Zip Learning Technologies (Zip) was founded by Colin Hay, who had a background in education. The company has grown from a small company developing educational videos for instructors, to a significant company in the online technology market. Originally employing two educators and three technology experts, Zip now employs around two-hundred staff in a range of roles including: customer-facing, research and technology development, as well as support functions. Revenue is generated by advertising on the platform, as well as a growing subscription service that offers premium-content.

Changes at Zip

Colin has identified some new opportunities, particularly around digital technologies and education. He has been working with a digital designer and programmer to develop a platform application that can complement existing online teaching technologies. There is increasing interest in the products and services of Zip. The number of queries from advertising agents is increasing and quarterly sales revenue is growing rapidly.

Colin has decided to restructure and establish three small separate divisional work-units of Zip (see Exhibit 1 for a first draft of the new structure). The Technology Unit would focus on the adoption of innovative technology for the Zip platform, as well as assisting with the production of videos. Colin is hoping that the Technology Unit would be able to sell its services externally to other organisations as well as important collaborative work internally. The Education Unit would focus on developing content both in-house and in collaboration with teachers and educational professionals. The Digital Online Platform Unit would work on the development of the new online learning application, which would also require collaboration with the other two divisions.

At a recent [online] industry event, after Colin had outlined the dramatic growth at Zip, an industry colleague advised: you are going to need a sound managerial control system to manage that organisation.

Following some further advice from an experienced accountant friend of his, this led Colin to make some decisions:

• Each of the three divisions would be treated as investment centres; and
• Each division would be evaluated on the basis of return-on-investment (ROI) in conjunction with some unique non-financial metrics relevant to each individual division.
• Autonomous decision-making would be encouraged. Colin recognised that while there was the need for collaboration between the divisions, each would need to pursue their goals in their respective markets,

Other then the use of the dual-transfer-pricing method; advise Colin on a transfer pricing policy suitable for the circumstances of Zip .

Explain the underpinnings of your advice.

Exhibit 1: Zip Learning Technologies Structure CEO Colin Hay Centralised services Research and Development Finance and Operations Business Development and Marketing Sales and Customer Support Divisional Units Technology Unit Education Unit Digital Online Platform Unit