Marshall School of Business
University of Southern California
Global Investors, Inc.
Teaching Note
Purpose of Case
This case was written to illustrate a transfer pricing problem in a service setting, here an
investment management company. The issues and solutions are not as obvious as in a
manufacturing setting where one division produces parts that are transferred to another division
for further processing.
Suggested Assignment Questions
1. What transfer pricing model is in the best interest of Global Investors, Inc.?
2. If management evaluation and compensation were the primary purpose of the transfer
pricing system, how should the choice of the transfer pricing method be made?
3. How should Bob Mascola run the transfer pricing task force meeting that will include GIs
CEO?
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Case Analysis
The Companys Profit Model
Addressing the transfer pricing problem requires an understanding of how Global Investors (GI)
creates value. The basic business model is essentially as follows:
2. Deciding how to invest the clients money was largely a centralized function performed by
3. Some corporate specialists focused on improving cost efficiencies, such as by generating
1. Client service was largely a local function. If the client was based in the UK, the service
was performed primarily by the London office.
2. Two of the subsidiariesthose based in Tokyo and Londonhad built-up small staffs of
advisors who specialized in providing investment advice for clients wanting to invest
locally and who developed local funds which did not necessarily follow the investment
strategies developed by headquarters.
Transfer Pricing Alternatives
Alternative 1 Current transfer pricing system
The case states that GIs current measurement system treated the subsidiaries as cost-focused
profit centers, instead of mere cost centers, because each is assigned a revenue figure
The current measurement system provided some real advantages for GI. It ensured that the
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regulatory authorities learned that the subsidiaries real profits were higher than were being
Alternative 2 Hoskins first proposal
Hoskins first proposal was to allocate revenues to subsidiaries based on a proportion of the
assets under management and to have the subsidiaries pay the corporate a royalty of 50% of
Alternative 3 Davis first proposal
Jack Davis, the corporate Operations VP, rejected Hoskins method. He argued that to a large
extent the subsidiaries were just following instructions from headquarters. And, further, many of
Alternative 4 Hoskins second proposal
Hoskins then did some industry benchmarking and found that the industry standard was to
split fee revenues equally between Client Services and Investment Management. We inquired
GI management as to the rationale behind this standard, and no one could explain it to us. The
primary rationale seemed to be a general recognition that both functions created value, but that
Alternative 5 Davis second proposal
Davis counter-proposal tweaked with this 5050 proposal. He proposed to leave all of the
Investment Management revenue in New York, since the investment strategies were almost
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Other Alternatives
Many more possibilities can be discussed. It might be productive to entertain student options
and to see how those other transfer pricing options impact the operating income reported by the
subsidiaries (modifying case Exhibit 5). Here are some alternatives that the students might
suggest:
1. Utilize Hoskins second proposal, but allow for the negotiation of the royalty rate provided
2. Utilize Davis second proposal, but give the subsidiaries full recognition of the investment
3. Recognize the full revenue at the subsidiary level and search for market data (such as the
Lipper data for investment management and sub-advisory fees) to determine the rate that the
Sidebar
If instructors wish, and time permits, students could also be asked to discuss the cost allocations
from cost centers to business units. Useful proposals might include the following:
1. Allocate costs directly from cost centers to business units, once only (thus, eliminating
2. Rather than relying on the individual judgment of cost center managers, base the cost center
allocations on actual business unit usage, which could be documented in a Service Level
Agreement (SLA) between the cost center and the affected business units. An added feature
of SLAs is that they could be used as part of the due diligence process for the Global
Transfer Pricing taxation review by GIs auditor, which must be carried out before the
arrangements are finalized, to ensure the taxation consequences are satisfactorily dealt with.
The first proposal emphasizes simplification; the second one documentation for tax compliance.
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a. Reporting to regulators (income tax authorities and financial regulators);
b. Possible valuation of subsidiaries (e.g., multiple of EBITDA);
e. Aligning subsidiary incentives to the overall strategies and goals of the corporation,
mitigating any conflicts between generating value for the subsidiary, and achieving the
broader corporate goals. Corporate strategic considerations are particularly important in this
company as recognizing the value added by subsidiaries of developing local funds may be
counter productive given that GIs differentiation strategy is focused on following corporate
trading strategies developed by prominent academics. Do the GI top executives prefer to
discourage the development of local funds following other strategies?
It must also be recognized that the subsidiaries financial reports can affect managers self
esteem and sense of fairness. Failure to please them in those areas can create conflict and
demotivation. Deciding which purposes to emphasize can suggest a preferred alternative.
If management evaluation and compensation (point c in the list above) were a more important
purpose of the measurement system, how should the choice of transfer pricing method be made?
The Process
It is useful to have the students note how expensive this process was. The task force was
comprised of a high-level group of executives who invested a significant amount of time in the
meetings and preparations for the meetings over a 7-month period of time.
In the real company, Gary Spencer, GIs CEO, just wanted this issue to go away. He did not
want to change the system, for the reasons discussed above. He agreed to have a task force
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Pedagogy
As with most case classes, instructors must make a decision as to how structured to make the