June 14, 2005

Union Commercial Services

Follow-up to Public Debate from Benny Blog

Dear all,

If you haven’t read the blog entry that I am writing about I suggest you go back and read it (and the associated comments) first, otherwise you will not understand what I am talking about.

Gareth Barker stated on my blog that,

“If you want a rough figure for the commercial contribution (and it is rough) then you are looking at something closer to £3 million, not 300k mate. Infact, 300k is what is reserved for our capital expenditure to make building improvements and purchase new equipment for departments each year. As you should already know."

If it were true that the commercial operations were making a net surplus of something close to £3 million which was then contributed to the non-commercial side, this would mean that the net surplus was something around 70% of sales. I cannot immediately think of any company that makes a profit of anything like 70% of its turnover on a regular basis. It might be thought at a first glance that a contribution of 300k, representing about 7% of sales, might be the more plausible of the two numbers. However as I have a copy of the budget pack available, I can look at the figures to work out which one is more likely to be correct.

The purpose of this entry is to examine in some detail whether it is plausible that the commercial contribution to non-commercial activities is something close to £3 million. I am going to do this by using data from the Union’s Budget Pack, dated 23rd June 2004.

Please note that this is only an attempt to quantify the monetary gains from the Commercial activities. Non-monetary gains are not included, as these are not the purpose of this discussion, although it is obvious that there are substantial non-monetary gains for students from the Union’s commercial operations.

I am using data for the Forecast for the year 2003–04, as estimated at the time of the June 2004 budget. Although the Union will now know actual figures for this year the detail of these have not yet been released to students, and so this is why forecasts are used. I am also using these figures for consistency as the figure of £334,000 that is estimated in the budget is a forecast for the 2003–04 year.

The budgets show Operating Income as being £4,227,737 and Operating Costs as being £1,409,271. The difference between the two is about £2.8 million, this could be said to be something close to £3 million.

But where does this £3 million go? Does it all go towards funding non-commercial activities? The answer is clearly “no”. This is clearly the case, as these operating costs do not include the payroll of £2,294,999. Some of this £2.3 million is spent employing staff who work only on commercial activities, some of it is spent on staff who work only on non-commercial activities, and the rest is spent on staff who work on both commercial and non-commercial activities. It is not all spent on the non-commercial side.

Fortunately, help is at hand, as Section 6 of the budget pack divides the budget up into these three sections.

Commercial is defined of consisting of
a) Entertainments
b) Food and Beverage
c) Stewarding
d) Retail
e) Machines
f) Rents
g) Marketing
h) Market Research
i) Venue Operations
j) Reception

The only suspect entry on this list is Reception, indeed the Budget Pack states,

The Union Reception provides a huge service to the Union in a whole host of areas, and is our front line for numerous enquires and services. It sits perhaps rather incongruously under Commercial Services because it produces some income from room hire.

Arguably, Reception should be transferred to the list of departments that is both commercial and non-commercial in nature. However as the cost of reception is only £42k, this makes very little difference in the end.

Non-Commercial (or Membership) is defined of consisting of
a) Advice and Democratic Services
b) Sabbatical Officers
c) Student Activities
d) Societies and Sports Federation
e) Committees and Representation

Things which are both Commercial and Non-Commercial (or the so-called “Department Services”) consist of
a) Facilities and Safety
b) Finance
c) Human Resources
d) IT
e) General Management
f) General Overheads
g) Other Income

It is worth noting that the total payroll budget for all the departments that are purely commercial is £1.35 million. Some departments also have “expenses” that are not included in Cost.

Section 6 rather usefully takes each department in turn and considers the total amount that the department makes. This is done by taking income and subtracting cost to give gross profit, and then subtracting labour and expenses to get the total amount made by the department.

The totals made by each of the purely Commercial departments is as follows:
a) Entertainments £143,034
b) Food and Beverage £1,064134
c) Stewarding (£152,052)
d) Retail £56,977
e) Machines £179,327
f) Rents £116,650
g) Marketing (£134,378)
h) Market Research £750
i) Venue Operations (£74,202)
j) Reception (£42,141)

Negative contributions are in brackets.

The total amount made by these purely commercial departments is £1,157,649. (or about £1.2 million if reception is excluded).

The total amount spent by all the purely Non-Commercial departments is as follows:
a) Advice and Democratic Services £161,402
b) Sabbatical Officers £124,729
c) Student Activities £85,288
d) Societies and Sports Federation £90,541
e) Committees and Representation £78.780

These departments run at a total cost of £540,740, so the cost of these departments is easily covered by the block grant of £1 million.

The total amount spent by the departments that are both Commercial and Non-Commercial is as follows:

a) Facilities and Safety £247,994
b) Finance £221,349
c) Human Resources £104,852
d) IT £153,204
e) General Management £97,889
f) General Overheads £699,305
g) Other Income (£21,423)

Negative costs (i.e. income) is in brackets.

With the exception of the “other income” category, and a misc. income of £600 in the I.T. Department, all of the departments that are both commercial and non-commercial have no income, these consists of costs that are borne on behalf of both the commercial and the non-commercial sides of the organisation.

Even if the commercial and non-commercial departments (like Facilities and Safety, Finance and Human Resources) only did any work for non-commercial side, the total contributed by the Commercial side would only be £1.2 million.

If, on the other hand, the departments that are both commercial and non-commercial only did work for the commercial side, the total contributed by the Commercial side would be minus £886k.

It follows that the true monetary contribution of the Commercial side to the non-commercial side is somewhere in the region of minus £886k and plus £1.2 million.

To work out whether the Commercial side makes and contribution at all, and the level of that contribution, it is necessary to make assumptions about how much of the expenditure from the departments that are both commercial and non-commercial should be attributed to commercial activities and non-Commercial activities.

This is what Ross Davidson did in Section 6 (i) of the Budget Pack entitled “Generation of Union Funds”. We know this is the case because he stated:

“In order to get an accurate picture of how much each area of activity costs us, it is necessary to reallocate the cost of Departmental Services between Commercial and Membership Services. In the past, this has been done based on a rule of thumb. This year, a Cost Driver Reallocation basis has been used, where the costs are allocated based on an analysis of what generates the costs. E.g. IT costs are reallocated based on the number of computers in each department.”

He clearly thought that this is an appropriate way to answer the question I am trying to answer because he went on to say:

“This technique allows us to make it abundantly clear that the Union’s Commercial Services produce a substantial surplus to the organisation. This is added to the Annual Allocation from the University, and is used to fund the cost of Membership Services.”

So this technique allows the question of whether the contribution from the commercial side is positive or negative to be solved, and infact shows that the contribution from the commercial side is substantially positive.

Ross Davidson calculated that commercial operations resulted in a net surplus of £334k, or about 7% of sales. And lets face it, a return of 7% of sales is not bad going for any commercial undertaking.

So, the figure of a commercial contribution of somewhat in the region of £3 million is simply not consistent with the Union’s own figures. All the commercial departments put together only yield a net surplus of £1.2 million, without taking into account the costs incurred by the commercial side in departments such as “facilities and safety” and “human resources”.

Note:

There is an argument of economies of scale which can be sensibly made – the idea here is that the whole is worth more than the sum of the component parts. This is slightly superfluous to the discussion of the monetary contribution; however it’s worth investigating to consider what the magnitude of these economies of scale might actually be.

According to Ross Davidson’s estimate the non-commercial side costs about £1.3 million, made up of £1 million from the block grant and £334k from the commercial side.

Now it could be argued that the non-commercial side would incur additional costs if it wasn’t part of the commercial operation, due to cost duplication. For example there would have to be a separate finance department and a separate human resources department. This would mean that the departments that currently provide both commercial services and non-commercial services would have to remain bigger than the amount estimated using the Cost Driver estimation method.

However it doesn’t seem plausible that these departments would have to grow in size if the commercial operations were dispensed with, so the upper limit of the cost of these departments to the non-commercial side would be £1.5 million. Adding this to the costs of the purely non-commercial departments of £540k, means that the total would be about £2 million, and so once the block grant is subtracted it would only be necessary to find £1 million to plug the hole left by removing the commercial services.

Of course, as I pointed out, this is an upper limit of how much the commercial services may be worth using an economies of scale argument, in practice it will be substantially less than this, as it would be possible to reduce the size of many of these departments in practice.

Conclusion:

This examination has told me that the claim that the commercial side gives something close to £3 million to the non-commercial side, a profit of some 70% of takings, is just not substantiated by the Union’s own figures.

The Union’s own budget pack suggests that the actual figure is £334k. A scale economies argument could be used to argue that in practice the figure would be somewhat more like £700k, but it is difficult to see how it could be argued that it is substantially more than that.

As I said at the outset, it could well be argued that commercial services are a good thing in their own right and should be retained on principle, but that is a separate argument.

A couple of final points, yes the Union does set £300k aside for capital expenditure, however this is generally spent on the commercial side (Zippy’s, the Graduate, Café Xanana, Cholo), and not on the non-commercial side at all.

It’s also worth noting that whilst losing the commercial services would downsize the Union, it would not be downsized as far as a sixth form college. How many sixth form colleges have a block grant of over £1 million?

Benny


- 10 comments by 1 or more people Not publicly viewable

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  1. Good essay Benny, my God you have some time on your hands! Your points are generally valid, and I shouldn't have been so foolish as to rush my previous answer to you. I have the same budget pack as yourself and can see that net contribution is around 1.2 million for the commercial side, yes I accept that this is closer to 300k than 3 million; but that wasn't really what I was trying to say. By using 3 million as opposed to 300k, I was simply trying to suggest that you have underestimated by ten-fold the synergy between commercial and non-commercial departments. When I talked about interdepartmental dependencies and the calibre of staff that we attract and retain, and previously when I wrote that Ents etc could be deemed a membership service, I was trying to suggest that in fact the way Union staff operate is not as black and white as you suggest. Without a commercial operation to support, the remits and potential for development of our 'membership' departments such as IT and finance etc would be practically nullified. Running commercial operations for the benefit of students creates a potential for growth within 'membership' departments. If you took away the supporting function of these departments then you would have to downsize the departments accordingly, and without the attraction of added responsibility that comes with a post in the Union then we would not attract such dedicated and skilled staff members. The knock-on effect can be quite easily predicted, the quality of work our organisation delivers would drop dramatically without the absolutely fundamental cooperation between commercial and non-commercial departments in order to administrate a venue the size of Union South in order to hold events our students (societies/sports/democratic activities included) want. If we had no package to attract high quality staff then our wage bill would drop and so would our annual allocation. Dramatically. This is why I made the mildly exaggerated comparison to the operations of a sixth form college.

    Furthermore practically every member of Union Staff contributes to both commercial and non-commercial events and activities every day in a hundred ways both tangible and intangible, from venue preparation and cleaning to food provision for 'non-commercial activities', for training by passing on valuable skills, and most notably on occasions such as open days when the whole spectrum of Union staff get involved to achieve a common end.

    If you lose the 'commercial' wing, then you lose the fundamental tenets of Union Independence, you would lose our ability to develop as an organisation. I find it incredibly humourous that by holding such a debate you imply that there may perhaps be some merit in handing over the commercial operations to an external contractor. Didn't you run for president claiming that you would fight tooth and nail for Union Independence? Why now are you actively encouraging debate on the issue as if it is a potential reality that we could lose our commercial wing? Do you honestly believe that through the 'devolved department discussions' the Sabbs would ever advocate this? The undertone to the whole debate is disheartening, almost as much as the constant mistrust the Sabbs face, when we work tirelessly to offer the best for all students and fight for the same causes as yourself, only to be ceaselessly criticised.

    14 Jun 2005, 18:02

  2. John Cross

    Hi Benny, Thanks for organising the debate. I enjoyed it and thought it was useful forum for discussion. I think students should be actively encouraging debate on all aspects of the Union and its activities. Personally- I am open minded – I therefore believe that there might possibly be some merit in the Union handing over some aspects of its commercial services to an external contractor. That's why I went to the open meeting: to hear the suggestions, listen to the arguments and benefit from other people's knowledge in an area which I am prepared to admit that I do not know a great deal about. This is what I did and I think I am now one step closer to being able to form an opinion on this complex subject.

    15 Jun 2005, 02:10

  3. The vice-chancellor apparently thinks we shouldn't have the commercial side. This should convince anyone who thinks we shouldn't have it that we most definitely should keep our commercial side.

    15 Jun 2005, 09:56

  4. Gareth,

    I would gently point out that I was not saying that the net contribution of the commercial side is arround £1.2 million, rather I was saying this was the theoretical maximum it could be, under the extreme assumption that the departments that are both commercial and non-commercial are completely non-commercial.

    As you know, the Union's own figures that were approved by the Executive Committee state that the Union has a

    Net Commercial income of £334k after contingencies and allocated costs (a return of 7% of sales).

    So it's not unreasonable to come to the conclusion that the actual figure is around £334k.

    I don't really understand how I could have underestimated the synergy between commercial and non-commercial departments by ten-fold when I had made no attempt to estimate this at the time you made the £3 million claim.

    I think you seem to be exagerating many of the claims you are making, whilst it is true that the Union would lose the benefits of economies of scale or financial synergies, if it were to lose the commercial wing, I find it difficult to imagine that these have a value of more than say 400k or 500k for the reasons I set out in my post. (This would mean that the non-commercial services, which currently cost £1.3 million to run, would cost a third as much again to run independently).

    I don't really understand what you mean by

    If we had no package to attract high quality staff then our wage bill would drop, and so would our annual allocation. Dramatically.

    Surely one way to continue to attract high quality staff would be to put wages up? Isn't the point that we would have to pay high quality staff more to retain them if we got rid of the commercial side?

    I'm not sure that there is any evidence that our annual allocation would fall if we let the University take over the commercial services, indeed I would have thought the University would be absolutely delighted and tempted to agree to significant increases to the annual allocation in return for all those services.

    Again, you exagerate by claiming that all Union staff contribute to both commercial and non-commercial events and activities every day in a hundred ways. Although it is true that there is more interlinking than meets the eye, it has to be accepted that staff who serve drinks in Cholo do what they are paid to do, which is to provide a commercial service. The same applies to other staff as well.

    Incidently the Union does not clasify Finance and IT as 'membership' departments, these are considered to be both commercial and non-commercial. You say that Entertainments could be considered a membership service, indeed it could, however I am using the clasifications that the Union uses in its own budget pack. I feel you are too quick to criticise me for using the Union's own figures and the Union's own clasifications! If you have any objections with these maybe you should take it up with whoever writes the budget pack?

    I have reached the maximum limit for a comment, so will continue in the next comment box.

    15 Jun 2005, 14:11

  5. I'm sorry if you feel that I have been criticising the Sabbaticals by holding this debate. I criticised you for suggesting that my figers were "humourous" when infact I was using the Union's own figures. Other than that I have not made any criticisms of any Sabbaticals in either of these blog entries. No, I do not think that the Sabbaticals are going to advocate losing the Commercial Services as part of the Devolved Department discussions, I have been assured that they will impliment Policy 605 and maintain our independence and commercial services unless students decide to reverse that policy in a referendum.

    I did run for President promising to fight for Union Independence – as you will recall only 89 students voted for me, and as my time at Warwick is almost over I thought it would be a good time to review what I've stood for over the last three years, think whether or not I got it right, have a bit of public debate about these matters and generally engage in discussion about what we, as students, think about the long term future of our Union.

    I don't think that there is anything wrong with debating these matters now and again. As students we should be constantly questioning and discussing the world that we live in – that is what University life should be about. The Union has nothing to fear from public debate. The future of the Union Commercial services will not be decided by any individual, but by the student body generally. As long as students wants them to remain then they will remain, if students ever decide that they want the Union to run them no more then they will go.

    The Union belongs to its students. If a small number of students want to get together and hold some debate about the best way forward for the Union, then I would have hoped that this would be something that the Union would welcome, rather than object to.

    15 Jun 2005, 14:11

  6. Trace Brazen

    Far be it for students to criticise the actions of the sabbaticals who are supposed to represent them. That would be impertinence in the extreme!

    15 Jun 2005, 16:43

  7. Gareth Barker

    Benny, thanks for your comments and clarification. I have no problem with you holding a public debate, and I appreciate your justification for doing so. It is indeed vitally important that students are able to gain a better understanding of the way their Union works. I accept that you haven't criticised the Sabbs in the last three entries. The reason I wrote what I did about criticism above comes from discussions we have had, in meetings where mistrust has been expressed regarding the 'secrecy' etc. of the devolved department discussions which led to a motion being put to referendum on the matter, which in my opinion wasn't entirely necessary. I hoped at the time, and now, that you would have trusted our Sabb team to adequately represent our students' desire for independence; whilst I appreciate the good the referendum did by means of raising awareness, the tone of the discussions surrounding it occasionally were open to interpretation as being motivated by mistrust of the team. I expect this wasn't your intention in the slightest, but this is the way in which it was occasionally received. My frustration came from the fact that the sabbs have faced what I believe to be unjustified mistrust regarding these matters, and I guess I just found it strange that given the strength and eloquence with which you have always voiced your personal opinions on Union independence that you might now be questioning them in a public meeting. I feel you have dedicated your years here (for the good of students) to standing up for these beliefs, I just found this meeting a strange thing for you to do… I don't think it was an attack on the sabbs, so sorry if I over-reacted.

    Last point on the budgets etc. in the summary of departmental costs, you will see that the net contribution of our commercial activities (excluding finance and IT and such depts) is £1,290,538. an increase of 104.6% on 2003/4. This is the 1.2m I was talking about as a more accurate estimation of the contribution, it is not a theoretical maximum. To clarify my comments about the payroll; if our organisational activities were restricted to work in Union North, across many departments that could be considered both commercial and non-commercial staff roles would have to be redefined. This would mean a lessening of responsibility for many staff and an effective down-grading of their post. This would mean that we couldn't attract such a high calibre of staff as we wouldn't be offering such an exciting or attractive job to come to. We would also not be able to justify to the University or anyone, offering high salaries for lessened responsibility, and thus our wage bill would have to drop. This would attract a lower calibre of staff and the organisation would not be able to function as it does. I hope that clarifies my point.

    Benny, I hope there are no hard feelings, I didn't want to be overly critical. Trace, what are you talking about? Being responsible for feedback I receive plenty of critical emails every day. I am the first person who hears about what goes wrong in our Union, so I am perfectly used to being criticised. Indeed, if you go to council you will see that the Sabbs take sole responsibility for any mistakes made within our organisation as per the staff student protocol. By running for a sabbatical position I have openly courted criticism. I don't have the attitude that criticising our work is 'impertinent' I don't think that I am more superior to anyone else. Sometimes people can forget that Sabbs are students too, who have run for the position because we care for our Union! The only thing I take issue with is uninformed or unjustified criticism (and as I have admitted, this is not what Benny has offered here)

    16 Jun 2005, 12:35

  8. Trace Brazen

    I was being bombastic. (referring to the real meaning, not the shaggy song, they call mr bombastic, semi fantastic… etc. – ah what a good song, shakespearean lyrics!)

    16 Jun 2005, 13:56

  9. I should have said 'Trace, you are indeed brazen', but I didn't think of it at the time… nevermind

    16 Jun 2005, 14:38

  10. Gareth –

    No of course there are no hard feelings, I always enjoy engaging in a robust debate! If someone has read this exchange and feels they understand a little bit more about the Union as a result then it will have been worthwhile.

    I think we are in complete agreement that the net surplus from the commercial departments alone is £1.2 million, the point is that it is necessary to then subtract some figure to account for the departments that are both commercial and non-commercial to get the true contribution, as the Union couldn't supply commercial services if it didn't employ any cleaners, for example, so these costs should be deducted.

    Thank you for clarifying your thoughts about the payroll costs, of course it is difficult for me to speculate about what the size of these costs might be – indeed I suspect that there may be many competing factors that would come into play if there was such major change – that is something that would need to be investigated if there ever was a referendum on this matter.

    Just a final point of reflection on the subject of uniformed criticism. One of the things about democracy is that the people who participate are often uniformed. It is somewhat ironic that its possible to inform yourself fully of all the issues, cast your vote, and them someone who has no idea about anything can then cast their vote and cancel yours out. Indeed I'd like to pretend that I don't do well in elections because the electorate is uniformed, though I fear that it might actually be because they don't like my policies!

    I think what the Union should try and do is to give students as much information as possible, and then hope that they make the "right" decision. Too often information is witheld because it is politically sensitive rather than because it is commercially sensitive. Some thought should be given to how the Union can reform its procedures so that students can be given more information to enable better quality decisions to be made. I hope it will.

    Benny

    16 Jun 2005, 15:32


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