. B. (1989). Organizational theories: Some criteria for evaluation. Academy of Management Review, 14, 496-515.

Braut, H. (2016). Transfer pricing in hospitals: Investigating the need and possible methods of transfer pricing in Norwegian hospitals (Unpublished Master Thesis). University of Oslo, Oslo.

Bryman, A. (2012). Social research methods, 4th ed. Oxford: Oxford University Press.

Business Dictionary. http://www.businessdictionary.com/definition/advantage.html

Carr, L. P. & Nanni, A. J. (2009). Delivering results: Managing what matters. New York, NY: Springer Science+Business Media, LLC.

Cheon, M. J., Grover, V., & Teng, J. T. C. (1995). Theoretical perspectives on the outsourcing of information systems. Journal of Information Technology, 10, 209-219.

Foxx, W. K., Bunn, M. D., & McCay, V. (2009). Outsourcing services in the healthcare sector. Journal of Medical Marketing: Device, Diagnostic and Pharmaceutical Marketing, 9(1), 41-55.

Fraihat, H. M. (2006). Theoretical and pragmatic framework for outsourcing of IT services. Journal of International Technology and Information Management, 15(1), 43-66.

Guimaraes, C. M. & de Carvalho, J. C. (2011). Outsourcing in the healthcare sector: A state-of-the-art review. Supply Chain Forum: An International Journal, 12(1), 138-146.

Haley, D. (2004). A case for outsourcing medical device reprocessing. AORN Journal, 79, 806-808.

Hazelwood, S. E., Hazelwood, A. C., & Cook, E. D. (2005). Possibilities and pitfalls of outsourcing. Healthcare Financial Management, 59(10), 44-48.

Hodge, G. A. (2000). Privatization an international review of performance. Boulder, CO: Westview Press.

Hsiao, C-T., Pai, J-Y., & Chiu, H. (2009). The study on the outsourcing of Taiwan’s hospitals: A questionnaire survey research. BMC Health Services Research, 9(78), 1-9.

Jensen, M. C. & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305-360.

Karimi, S., Agharahimi, Z., Yaghoubi, M. (2012). Impacts of outsourcing in educational hospitals in Iran: A study on Isfahan University of Medical Sciences-2010. Journal of Education and Health Promotion, 1(25). doi: 10.4103/2277-9531.99959 Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3577378/

Lee, J-N., Huynh, M. Q., Chi-wai, K. R., & Pi, S-M. (2000). The evolution of outsourcing research: What is the next issue? Proceedings of the 33rd Hawaii International Conference on System Sciences – 2000.

Martin, G. M. (1996). Outsourcing in Western Australian hospitals: Management considerations. Retrieved from http://ro.ecu.edu.au/ theses/961

Mitnick, B. (1975). The theory of agency: The policing ‘paradox’ and regulatory behavior. Public Choice, 24, 27-42.

Mitnick, B. (1986). The theory of agency and organizational analysis. Paper presented at annual meeting of American Political Science Association, Washington.

Mobley, M. (2000). What you need to know about outsourcing HR functions. HR Focus, 77, 7-12.

Moschuris, S. J. & Kondylis, M. N. (2007). Outsourcing in private healthcare organisations: A Greek perspective. Journal of Health Organization and Management, 21(2), 220-223.

Roberts, J. G., Henderson, J. G., Olive, L. A., & Obaka, D. (2013). A review of outsourcing of services in health care organizations. Journal of Outsourcing & Organizational Information Management, Article 1D 985197. DOI: 10.5171/2013.985197

Roberts , V. (2001). Managing strategic outsourcing in the healthcare industry. Journal of Healthcare Management, 46, 239-249.

Ross, S. (1973). Economic theory of agency: The principal problem. American Economic Review, 63, 134-139.

Rudner, R. S. (1966). Philosophy of social services. Englewood Cliffs: Prentice-Hall.

Sanders, S. (2004). Outsourcing. Sanitary Maintenance, 62(5), 12.

Siganporia, P., Astrakianakis, G., Alamgir, H., Ostry, A., Nicol, A-M. et al. (2016). Hospital support services and the impacts of outsourcing on occupational health and safety. International Journal of Occupational and Environmental Health, 22(4), 274-282.

Sunseri, R. (1999). Outsourcing on the Outs. Hospitals & Health Networks, 73(10), 46-52.

Tas, J. & Sunder, S. (2004). Financial services business process outsourcing. Communications of the ACM, 47(5).

 

FINANCE

Big Data in Financial Accounting

Financial reporting, also known as the fiscal report can be said to be a formal record of commercial activities and position of a business, person, or any other entity. Financial reporting includes some basic financial statements such as balance sheet, income statement, statement of retained earnings, and cash flow statements (Charifzadeh and Taschner 2017). The current world is composed of new and improved technology which changes the ways in financial reporting is done in business. Precisely, evolution in technology has revolutionised financial reporting to Big Data. Big Data can be defined as extremely large data sets that can be analysed computationally to reveal trends, patterns, and associations concerning the behaviour and interaction of an entity or an individual (Charifzadeh and Taschner 2017). The large and complex nature of Big Data makes it impossible for traditional software to be used in their analysis. The focus of this study is to analyse Big Data as developed with financial reporting. Further, the study will explain some of the benefits and drawbacks of big data in financial accounting.

As explained earlier, big data is a series of information that is extraordinarily enormous and complex (Charifzadeh and Taschner 2017). Due to this complexity, this information cannot be analysed using old methods and technologies. It should be noted that data analysis is a very crucial concept in business because it provides the required information to categorise a business. Further, the results from a study are used to the government while taxing, and by the shareholders to understand the financial health of an organisation.

An analysis suggests that big data concerning finance office should consist of all the information that companies collect internally in the normal operation. The use of big internal data in financial reporting is always note encouraged by the chief financial officer (Charifzadeh and Taschner 2017). However, those who have used the big data in financial analysts argue that it assist in identifying cases of fraud in business. In this case, one can say that the use of big data in financial reporting helps in determining and detecting fraud and some credit or risk identification as used in an organisation. The benefits mentioned earlier are only possible in a small organisation by reorganising data and then applying advanced analysis.

On the same note, it should be noted that the financial reporting has seen new development in the past that affects the way in which organisations conduct financial reporting. The new accounting framework introduces two different suites of standards for-profit entities and for public benefit entities (Segall and Cook 2018). The for-profit standards must follow the international financial reporting standards (IFRS). On the other hand, the public benefit entities’ reporting standards must follow the international public sector accounting standards. Both of these suits are based on IFRS which are in continuous and progressive changes in the due to the ever-changing financial economy.

The new financial reporting standards are likely to affect several businesses including the banks and their customers. The reason why the big data affects banks and some small companies is that they lack proper bookkeeping that can be used as a source of big data. Further, the implication of the use of big data means that organisations have to apply and dedicate their efforts to technical, methodological issues. In particular, this part would require onto think of how they can affect forward-looking assumptions macroeconomic settings in their existing facsimiles and techniques. Besides, IFRS requires that business organisations recognise financial assets or liability in its statement of financial position. In this case, some organisations like banks face strategic as well as business challenges when it comes to the adaptation of their operation in a new environment under IFRS (Segall and Cook 2018). If they have to address this issues, then they would have to apply fundamental changes in their model and affects areas such IT and risk management (Charifzadeh and Taschner 2017). Besides, the IFRS is likely also to affect the ability of banks to lend cash. This discouragement is so because some sections of the IFRS discourages credit origination for clients. For instance, if one considers venture investment to be substance to volatile cyclic behaviour, then they may resolve to limit new business expansion in such arrangements.

Benefits of Big Data in Financial Accounting

Investors use the information presented by a business to determine whether they should or should not invest in a given organisation. In the modern day, the world is increasingly driven by data and how organisations outline its strategy and approaches is a crucial determinant of its ability to compete in a given industry (Al-Htaybat and von Alberti-Alhtaybat 2017). Further, stakeholders across the world use big data to make all sorts of economic decisions regardless of the size of their business. In other words, big data is a primary source and guide related to decision making in either small or large organisation.

Another benefit of using big data is that it provides descriptive analytics. It involves classifying and categorising data into useful information. In other words, it can be used to analyse which region or branch sold a given brand in high number, which brand has the highest demand, and what feedback customers give to a given brand among others. Another example of descriptive analytic in an organisation is when a business may need to spend some cash on marketing and want to find out how this spending can affect their sales or profit realisation.

Besides, big data can be used in real-time impacts and financial predictions which are crucial in determining the effectiveness of a business. It can be incorporated into a measure of financial forecasting. Such predictions can then be used to increase the efficiencies, assess risks, and identify any form of advantage or weakness via inquiry.

Lastly, accountants and CFOs in business can use big data to present the industry as a potential business partner. In this case, the finance department is expected to use the predictive analytics tool in collaboration with customer data to make future forecast operation of a business (Al-Htaybat and von Alberti-Alhtaybat 2017). Thus the move can be used to form alliances with potential investors.

Drawbacks of Big Data for Financial Accounting

Despite the vast advantages of big data, it also presents some challenges in a business setting. For instance, if the financial managers in an entity fail to understand the need for big data in a business, then they are most likely to lead the market into turmoil. Besides, a company may end up paying more taxes if they present big data in a wrong way. Further, the method of collecting and analysing big data is quite tedious and cumbersome, especially for some organisations. Lastly, a big information is like to negatively affect small organisations.

 

References

Al-Htaybat, K. and von Alberti-Alhtaybat, L. (2017). Big Data and corporate reporting: impacts and paradoxes. Accounting, Auditing & Accountability Journal, 30(4), pp.850-873.

Charifzadeh, M. and Taschner, A. (2017). Management accounting and control. Weinheim: Wiley-VCH Verlag GmbH & Co. KGaA.

Segall, R. and Cook, J. (2018). Handbook of research on big data storage and visualization techniques. IGI Global.

Adidas Financial Challenge Strategy Document

Introduction

Most organizations face financial challenges classified based on their attributes. Financial challenges affect business functionality, impeding operational difficulties which may lead to loss of sustainability power of an entity (Pointer & Stillman, 2004). It is in this regard that the study evaluates the appropriate strategy to remedy Adidas from its financial challenge, as the problem is largely affecting its operational efficiency. Therefore, the study focuses on providing a strategy to overcome the financial challenge affecting the company, and through guidance from business valuation outcomes, the appropriate strategy is identified. It is found that Adidas should expand on its ownership structure to add more debt funds to finance its operations, as well as leverage its value.

Analysis of the financial challenge facing Adidas

Adidas owns a recommendable progress in terms of performance, characterized by its growing revenue over the analysis period. However, the company is facing a financial challenge characterized by high operating expenses, which may adversely affect its performance in the future (Adidas, 2017). Critically, the forecasted operating expenditure level accounts to 64.17 per cent of its gross profit, signaling high level of operating costs on its activities. Despite this posing a financial risk to the company, emanating from decline operating efficiency, the challenge may lead to loss of company value, as it leads to low profitability in the company. Apparently, it is evident that the challenge has led to a low forecasted net profit margin and the operating profit margin, accounting to 10.32 per cent and 17.20 per cent, respectively.

Loss of company value is common in instances of low profitability, as there is low return on assets as well as on the capital employed (Wahlen, Baginski, & Bradsh, 2010). This is an indication of low efficiency, which leads to decline in the value of the supply chain of the company. Moreover, with a low return on capital employed, investors worry about the sustainability power of the company, thus opting to hold less capital in the company. As a result, the growth rate of the company declines, as there is low level of invested capital, affecting its going concern attributes (Drury, 2004). Therefore, the financial challenge facing Adidas is worth to be proactively amended, to limits its spread effects on the company at large. Moreover, operating efficiency in an organization provides a strong operating backbone of a company, leading to the attainment of a strong financial muscle for thriving in the market space.

Business valuation

In business valuation, key concepts are evaluated to determine and evaluate the sustainability of an entity (Stickney, Weil, Schipper, & Francis, 2009). Therefore, based on the available information in the forecasted financial statements of Adidas, the valuation is based on its profitability, efficiency, as well as financial health of the company. This is done via various ratio analyses, as the ratio metric helps to determine the relative performance of the company.

Financial health valuation

Apparently, the financial strength of the company in relation to the industry and past history is recommendable, as it is ranked to have 7 out 10 in the ranking scale. This is mainly contributed by cash to debt ratio of 1.78, which is higher than the industry value of 1.45 (MorningStar, 2018). This is an indication that the company owns more net cash from operating activities than the average current liabilities. In addition, the company is in a position to pay its maturing obligations when they fall due for payment. This certifies the credit worthiness of the company, as its liquidity position is strong (Lumby & Jones, 2003).

In additional, the amount of assets that shareholders can claim from accounts to 44 percent, but this is lower than the industry average, whose level is 58 percent (GuruFocus, 2018). This means that almost 50 percent of the asset value equates to shareholder’s equity, a level which is recommendable to investors. This guarantees a sustainable return and minimal loss in instances of solvency. Importantly, on an average of 10 years, the maximum equity to assets ratio is 47 percent. In addition to its financial strength, Adidas has a promising future characterized by low debt in its capital structure. Based on the debt to equity ratio value, the company owns a debt level which equates to 17 percent of its equity value, a level lower than the industry average which is 34 percent. With strong capital structure, characterized with strong liquidity position and equity-asset ratio, the financial health of the company can be termed as strong, providing evidence of strong valuation exhibited by the company. This can be illustrated by the diagram below.

Source: https://www.gurufocus.com/stock/ADDYY

Profitability and growth valuation

The operating margin of the company is 9.6 percent, making it being ranked as one of the companies in Global footwear and Accessories industry with a meaningful operating profit. The industry operating profit level is 5.92 percent, an indication that the industry operating expenditure level is high. Despite Adidas being ranked among the best companies in the industry, this level of performance is not recommendable, as it lowers its financial muscle to run effectively its operations. Moreover, with a low operating profit margin, the company is characterized by a low net profit margin of 5.12 percent, which lowers its profitability growth prospects.

Investors in the company realizes a return accounting to 17.01 percent of its earnings, a figure higher than that of the industry, which accounts to 7.59 percent of the industry’s earnings. Apparently, the company has an appealing performance in the industry, but the investment competition operates above the industry boundaries, thus terming its performance as non-appealing to the majority of investors. This lowers its growth power, as investors tend to focus on companies with high returns in other industries. Moreover, the negative perception on the company by investors is detrimental to its survival rate, thus increasing solvency chances (Gocejna, 2014). This can be illustrated by the diagram below.

Source: https://www.gurufocus.com/stock/ADDYY

Investor’s perspectives valuation

Investors add up the capital in an entity, with anticipation of return from the entity’s earnings. Therefore, the valuation of the company in terms of earnings and share prices plays a fundamental role in determining the investment profile in an organization. Adidas’ investors are required to pay $ 35.94 to earn a dollar of the company earnings, a price which is higher than the industry average, whose stock price per industry earnings is $ 20.38. This is an indication that the company shares are overvalued in comparison with the industry, a factor that may lead to loss of investors. This is a similar case when the analysis is based on the predicted earnings verses current stock price, as the company forward price earnings ratio is $ 24.04. Investors in the industry are required to pay less by $ 7.35, a factor that will adversely affect the company valuation by investors. This can be illustrated by the diagram below.

Source: https://www.gurufocus.com/stock/ADDYY

From the valuation reports, it is evident that the company financial health is recommendable, but much need to be done on its profitability and growth, as well as its investment profile in terms of pricing, as both experience a lower performance than the industry average.

Overview of an appropriate strategy to overcome the financial challenge

The financial health of Adidas ascertains its sustainability power, thus exiting the business is not an appropriate strategy of recovering from its financial challenge. In addition, improve its spending will add more to its prevailing challenge, and its investment valuation lowers its credibility in obtaining additional equity. Moreover, its stock is priced higher than the industry average, thus having a low investor’s interest. Therefore, to recover from the prevailing financial challenge, the company needs to acquire more funds through changing ownership of its capital structure, through additional of debts in its capital.

With its strong financial health, characterized by strong liquidity position and low debt levels, inclusion of additional debt will provide funds to finance its operating expenditure. Moreover, additional of extra debt helps in leveraging the value of a firm, thus gaining more value from investor’s perceptions (Adam, 2015). In the long term, the value of the company will improve, providing a sustainable power over its operations.

Conclusion

Inefficient operations in an entity lead to financial challenges that impact the value of entity in association with the rate of growth of its sustainability power. Apparently, as a financial challenge facing Adidas, its operation efficiency is at risk if proactive strategies would not have been taken place to remedy the situation. Moreover, with inclusion of additional debt capital in its ownership structure, the entity achieves a financial muscle to remedy its ailing operations, as well as attain a leverage value emanating from debt financing.

 

 

 

 

 

 

 

 

 

References

Adam, P. (2015). Managing Internationalisation. Zlín: UTB.

Adidas. (2017). Annual Report 2017. Herzogenaurach: Adidas.

Drury, C. (2004). Management and Cost Accounting, Volume 2; Volume 6. Boston: Cengage Learning EMEA.

Gocejna, M. M. (2014). Investor Expectations in Value Based Management: Translated by Klementyna Dec and Weronika Mincer. Boston: Springer.

GuruFocus. (2018). Adidas Valuation. Retrieved March 19, 2018, from https://www.gurufocus.com/stock/ADDYY

Lumby, S., & Jones, C. (2003). Corporate Finance: Theory & Practice. Boston: Cengage Learning EMEA.

MorningStar. (2018). Adidas valuation . Retrieved March 19, 2018, from http://www.morningstar.com/stocks/PINX/ADDYY/quote.html

Pointer, D. D., & Stillman, D. M. (2004). Essentials of Health Care Organization Finance: A Primer for Board Members. New Jersey: John Wiley & Sons.

Stickney, C. P., Weil, R. L., Schipper, K., & Francis, J. (2009). Financial Accounting: An Introduction to Concepts, Methods and Uses. Boston: Cengage Learning.

Wahlen, J. M., Baginski, S. P., & Bradsh, M. (2010). Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective. Cengage Learning: Boston.

 

Financial Analysis & Statement Preparation

Introduction

Adidas is a multinational corporation, headquartered in Germany. The company is known for designing and manufacturing high-quality clothing, shoes, and accessories. Its innovation and reliability has made the company the second largest manufacturer of sportswear in the world. Adolf Dassler started the company and later, his brother, Rudolf, joined him. The company made its first innovation when it replaced metal spikes in athletic footwear by rubber and canvas. The company has a vast portfolio, extending from sports clothing and footwear to bags, eyewear, watches, etc. (Lebron, 2010). The company employs around 50,000 employees and also incorporates 170 subsidiaries.

The company employs a vast differentiation strategy. With its corporate strategy focusing on innovation, the company also makes consistent efforts on improving its product line to stay ahead in the competition. The company also strives for investing in potential markets and employing a unique channel approach. The company has a supply chain that maintains a high response rate with the customers by making a quick response to the market changes. The company recently centralized its Excellency and Sales Strategy team so that the company can effectively manage global markets. The company offers high competition because of its multi-brand portfolio. This further helped the company to create an international sales function which, in turn, managed commercial activities of the company. The company also dwelled upon dividing its global sales function- the plan that company implemented later. Retail and wholesale became the two critical elements of the global sales function.

Adidas also strengthened its presence by embracing e-commerce. This helped Adidas to reach and attract more customers. Adidas has a corporate culture that encourages employees to be more innovative. This has supported the company to design products that are highly innovative as well as highly reliable. The company has successfully maintained sustainability by satiating the concerns of employees as well as shareholder’s interest.

Business Model

A business model is often looked upon as a plan that businesses employ for their successful operations (Seelos, 2010). Adidas has been emphasizing upon innovate products to satiate the needs of their customers. The company, in the past few years, has been less focused upon endorsing their products while at the same time, developing and advancing their product line to suit the specific needs of consumers, mostly athletes. The company has also been improving its infrastructure so that they can produce products at a faster rate. They have also streamlined the global range of their products to reduce the complexity. To complement the decrease in complexity, the company moved further and harmonized the above market services and consolidated their warehouse base. The supply chain has also been encouraged by innovating models, and as a result, the response rate with the customers has been increased immensely. This strategy was highly successful in attracting investors from all over the globe and easily persuaded many of them into buying Adidas’ common stock.

Adidas has three product categories. The products in the first category are shoes, perfume, and eyewear (Mahdi, Abbas & Mazar3, 2015). The product in the second category includes vintage clothing and superstar sneakers. The third category of products includes belts, bags, style caps, and handbags. Adidas launches its products at high prices. Adidas uses market skimming strategy to price its products. The company’s price is generally dependent upon color and looks. For example, the price of white color shoes is generally higher than other color shoes, given their same quality. The company is also focused on providing the best shopping experience to its customers by customizing its products according to the needs of its customers (Piller, Lindgens & Steiner, 2012). Due to high prices, the company only focuses on individuals who are in the higher income bracket.

The current and projected costs

The current cost of the company is defined as the cost that is incurred by the company to generate a certain amount of the revenue. It is also known as the cost of revenue. The current costs of the company for the years 2015, 2016 were 8748000000 and 9912000000 Euros respectively. The projected costs of the company were predicted on the basis of the percentage change. The projected costs for the year 2017 was 15175680000 Euros.

Nevertheless, the projected costs for years ahead of 2017 are mentioned in the pro-forma financial statements.

Break-Even Analysis

This is a measurement system that measures the margin of safety by identifying the number of units that are to be sold in order to cover the expenses regarding variable and fixed costs (Catanzaro, 2016). In simple words, it provides insights on when a business will start earning profit. The main purpose of carrying out a break-even analysis is to find out the minimum amount of sales that will make a business eligible to earn some profit.

There are different ways to calculate the break-even; however, the method that I am employing uses contribution margin. Contribution margin is equal to the difference between the selling price of the product and the variable cost that is related to the product (Tambrino, 2001). Now, based on the market research, I have assumed the selling price to be €100 and the variable cost associated with each product to be €75.

Therefore, contribution margin = selling price – variable cost

= €100-€75

=€25.

Calculation of break-even point

Break-even point can be calculated in different ways; however, the method that I have employed uses total fixed costs and contribution margin. Now, from the financial statements of Adidas, I took the fixed costs as €7296000000.

Now, the break-even point is calculated as the ratio between total fixed costs and contribution margin.

Therefore BE= €7296000000/€25

BE= 291840000 units

This reflects the fact that the company has to sell 291840000 units annually, in order to reach the break-even point. In other words, when the company’s amount of sales is beyond 291840000 units, the company will start earning some profits. This is also to say that the number of monthly sales should be 24320000 units.

Pro-forma financial statements

Pro-forma is often looked upon as a method with the help of which the calculation regarding the financial results are executed (Dilla, Janvrin & Jeffrey, 2014). It includes hypothetical conditions and a few assumptions about events that might occur in future, or it also reflects the impact of events that might have occurred in the past. Pro-forma financial statements for Adidas is given below, and it includes various assumptions which are also listed.

Income Statement

From the break-even analysis part, we found out that 24320000 units must be sold monthly to equate revenue with the expense. The number of units sold per year was increased by (10-20) percent. Revenue for years 2017-2021 has been formulated accordingly. From the latest financial statements of Adidas it was found out that, for all the years, the cost of revenue was around 50 percent and therefore, for the upcoming years, the cost of revenue is taken as 52 percent of the revenue.

Operating expenses were also calculated by adding R&D and SG&A costs. R&D was assumed to be 0.8 percent of the revenue, and for all the subsequent years, the research and development costs were also assumed to be 0.8 percent of the revenue. SG&A costs were assumed to be 30 percent of the total revenue, and for all the subsequent years, it was also assumed to be 30 percent of the revenue.

Later, operating income was calculated by subtracting total operating expenses from the gross profit. Provision for income taxes was assumed to be 40 percent of the operating expenses. Later, net income was calculated by subtracting provision for income taxes from the operating income.

 

INCOME STATEMENT
           
Fiscal year ends in December 2017 2018 2019 2020 2021
USD          
Units Sold (monthly) 34320000 41184000 45302400 49832640 54815904
Revenue (Annualy) 41184000000 49420800000 54362880000 59799168000 65779084800
Cost of revenue 21415680000 25698816000 28268697600 31095567360 34205124096
Gross profit (A) 19768320000 23721984000 26094182400 28703600640 31573960704
           
Operating expenses          
Research and development 329472000 395366400 434903040 478393344 526232678
Sales, General and administrative 12355200000 14826240000 16308864000 17939750400 19733725440
Total operating expenses (B) 12684672000 15221606400 16743767040 18418143744 20259958118
           
Operating income (A-B) 7083648000 8500377600 9350415360 10285456896 11314002586
(-) Provision for income taxes 2833459200 3400151040 3740166144 4114182758 4525601034
Net income 4250188800 5100226560 5610249216 6171274138 6788401551

 

Balance Sheet

Cash and cash equivalents and receivables were assumed to be 11 percent of the revenue, and for the subsequent years, they were also assumed to 11 percent of the revenue. Inventories were assumed to be 16 percent of the revenue, and for the subsequent years, they were also assumed to be 16 percent of the revenue. Total current assets were calculated by adding cash and cash equivalents, receivables, and inventories. Total fixed assets were calculated by subtracting depreciation from the sum of the building, equipment, and other assets. Later, total assets were calculated by adding total current assets and total fixed assets.

Short-term debt was assumed to be 4 percent of the revenue, and for all the subsequent years, they were also assumed to be 4 percent of the revenue. Accounts payables were assumed to be 12 percent of the revenue, and for all the subsequent years, they were also assumed to be 12 percent of the revenue. Total current liabilities were calculated by adding short-term debt and accounts payable. Assumptions were also made when the long-term debt was assumed to be 8 percent of the revenue, and for all the subsequent years, they were also assumed to be 8 percent of the revenue. It became the total current non-current liabilities. Later, total liabilities were calculated by adding total current liabilities and total non-current liabilities. Total stockholder’s equity was also calculated by subtracting total liabilities from total assets.

BALANCE SHEET
Fiscal year ends in December 2017 2018 2019 2020 2021
USD          
Assets
Current assets          
Cash and cash equivalents 4530240000 5436288000 5979916800 6577908480 7235699328
Receivables 4530240000 5436288000 5979916800 6577908480 7235699328
Inventories 6589440000 7907328000 8698060800 9567866880 10524653568
Total current assets (A) 15649920000 18779904000 20657894400 22723683840 24996052224
           
Building 2242000000 2466200000 2712820000 2984102000 3282512200
Equipment 2425000000 50000 50000 50000 50000
Other assets 242500000 278875000 320706250 368812188 424134016
Depreciation 245475000 137256250 151678813 167648209 185334811
Total Fixed assets (B) 4664025000 2607868750 2881897438 3185315978 3521361405
           
Total assets (A+B) 20313945000 21387772750 23539791838 25908999818 28517413629
           
Liabilities
           
Short-term debt 1647360000 1976832000 2174515200 2391966720 2631163392
Accounts payable 4942080000 5930496000 6523545600 7175900160 7893490176
Total current liabilities (A) 6589440000 7907328000 8698060800 9567866880 10524653568
           
Long-term debt 3335904000 4003084800 4403393280 4843732608 5328105869
Total non-current liabilities (B) 3335904000 4003084800 4403393280 4843732608 5328105869
           
Total liabilities (A+B) 9925344000 11910412800 13101454080 14411599488 15852759437
           
Stockholders’ equity
Total stockholders’ equity 10388601000 9477359950 10438337758 11497400330 12664654192

 

Cash Flows

Cash from operations was calculated by adding depreciation and profit after tax. Total source of cash was calculated by adding cash from financing and cash from operations. Later, the total change in working capital was calculated by subtracting accounts payable from the sum of inventory and accounts receivable. Values for total fixed assets, total financing and total use of funds are also mentioned in the pro-forma cash flow cash flow statements.

 

Cash Flow
Funds 2017 2018 2019 2020 2021
Profit After Tax 10090080000 12108096000 13318905600 14650796160 16115875776
Depreciation 245475000 137256250 151678812.5 167648209.4 185334810.8
Cash from Operations 10335555000 12245352250 13470584413 14818444369 16301210587
           
Cash from Loan instrument 3335904000 4003084800 4403393280 4843732608 5328105869
Cash from Financing 3335904000 4003084800 4403393280 4843732608 5328105869
Total Source of cash 13671459000 16248437050 17873977693 19662176977 21629316456
           
Changes in Working Capital          
Inventory 6589440000 7907328000 8698060800 9567866880 10524653568
Accounts Receivable 4530240000 5436288000 5979916800 6577908480 7235699328
Accounts Payable 4942080000 5930496000 6523545600 7175900160 7893490176
Total Change in Working Capital 6177600000 7413120000 8154432000 8969875200 9866862720
           
Acquisition of Fixed and other assets          
Total Fixed Asset 4664025000 2607868750 2881897438 3185315978 3521361405
           
Repayment of financing          
Dividend Payment          
           
Total Financing 3335904000 4003084800 4403393280 4843732608 5328105869
           
Total Use of Funds 10841625000 10020988750 11036329438 12155191178 13388224125

 

Key financials details

All the key ratios that are crucial to the company are listed in the table named Key Financial Details. Key financial details in this pro-forma statements include inventories, amount of sales (also known as the number of units sold), total asset, long-term debt, total liabilities etc.

 

Key Financial Details
  2017 2018 2019 2020 2021
Inventories 6589440000 7907328000 8698060800 9567866880 10524653568
Units sold (monthly) 24320000 29184000 32102400 35312640 38843904
Total Asset 20313945000 21387772750 23539791838 25908999818 28517413629
           
Long Term Debt 3335904000 4003084800 4403393280 4843732608 5328105869
Total Liabilities and Equity 9925344000 11910412800 13101454080 14411599488 15852759437
           
Revenue 41184000000 49420800000 54362880000 59799168000 65779084800
Margin 14414400000 17297280000 19027008000 20929708800 23022679680
           
Operating Expense 12684672000 15221606400 16743767040 18418143744 20259958118
           
Depreciation 245475000 137256250 151678812.5 167648209.4 185334810.8
Tax 4324320000 5189184000 5708102400 6278912640 6906803904
           
Profit After Tax 10090080000 12108096000 13318905600 14650796160 16115875776

 

Sales forecast

This is the method by which a business determines its future sales. If companies predict their sales accurately, then it helps them to implement informed decisions and also helps them to predict both short and long term performances (West, 1994). Most companies forecast their sales by taking into account their data from past sales, economic trends and industry-wide comparisons.

Since Adidas is an established company, it is easy to predict their sales on the basis of the available data. An accurate forecast allows companies and businesses to predict attainable future sales, allocate resource efficiently and to draft plan for future growth.

Results from the break-even analysis concluded that Adidas has to sell 291840000 units in a year to make the company eligible for earning profits. Therefore, for 2017, it was expected that the company would cross the break-even point by selling 34320000 products monthly.

I have assumed that the sales forecast for the subsequent years will increase by 10 to 12 percent annually. As a result, the monthly sales forecast for the next four years, starting from 2018, will be 41184000, 45302400, 49832640 and 54815904 respectively.

The complete sales forecast is also shown in the pro-forma financial statements.

Potential challenges to Adidas

From the available financial statements and the pro-forma financial statements, it can be said that Adidas is performing better every year and if the company continues to implement the innovative business model, it will carry on this performance. Nevertheless, the company is surrounded by considerable risks as the company incurs huge operating expenses that can change the performance track of the company.

If we calculate the company’s Return on Capital Employed ratio, which is the ratio between EBIT and capital employed, we will find out that Adidas had € 0.1 ROCE (Jayawardhana, 2016). This value of ROCE signifies that the company has less efficiency in the capital that is employed and investors always favor a stable and increasing value of ROCE. Therefore, the company should draft strategies to invest money prudently, and the company should also dwell upon selling off the unproductive assets. Also, the company should make wise investments on the productive assets such as vehicles for showrooms and sales, and equipment for their factory. In addition to their investment struggles and rising operating costs, the company is also facing few external and internal challenges. The company can incorporate an external approach to reducing the operating costs by improving their supply chain.

Adidas’ Supply Chain Structure

For big companies, the operating efficiency is dependent on their supply chain system (Joyce, 2006). The company, for several years, has been working with independent suppliers who manufacture the company’s product globally. The company has a multi-layered and global supply chain system that incorporates several types of business partners. Among these business partners, some are contacted directly, and some are indirectly contacted. This has created a complex supply chain structure for Adidas, and therefore, the company has to bear huge operating expenses to manage its supply chain. One thing that the company can do is to unify its supply chain by using fewer, however, bigger factories with larger order volumes.

Sourcing Strategy

Adidas should also focus on its sourcing strategy by balancing security with growth and flexibility. The major outsourcing countries for company’s products are China, Vietnam, Indonesia, Turkey, and Thailand. The company should take initiatives for improving competitiveness and managing their cost-control system.

Conclusion

It is evident that a company’s success is defined by its understanding of the market trends. The company should be able to analyze the market and should identify its core capabilities to mitigate the risks that come along the way. The company should be well prepared to give a subtle response to the changing market trends. A company should streamline its business and should make sure that their success and their investments are in the same direction. Overall, the success of a company goes hand in hand with the strategies that the company follows.

Adidas has always been a company that challenges the market trends and streamlines its strategies accordingly. The main focus of Adidas has been on reducing the production costs and at the same time, expanding its market. The company has attracted a huge market share with its sports equipment; however, it has come at the cost of increased operating costs.

 

 

 

 

 

References

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Tambrino, P. (2001). Contribution Margin Budgeting. Community College Journal Of Research And Practice25(1), 29-36.

West, D. (1994). Number of sales forecast methods and marketing management. Journal Of Forecasting13(4), 395-408.

BUSINESS LAW ANALYSIS REPORT

Business Law Analysis Report

Introduction

The buying and selling of goods and services as well as contracts related to these transactions are guided by a set of civil laws referred to as business/commercial law. The law is important in that it maintains uniformity and consistency in legal matters in the business world. Acknowledging this, Joseph, a businessman seeks advice on a number of legal issues applicable in the operation of his small bakery/restaurant. This paper provides an analysis of the legal issues raised by Joseph and how he should go about solving each of the four cases as provided.

Case 1

Joseph has started a restaurant business on a quaint location where there is quite a high volume of foot traffic. Because of the small size of the kitchen, Joseph cannot manage to cook in the premise. He sees it fit to outsource the creating of the baked food to his cousin, Alfred. Within a few days of operation, Joseph decides to increase his output which means more baked food and, unfortunately, he is not sure whether Alfred is going to meet the demand.

Regarding the formation of a contract, Joseph needs to be aware that there are requisite elements that must be incorporated for him to be considered to have entered into a legally binging contract (McKendrick, 2014). These elements include: offer, acceptance, consideration, mutuality of obligation, capacity and competence. In this case, Joseph gave the offer of supplying the baked food daily to Alfred who accepted the offer and notified Joseph hence forming a legally binding contract (Carter & Peden, 2003).

The agreement/contract between Joseph and Alfred is not a written agreement but an oral one (by word of mouth), a form of contract that is recognized in Australian law (Utz, 2015). Generally, there are no special procedures or requirements when forming a contract, but is important to put the agreement in writing. This is because the written agreement will clearly show both parties expression of intentions and act as evidence. The court will also give more considerable weight on the party’s expressions of intentions and evidence as presented in the written document of the contract (Utz, 2015). Joseph outsourced the creation of baked food to Alfred who agreed to supply all necessary baked goods on a daily basis. Therefore, this can be termed as an oral contact between Joseph and Alfred. Joseph should go ahead and let Alfred know that he wants more baked food from him to sustain the increased output of 100 croissconenut. Alfred should be in a position to meet the demand since he promised to supply all needed baked food to Joseph.

On the other hand, if Alfred cannot meet the demand of baked goods, Alfred will have breached the contract. This means that Joseph can forward the matter to the court and Alfred will be liable for a breach of the contract. In such a situation, Alfred would pay for all damages and inconveniences caused by him as a result of breaching the contract. Although Joseph has the right to take Alfred in court in case of a breach of a contract, oral contracts present a lot of challenges in courts since without a written document, one party may decide to depend on lies for the mere fact that there is no evidence to proof he/she is not telling the truth hence the need for a written contract (Roxenhall & Ghauri, 2004).

Case 2

            Joseph wants to partner with his siblings and wants to divide the ownership of the business equally among the three of them. Joseph also want to protect them all from full liability in case of any wrong eventuality in the business. It is critical for Joseph to understand various business structures available and how these structures operates in the course of doing business thereby making it easier for him to pick the best business structure that will suit his interests. Below is an analysis of common businesses structures recognized by the law.

Sole trader also known as sole proprietorship is one of the business structures. In this type of structure, the owner conducts/operates the business individually or with the help of family, or some friends or relatives. This type of a business is easy to set up and operate since there are no much rules and regulations governing the structure (Andersson, Carlsen, & Getz, 2002). The size of the business is also small hence able to be handled by one person. There is no separate legal entity other than the owner in this type of a structure of business is taxed personally (Clayton, 2014). The business structure is advantageous in that the business owner enjoys all the profits solely, but disadvantageous since he/she is also liable for all obligations/expenses incurred in the course of the business and bears all liabilities with no one to share losses with.

Partnership is the other form of business structure and can be formed by two or more individuals or companies. This form of business structure is limited to 20 members or more in case of a professional partnership. During establishment, a partnership agreement is formed and registered with the relevant authorities. Partnership agreement is meant to define the rights and obligations of the members who are the partners (Tomasic, Bottomley, & McQueen, 2002). The partnership type of a business is not a separate legal entity and the assets of the business are jointly owned in specific proportions as set out by the partnership agreement. The profit realized from the business is shared equally among members or according to the specific proportions as defined in the agreement. Additionally, partners are liable for the obligations of the business and hence the obligations are shared equally among the partners or according to the specified ratio. Some partnership in Australia are formed in a way that liability is limited to the extent of each member’s capital contributions.

Company is another form of business structure, and in fact, it is the best choice for Joseph who wants to shield his siblings and himself from liability. The company is a separate legal entity that can own properties in its own name and also liable for its obligations. In Australian law, a private company can be comprised of not more than 50 members who are not employees while a public company which can comprise of an infinite number of members. The company must have a registered office in Australia and an Australian citizen as director (Farrar, 2001). The Director’s main responsibility is to manage company’s day to day business and affair and complying with the statutory measure put forth by the law such as diligence, and acting with care. Joseph and his siblings in this setting will be the directors of the company. As mentioned earlier, this is the best option for Joseph since it is an independent entity set apart from its members and subsequently limited liability for its members and directors.

Other forms include the Joint venture which involves multiple parties coming together to pursue a common goal as they remain a separate entity. Right and obligations of a joint venture depends on the stipulated the stipulated terms. Trust is also a business structure that involves the trustee who owns the property but carries out the business on behalf of the beneficiaries of the trust.

Case 3

Joseph is concerned about protecting the name of the business and also about the protection of his intellectual properties. Joseph wants his business to have a unique name which is not shared by any other business. A business/trading name is the name used to identify a business while carrying out the normal business transactions. The business name helps one to have a customer identification and also create the emotional relationship between the business and the customers. In Australia, ASIC is a body responsible for registering of business names in Australia (ASIC, 2008). One of the rules according ASIC is that one cannot have a name identical or similar to a name possessed by another business. For this reason, Joseph should consider registering his business at ASIC to ensure that it is not copied.

Joseph intends to obtain a design on his signature baked goods and wonders whether it is an appropriate method of protecting his business and intellectual property as a whole. Having signature designs on the food products is advantageous in that the consumers will enjoy a certain uniqueness and experience. Joseph can utilize the signature to differentiate his food products from those of other restaurants in the town. Hence joseph can take advantage of the signature design to keep the customers desire high hence product promotion. However, it is important to note that protecting intellectual property is expensive and one can spend a lot money. Apparently, intellectual property is an asset. Joseph should be careful with any partner he is dealing with especially on matters regarding the patent. It is important to have adequate security on the patent when working on it. Joseph should be cautious about how his property is being handled by the remote team. Most of intellectual property owners have also adopted the method of encrypting their intellectual property. Joseph should employ a better level of encryption and also place strong enforceable agreements that are applicable in both the developers place and owner of the intellectual property. This might seem a bit expensive but it is much better than dealing with breach of a trust. It is critical to document everything regarding the intellectual property. This is important since in case of a stolen intellectual property, presentation of the evidence and defending the property will be simple. Therefore, Joseph should consider filing for a trademark, an intellectual property right which protects the name of the business, symbols used to represent the business and the design of the products sold in his restaurant. When the trademark is registered, Joseph will enhance his rights as the owner of the intellectual property hence provide legal evidence and public notice of ownership. Subsequently, Joseph will have the right to sue anyone who copies (infringes) his rights within the 10 year period after registration and subsequent renewal of the trademark.

Case 4

On the first date of operation, a bicyclist crashed into a sign board placed outside the restaurant, on a sidewalk. When placing the sign board, it was important to have the duty of care since the restaurant was located on a busy route. When one fails to act or fails to comply with the duty of care, a tortious act may take place leading to legal suit (August, Mayer & Bixby, 2009). This is the case in Joseph’s analogy. Joseph should understand that after confirming the need to have a sign board outside the restaurant, it was important for him to place a warning sign to alert people of the existence of a sign board on the sidewalk and hence avoid incidences such as this. Now that this was not in place, the bicyclist has the right to press charges against Joseph citing an act of negligence. Joseph will be guided by the court regarding the compensation of damages caused by recklessly placing the sign board on a busy path. However, the plaintiff (bicyclist) cannot claim damages that were not caused by the sign board. Therefore, the only payable damages are those that were as a result of the reckless placing of the sign board, which amounts to be an act of negligence. Regarding the type of court Joseph is likely to appear in case this matter goes to trial is a question of which court has the mandate to handle such a case. Joseph is likely to appear in a civil court which deals with matters pertaining tort and contracts. In other words, civil courts handles issues which are not of crime in nature while civil courts deal with issues such as this one (torts, contracts, etc.) (Dobbs, 2008. Therefore, Joseph should know that he is most likely going to appear in a civil court.

 

References

Andersson, T., Carlsen, J., & Getz, D. (2002). Family business goals in the tourism and hospitality sector: Case studies and cross-case analysis from Australia, Canada, and Sweden. Family Business Review, 89-106.

ASIC. (2008). Investment Commission (ASIC). Sydney.

August, R., Mayer, D., & Bixby, M. (2009). International Business Law: text, cases and readings. Pearson education.

Carter, J. W., & Peden, E. (2003). Good Faith in Australian Contract Law’. Journal of Contract Law, 155.

Clayton, U. (2014, Jul 24). Doing Business in Australia: Business structures. There are five different business structures in Australia, each with their advantages and disadvantages.

Dobbs, D. (2008). Law of Torts (Hornbook Series). West Academic.

Farrar, J. H. (2001). Corporate Governance in Australia and New Zealand. New york: Oxford University Press.

McKendrick, E. (2014). Contract law: text, cases, and materials. UK: Oxford University Press.

Roxenhall, T., & Ghauri, P. (2004). Use of the written contract in long-lasting business relationships. Industrial marketing management,, 261-268.

Tomasic, R., Bottomley, S., & McQueen, R. (2002). Corporations law in Australia. Federation Press.

Utz, C. (2015, May 7). LEGAL RESOURCES . Australian Contract Law.