Data Services at Armistead

Data Services at Armistead

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Background: Armistead Insurance Company is a major provider of insurance services.  Over the past 20 years, they have experienced high levels of growth.  This was shown when the company became the first firm in the industry to have a fully automated operations process. This involved, operating two different data servers which helped run multiple applications and data systems. Even though this was looking promising, Armistead insurance company was not operating at full capacity as these two shifts were only used close to capacity, leaving one shift unproductive. This led to Armistead establishing “Data Services Incorporated” as a subsidiary company in 1997, with the aim that this would help them find profit earning applications for the unused shift. Armistead’s objective of establishing Data Services as a company was to help improve the efficiency and lower both labor and operating expenses for firms in the fast food industry. This involved them processing the fast food restaurant's data so that updated reports could be used for financial analysis and future business decisions.

BCG: The BCG Matrix is a tool used to analyse a business based on the company’s market growth rate and the industry growth rate. Data Services Incorporated is a company that has low market share as they face one other competitor, a subsidiary of a large fast food chain which has generated three time more sales. It is also a business unit operating in a high growth market as more firms are looking to implement efficient processes meaning more business units will be looking to use modernised technology services such as the services offered by Data Services Incorporated. This means Data Services Incorporated is a question mark in the BCG Matrix, a firm using lots of cash to expand but earning little in return. However, with little cash being achieved means there is the potential that Data Services Incorporated could fit into the dog category but if changes such as the alternatives listed in this report are effectively put in place then it could move into a positive direction of becoming a cash cow or star.

Swot Analysis:

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Main Problem:  The main problem is that Armistead Insurance company are unsure whether to continue the operations of Data Services Incorporated or not. This is mainly due to the subsidiary not earning sufficient profits compared to the amount of money it requires to expand and grow. Currently, it is operating at a loss of $2760 as shown in figure 2 below despite increasing cash investments. Therefore, Mike Nunnally the president of Data Services needs to look for ways to improve the profitability of this business unit otherwise he may have no option but to close the operations all together. 

Mutually Exclusive alternatives to solve the problem:

1. Keep Data Services but decrease costs
2. Shutdown Data Services
3. Keep Data Services but restructure management

Alternative 1: Continue Operations but decrease costs

Workings: 

Continuing operations:

Average number of customers over a year = 32+ ((½) x 14) = 39

39 Customers x 12 Visits = 468 Visits/year

Installation:

14 customers x 3 visits = 42 visits for installation

Total number of visits = 468+42 = 510 visits

$1,000,000/510 visits = $1,961 per visit

468 x $1,961 = $917,748 to continue operations

42 x $1,961 = $82,252 to sales and installation

Travel:

Sales and Installation: 14 customers x 3 = 42

Continuing operations: 39 customers x 12 = 468

Management selling the product: 14 sales x 7 companies per sale x 3 visits per company = 294 visits

Total visits = 804

$1,200,000/804 = $1,493/visit

468 x $1,493 = $698,724 for continuing operations

42 x $1,493 = $501,276 for sales and installation

Table 1.  

One option is to continue the operations but decrease costs. As Data services is a service firm meaning that its main costs are associated with direct Labour, decreasing the number of visits its staff make will reduce this cost. Data Services are currently operating at a loss of $2760 as shown in table 1.  At present, Data Services Incorporated visit each of its regular customers once a month to help with the installation and another to analyse the system. For this example, the total costs for visits related to the sales and installation aspect remains fixed no matter the visit frequency as it is heavily dependant on the number of customers they gain which is hard to estimate. The calculations above show that 468 visits are made each year related to continuing the operations.  As a result, Data Service Inc incur $917,748 in costs which is shown in Table 1. In addition to this, 42 visits are made on an annual basis for installation purposes and this incurs a cost of $82,252 which is also shown in Table 1. Overall, $1,000,000 is required to cover these expenses. These figures are based on the idea that Data Services Inc acquired 14 new customers over the year meaning 42 sales and installation visits are completed and so it must also be considered that the number of visits is dependant on the number of customers it acquires meaning that if more customers are gained then this cost will increase but if less customers are gained then costs will be reduced assuming the cost per visit remains the same.