Soup operates passenger rail services in Deeland, a technologically advanced country, with high demand for fast reliable rail travel from business and leisure passengers. Many passengers choose train travel because they see it as less harmful to the environment than other forms of transport.
Soup’s main objective is to maximise shareholder wealth. Since becoming licensed to operate routes in Regions A and B by the Deeland government five years ago, Soup has consistently delivered increased dividends and share prices for investors. In its initial appraisal of the licensing opportunity, Soup expected to operate the routes for at least 15 years, however, their licence may not be renewed when it expires in three years’ time. The government has warned Soup it ‘is unhappy about high returns to shareholders while there are many reports of poor passenger service, overcrowded trains and unreliable services on certain routes and at busy times’.
Soup owns its fleet of diesel powered trains. Each train in Region A has seven coaches with 70 passenger seats available per coach. In the less busy Region B, each train has six coaches each with 70 seats. As a condition of the licence, Soup runs a set number of services at both busy and quieter times in both regions. Soup has two larger rivals, both operating electric trains, which cause less harm to the environment than diesel powered trains. They run on the same routes in both regions.
The government regulates fares charged to passengers, which are the same per distance travelled for every operator in that region. The railway track, stations and other infrastructure are managed by the government which charges the operators a fee. There are several stations along the route which are only used by Soup trains and others where Soup trains do not stop at all.
Soup’s trains are 25 years old, originally purchased cheaply from an operator whose licence was withdrawn by the government. Soup believes the low price it paid is a key competitive advantage enabling them to steadily increase their return on capital employed, the company’s main performance measure, to a level well in excess of their rivals. The shareholders are pleased with the growth in passenger numbers over the last five years, which is the other performance measure Soup uses.
Soup’s ageing trains spend increasing time undergoing preventative maintenance, safety checks or repairs. A recent television documentary also showed apparently poor conditions on board, such as defective heating and washroom facilities and dirty, torn seating. Passengers complained in the programme of difficulties finding a seat, the unreliability of accessing wireless internet services and even that the menu in the on-board cafe had not changed for five years.
Soup’s CEO responded that unreliable internet access arose from the rapid growth in passengers expecting to access the internet on trains. She said Soup had never received any formal complaints about the lack of choice in the on-board cafe, nor had she heard of a recent press report that Soup’s trains were badly maintained, so causing harm to the environment.
The CEO has asked you, as chief management accountant, for your advice. ‘In view of the government’s warning, we must develop performance measures balancing the needs of passengers with the requirements of the shareholders’, she has said. ‘I don’t want to know how to improve the actual performance of the business; that is the job of the operational managers, nor do I just want a list of suggested performance measures. Instead I need to know why these performance measures will help to improve the performance of Soup.’
The following data applies to Soup:
Required:
(a) Advise the CEO on how the use of the balanced scorecard could improve the performance management system of Soup.
(b) Using the performance data given, evaluate the comments of the Deeland government that Soups trains are overcrowded.
(c) Assess the problems Soup may encounter in selecting and interpreting performance measures when applying the balanced scorecard to its performance management system.
(a) The balanced scorecard consists of four perspectives: customer, internal, innovation and learning and financial. It requires an organisation to have a number of goals supported by performance measures in each perspective. The customer perspective measures what it is that customers value from the business; internal looks at what processes does the organisation need to be successful; innovation and learning considers how future value can be created and financial measures whether performance is acceptable to investors.
It is useful because it uses both internal and external information to assess performance and measures financial and non-financial aspects of a business to ensure long-term future success, rather than just focusing on historic results. It can also be used as a mechanism to link KPIs into the CSFs which are vital to deliver strategy.
Soup currently uses return on capital employed (ROCE) as its key financial performance measure, but this does not correlate directly with the objective to maximise shareholder wealth and could encourage short-term decisions to be taken at the expense of long-term success. This is the case at Soup which purchased old trains and subsequently failed to reinvest, meaning that Soup’s ROCE is probably higher than its rivals. However, the trains are becoming unreliable and their condition is deteriorating. In the long term this will reduce customer satisfaction and financial performance.
Using the scorecard, Soup should have a broader range of financial measures which encourage managers to take decisions, such as investment decisions, consistent with the objective to maximise shareholder wealth in the long term. EVA would be a suitable measure to help achieve this, and would be preferable to the current focus on ROCE.
Soup does measure growth in passenger numbers which could be a measure of customer satisfaction. However, it is a limited, quantitative measure. Though Soup does have rivals and is likely to be required to operate a specified level of service under the terms of the licence from the government, some passengers may be forced to travel on Soup trains, rather than those of another operator because of where they live or the times they need to travel. The number of operators (competitors) is limited by the capacity of the railway infrastructure as well as by passenger demand. This means that the level of repeat customers may not be appropriate for Soup.
Passenger numbers are also externally focused but again this fails to fully consider the environment in which Soup operates.
Within the customer perspective Soup could use a range of performance measures. This will be beneficial as where passengers are able, they are likely to choose to use Soup if they provide a good service. This can be easily measured by surveying or asking passengers’ opinions. This will give Soup more qualitative information about their customers and their expectations, which will vary, for example, passengers will have different perceptions of overcrowding, or what is an acceptable delay. Certain groups may be more affected by overcrowding like frequent travellers and the elderly. Passengers who are unable to find a seat will probably be the most dissatisfied, though this will depend on how long their journey is. Other aspects of Soup’s service may be less valued than reliability and occupancy, like wireless access and the on-board cafe, but will be important to certain groups.
Another key element of customer satisfaction will relate to the amount of fare paid. Fares are regulated in Deeland so the interaction between fares and other aspects of the service is unknown. Many customers while valuing a particular aspect of the service may be unwilling to pay more for it; some may accept a reduction in the level of service if fares were reduced.
This detailed information about customers will allow Soup to focus performance improvements on key areas using more external data to make decisions.
Measures of the internal processes are likely to be closely linked to customer satisfaction. Soup apparently neglects this area in its performance management system. The scorecard could be used to help to address reliability, overcrowding and environmental factors.
Reliability will be highly valued by customers especially those who travel frequently and who rely on rail travel to get to work. The number of trains arriving late would be a suitable measure of reliability, as would the number of train services cancelled, though the length of the delay is also critical and should be carefully defined. The scorecard would allow more detailed measures as some of the factors affecting reliability will be within Soup’s direct control but others such as failures in the railway infrastructure are controlled by the government. This is useful information for Soup to effectively assess their controllable performance and feedback as necessary to external parties.
Seat occupancy, the number of passengers on a train compared to the number of available seats on different routes and at different times, is a suitable measure of train overcrowding and is important for passenger safety. To fully utilise its trains and achieve its objective of maximising shareholder wealth, Soup must try and maximise both the seat occupancy and the amount of time its trains are actually running. These internal measures would then help to support financial targets.
Soup’s licence to operate rail services in Regions A and B expires in three years’ time, and as with the operator from whom Soup purchased the trains, it may not be renewed. Soup must balance the needs of shareholders for short-term increases in dividends and share price with the long-term need to renew to its operator’s licence.
The creation of long-term future value can be addressed by the innovation and learning perspective. The immediate scope to innovate the service experienced by the passenger is limited, but there are some quick wins available in the choice in the on-board cafe and improving the reliability of the internet access. Also time spent training staff may improve customer satisfaction and reduce maintenance time. Fundamental innovation like the use of faster or environmentally less harmful trains requires long-term planning and large capital investment. The scorecard will encourage Soup to be forward looking, unlike the present system which is limited to historic performance.
(b) To measure the extent of overcrowding, some measure of occupancy is needed. The number of passengers per available seat can be used as a measure of occupancy.
Seats available per train is 490 (7 coaches x 70 seats) in Region A and 420 (7 coaches x 60 seats) in Region B.
Total seat occupancy = 82·5% (8,200/9,940)
Overall occupancy is below 100% which means on average there are more seats available than passengers, which is not consistent with the government’s claims that the trains are overcrowded. However, these averages may be misleading as trains running on certain days or at certain times may be relatively overcrowded. This may generate customer dissatisfaction even on services which are on average not fully occupied. The total number of passengers without seats would be a better measure.
There are significant variations between regions and times travelled with only the trains in Region A travelling at peak times being over occupied. This affects only 18% (4/22) of all services.
Most affected by this will be the 28% of the passengers travelling at peak times in Region A who are unable to obtain a seat. This represents only 9% (28% x 2,500/8,200) of total passengers per day. There is some overcrowding but the claim that Soup’s trains are overcrowded seems exaggerated given the data provided. However, certain routes or specific times or sections of the trains may be more affected and more analysis is needed.
The impact of overcrowding on passengers also depends on journey times, with passengers being less satisfied by not obtaining a seat on longer journeys rather than on short ones. Assuming trains are available for 14 hours per day and there are 22 services, each service is on average almost 1·5 hours which may be a significant length of time for passengers to stand on a train.
(c) When applying the balanced scorecard in Soup, the measures need to be chosen carefully. A balance needs to be struck and only measures which help Soup to achieve its objectives should be chosen. Currently Soup focuses on short-term financial measures such as return on capital employed, whereas the balanced scorecard considers more long-term measures.
Some measures are more important than others, so prioritising measures will be difficult. Customers may value some aspects of the service more than others, for example, the choice available in the on-board cafe is probably unimportant to most passengers provided they can obtain some food and drink. The punctuality of Soup’s trains or whether they even run at all is fundamental to achieving customer satisfaction and needs careful measurement. Soup must have measures for regulatory or safety reasons too.
Some aspects of the business may be harder to measure than others. For example, it may be relatively easy to measure seat occupancy as a measure of overcrowding, but passengers’ perceptions of overcrowding may differ. Non-financial aspects such as customer satisfaction may be subjective and any surveys done may not reflect the experience of the majority of passengers. Performing and analysing surveys would also be time consuming and resource intensive.
Measures chosen may conflict. Overcrowding may be unwelcome by passengers but making them less crowded conflicts with Soup’s presumed objective of fully occupied trains. Time spent maintaining trains to reduce their impact on the environment or ensure reliability will mean they are not operational for periods of time, though safety will be a key factor here.
Care must be taken to avoid overloading with too many performance measures. The current objective to maximise shareholder wealth is very broad. Having a clearer strategy would enable Soup to determine suitable performance measures so it is not overloaded with KPIs which do not contribute towards achieving this strategy.