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management matters

17th August 1973, Page 50
17th August 1973
Page 50
Page 51
Page 50, 17th August 1973 — management matters
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Which of the following most accurately describes the problem?

The control that makes TDG's take-overs really tick

by James Millen

TAKING over haulage companies is now a fine art with TDG. Under this kind of decentralized set-up the quality of management in the trading companies — and their goodwill — is obviously of considerable consequence, so that much care and thought is exercised in these areas.

Mr James Duncan, managing director, explained the group's approach in these situations: "We often acquire a company with an accountant of, say, 50 or 55 years. I have the greatest sympathy because the older you get the more you realize that it is difficult to change quickly. So our object is to push in our techniques, but to push them in such a way that we take people with us. We go at their pace. We inculcate rather than impose. But we don't go in and change the basic systems operated by the company. All we are saying is 'There is an end product that is required and we will adjust our techniques to suit the way your company works'.

"In accounting terms they keep their documentation, they keep their way of sales invoicing and nearly everything else. Perhaps the accounts classification code is changed to suit us because with 94 sets of accounts with different codes there would be an impossible situation.

"So really we are retaining the basic way of working within that company, but we are introducing our own accounting techniques. In every other way they stay as they are. Their buying arrangements continue undisturbed; they fix the salaries; they fix the wages; they deal with the customers; they fix the rates. They ensure that the service is provided.

"In every way the chief executive of that business continues to carry out his duties in a manner similar to that before acquisition. The major thing that is different is the monitoring he receives from us — the information he is getting which he usually finds is of considerable assistance in improving his performance."

Uncomplicated The system of monitoring is uncomplicated and its structure a result of the group's history. The policy of expansion out of London was decided upon in the early 'Fifties. From that time the administration could have been based on either function or geographical location., Because many of the transport trading companies had three or four functions — lighterage, warehousing, haulage, etc. — it was thought impossible for the chief executive of a business to have to answer to three or four functional directors. Therefore a system of administration by geographical location was fixed upon.

A great merit in this arrangement, according to Mr Duncan, is that it tends to preclude interference from well-meaning experts. "If we had gone the other way we would have at the board table a lighterage expert, a haulage expert and various other experts — and when you become an expert you tend to dabble a little — whereas we deal with each business and we deal with it as business people. We are transport people and we understand the transport problems."

A stage was reached when it was recognized that it was impossible for the group executives to meet regularly with the top men from the trading companies. An umbrella of seven area holding companies was set up under the main holding company. Each area holding company has its own chief executive "who stands in the shoes of the proprietor, as it were". He is not concerned with trading: he is concerned with administration. He has on his staff an accountant and a secretary.

This concept is integral to control within the group. It has been very closely considered. TDG's managing director comments: "The lines of communication are short and the communications are good."

The weekly costings permit prompt remedial action when marked variations from the norm are observed. A sudden noticeable and unaccountable drop in profits would provoke a speedy response. The monthly and half-yearly figures provide for further checks.

The other aspect of TDG's monitoring system is an arrangement whereby meetings take place every month or six weeks between the chief executives of the trading companies and the chief executives of the area holding companies to discuss aspects of the business. "In this way we keep abreast of what's happening," says Mr Duncan, who receives a copy of the reports of all these meetings.

Overheads The results produced by TDG in recent years prove the efficacy of the management control system used by the group; but the overheads involved are quite considerable. The seven holding companies and the group headquarters at Kingsgate House, Victoria Street, London, employ a total of between 80 and 100 people. The head office staff includes the managing director, the company secretary, the financial controller, a group accountant and four qualified accountants, an insurance adviser, a property adviser and a secretarial department.

The accountants are mostly engaged in investigating takeover situations and looking at new business and those where things have gone wrong — "It does happen in the best of concerns."

Information on likely takeover situations come from two or three sources and the number of candidates has now settled down to about one or two a week. Haulage firms not infrequently apply to TDG to be taken over — "the nearest thing you can have to continuing in your own business is to sell it to us in that a great degree of autonomy continues," says Mr Duncan.

Grou secretary Mr R. D. Garwocie comments: "Some of the best salesmen for TDG are the hauliers in the group. They say 'Look, I've been through the blood and water and it wasn't half as bad as I thought. It's marvellous inside — why don't you come in as well'?"

One thing that TDG insists upon is that it would never get involved in a takeover bid. It has always worked on the basis that it is buying businesses that are involved in providing a$ service — "and it's not good for staff, not good for customers and in the end is not good for shareholders to get into a takeover battle. There are quite a few occasions when we've bowed out of the picture quietly when we just could not make any headway".

Prices When putting a price on a company TDG takes into account management, profits and assets and values them in this order. "But that is not to say that we don't occasionally buy businesses without management or without profits — but our normal approach is that we are concerned with good management, because we haven't a reservoir of management here," explains Mr Duncan. "When you buy a business with good management it's usually got good profits; we're prepared to pay for that. And we like to satisfy ourselves that the assets are in order. But there's no single mathematical formula that we apply — each business is separate and distinct and you've got to deal with them on that basis."

Though the chief executives of TDG trading companies are largely left to get on with the job, they have to refer decisions relating to capital expenditure. "We have a very tight control on capital money," insists Mr Duncan. "It's a peculiar outlook, but we think it is the right one. What we say is this: 'On your budgets you can allow £1000 or £2000 for redecorating your office and go ahead and spend it — but you can't spend £50 on a typewriter without our approval". One is a revenue item and is charged to profit, the other is a capital item."

The worst thing that can happen, says TDG's managing director, is to delay making a decision. In the transport business, he maintains, it's the quick and the dead that apply — and if you're not quick you're out. "That's the way that most of these transport men think. If we were delaying decisions — going up through various levels and back down again with three months in between — this would be fatal. That's why our lines of communication are short. The basic request goes to the area holding company who normally deal with most of the smaller items of capital spending — if it's a major item then they submit it with a recommendation to me."

The TDG view is that capital expenditure is the life blood of the business and it regards its vehicles as being much like stock-in-trade. It considers that its depreciation policies — the bread and butter vehicles it writes off over four years and the heavier vehicles over six — are conservative and asserts that if you want a balanced fleet you need to replace every year. A balanced fleet is important, of course, if maintenance costs are to be held at a consistent level from year to year. TDG, however, does not believe that it is practicable to have an equalization account for maintenance costs.

"If we were operating one fleet of 30 vehicles which was out of balance then theoretically we should introduce an equalization," suggests Mr Duncan. "In practice the aim of each haulier should be to achieve a balanced fleet so that maintenance costs can be kept at a fixed level, and this comes back to your replacement programme.

"If you have 40 vehicles and their estimated life is four years — the actual life and the depreciation life are not necessarily the same thing — you should set out to replace 10 vehicles a year. You can go a stage further with a company and say: 'At the beginning of each year we want a replacement capital expenditure programme'. Each company then has the exercise of working out a replacement programme over the next five years. You must look five or six years ahead. You have to be thinking: 'What am I working to? I've got certain models, certain types. Am I to change? Where am I trying to get to?' I think this exercise is good for the soul as well as for the business.

"Eventually we get the figures which have to be agreed at certain levels. We either accept them — or go back for discussion with them. We might decide that the projected figure is too large because of cash-flow considerations. There might be some other comment. But eventually it's fixed and that means that these chaps have an agreed replacement programme. They can then work out their repairs and their maintenance to suit this programme. It does not follow that we will never vary the replacement programme, but we are provided with a certain stability at company level.

"In the trading companies they can switch and manoeuvre within broad limits, but the engineer is allowed to plan ahead. It is senseless spending a lot of money on a vehicle's maintenance and then finding that you're due to replace it in a month's time."

Depreciation On the general subject of depreciation, obviously so tremendously important to a group operating about 4,500 vehicles, its managing director comments: "We have laid down what we consider to be a conservative maximum depreciation life. You have to hold a balance between what is sensible in a commercial way and what the instinctive reaction of the accountant would have you be, that is ultra conservative.

"With depreciation 1 do not think that any view is the right view. I think there can be wrong views, but I think there can be more than one right view. But I don't think it is a good thing to be ultra conservative".

The future for TDG looks very bright. After the depression in road haulage in 1971-72, the short-term prospects for the industry are regarded by many people as bright, not least by financial and investment commentators. James Duncan says he is certain that there is a good future for the industry and that haulage is a growth business. In the recent past, he thinks, there have been too many lorries chasing too few goods — but he does not think that is so today.

The company is currently reported to be trading well. It certainly appears well geared to take advantage of a better climate for road haulage, not only in the UK but overseas.

Of the group whose fortunes he directs, James Duncan observes: "The strength of our organization is not ,at holding company level, it is in the 94 chief executives of the trading companies. If the holding companies were eliminated tomorrow, the trading companies would continue. But these assets are like any other assets — they need attention, they need care".

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