Teletech Case Summary
Statement of Problem
Teletech Corporation’s CFO, Margaret Weston needs to decide three things. (1) What are the appropriate hurdle rates for each segment of their business? (2) Is the Products and Systems segment underperforming? And (3) How should Teletech respond to the raider Victor Yossarian?
Facts and Assumptions
Teletech Corporation has two distinct business segments, the more established Telecommunications Services segment, and the recently added Products and Systems segment. These two business segments are in different phases of the business life cycle and thus have radically different growth rates and characteristics. In 2004 the Telecommunications segment earned a return on capital of 9.10% while the Product and Systems segment earned a return on capital of 11%. Internal Company management has been discussing and struggling with the most appropriate way to allocate capital project funds (expected to be approximately $2 billion in 2006) between the two business segments.
The company is currently using one hurdle rate. Teletech is currently using the hurdle rate to assess its two business segments. They look at return of capital on both segments and apply the same hurdle rate, which is also used for performance assessment. The hurdle rate was established using Teletech’s Weighted Average Cost of Capital (“WACC”) as a representation of the opportunity cost of money.
Some of the company’s senior management, chiefly Rick Phillips, Executive Vice President of the Telecommunications Services segment, believe the company should be using different hurdle rates for each of the business segments. They believe that the two segments have different risk and thus the measurement of the opportunity cost of investing in projects in these segments should be adjusted to reflect this difference.
Others senior management of the company, chiefly Helen Buono, Executive Vice President of Products and Systems believe that it would be inappropriate to use different
Teletech Corporation’s CFO, Margaret Weston needs to decide three things. (1) What are the appropriate hurdle rates for each segment of their business? (2) Is the Products and Systems segment underperforming? And (3) How should Teletech respond to the raider Victor Yossarian?
Facts and Assumptions
Teletech Corporation has two distinct business segments, the more established Telecommunications Services segment, and the recently added Products and Systems segment. These two business segments are in different phases of the business life cycle and thus have radically different growth rates and characteristics. In 2004 the Telecommunications segment earned a return on capital of 9.10% while the Product and Systems segment earned a return on capital of 11%. Internal Company management has been discussing and struggling with the most appropriate way to allocate capital project funds (expected to be approximately $2 billion in 2006) between the two business segments.
The company is currently using one hurdle rate. Teletech is currently using the hurdle rate to assess its two business segments. They look at return of capital on both segments and apply the same hurdle rate, which is also used for performance assessment. The hurdle rate was established using Teletech’s Weighted Average Cost of Capital (“WACC”) as a representation of the opportunity cost of money.
Some of the company’s senior management, chiefly Rick Phillips, Executive Vice President of the Telecommunications Services segment, believe the company should be using different hurdle rates for each of the business segments. They believe that the two segments have different risk and thus the measurement of the opportunity cost of investing in projects in these segments should be adjusted to reflect this difference.
Others senior management of the company, chiefly Helen Buono, Executive Vice President of Products and Systems believe that it would be inappropriate to use different