Case: Barracuda Server Co. Barracuda Server Co is a technology company that sells both computer servers and support services in the United States. B: ida began as a small company in Vir but expanded organically and through a series of small acquisitions. The Company now covers the Cs and Eastern United States. Barracuda 5 a profitable company, but it's margins consistently lag peers in the industry. Barracuda hired us to identi what is causing their lower profit marcins and identity possible solutions. Cre erueu cue ka eo} PCS tote Tae et) Sales: Barracuda and peers typically earn 70% of revenues from products and 30% from support services. The services segrrent is more profitable. ‘Typical Sale: Customers negotiate 3-5 year ‘exclusive contracts. The customer buysnew | products at this time. The server company then | provides support and maintenance services based on a set rate for the contract's duration. Barracuda Server Co. 4. Columbia Business School 3Sample Framework ‘(This is one approach, remember that there are other potential frameworks) ‘Sample Candidate Framework Financials: Sales price or volurre difference vs. peers. Cost structure difference with fixed vs. variable costs ‘Company: Capability and expertise to manage a larger ‘company and integrate roll-up acquisitions. Sales force structure and incentives. Labor structure (union or non- union). Organizational structure mismatch with customers? Product: Lost edge in technology leading to better differentiation for competitors, Bundling ineffective relative to peers (product-service mix). These are largely comparable goods that are not differentiated ‘Customer: Barracuda serves different customer segments that are less profitable. Industry: New entrants, Change in competitor behavior (on gaining share), Concentration of suppliers. Best practices-did they find a better way of providing service that Barracuda lacks? Cheapo Coffee 4 Columbia Business SchoolPotential Areas for Analysis roast Barracuda is the third largest company in the industry, with an 8% share of the market. The top five firms hold a combined 40% market share. -Barracuda’s product offering has kept up with Peers in terms of technology and price. -Barracuda wins contracts with terms and pricing that are comparable to peers. -When the locations of an acquired company overlapped with Barracuda’s offices, the two offices were combined and staff sizing matched to market conditions. Overlapping functions, (legal, HR) were also integrated, Product The product offering by all of the top firms in the industry is relatively similar. ~The ongoing service contract sets a fixed fee that ‘server companies receive each year. The company then provides maintenance and tech support to the client. -Staff pay particular attention to clients at the start of a conract ding set up and toward the end of a -Barracuda and its peers target similar clients, -Renewals of existing contracts for Barracuda are comparable to their peers. Barracuda Server Co. 4- Columbia Business School s<Question 1 (Hand interviewee Exhibit 1.) How do Barracuda’s customers compare to those of its peers? Do you have a hypothesis for what is causing their decreased profit margins? Why would this cause margins to be lower? What additional information would you need to confirm this hypothesis? Clee a ein My hypothesis is that Barracude's profit margins are lower because they focus disproportionately on smaller offices. This focus hurts Barracuda because they cannot take advantage of economies of scale by ‘spreading fixed costs for each office over a large customer base. Barracuda Server Co. 4. Columbia Business School =»Question 2 Barracuda does in fact have many small offices in rural locations. (Hand interviewee Exhibit 2.) Here is a financial snapshot comparing results from one of Barracuda’s smaller offices in Chattancoga with a larger office in Atlanta, Does this confirm or change your hypothesis? What can Barracuda do to improve profit margins? This exhibit confirms my hypothesis that Darracuda's focus on rural areas is causing its lower pro Even though Barracuda actually earns a higher profit margin on each individual customer in rural areas, the fixed costs cannot be spread over as many customers. This results in profit margins of only 12% in ‘offices relative to 20% for larger offices. Barracuda can expand its presence in densely populated areas. To do this, Barracuda can build its cities and bid more aggressively on upcoming contracts. The company can also se itself in cities more by adding services or increasing the training of ts staff, Barracuda can also attempt to lower fixed costs in their rural offices. This could potentially be done by centralizing common functions into a regional hub Bicycle Parts Manufacturer 4--Columbia Business School 3sConclusion commento © Barracuda should increase its focus on high-revenue offices in larger cities. © Bid aggressively to gain share in large markets. Expand capacity in these markets and consider staff training to improve service offering relative to peers. Restructure smaller offices to reduce fixed costs. racuda's gain in share depends on competitor responses. If competitors match Barracuda’s , Barracuda does not capture more profit. © Decreasing fixed costs in small offices may cause a loss of customers, further decreasing ‘economies of scale. Next Steps © Analyze © Purchase coal on the open market to fuffll the New Charleston Mine's contra (or use production from another MC mine, or sell the profitable contract to another mining comp: Barracuda Server Co. Columbia Business School 3»Exhibit 1: Office Profitability Profit Margin by Office 30 -——— ae 3 -—_________________¥_- 7 = industry Average 0 y__ - ndusey Avera Sis jy —Y% § 10 = me |oe ° v ys 5 So x v 0 eee 0 20 40 60 80 100 Office Revenues V East-coast office @ Midwest office Southeast Office Barracuda Server Co. 4. Columbia Business Schoo! «Exhibit 2: Financial Snapshot Atlanta Chattanooga Customers Served 25 a Revenues 90,000 12,000 Variable Costs 50,000 5,000, Fixed Costs 22,000 5,200 Profit 18,000 1,800 Barracuda Server Co. 4. Columbia Business School «: