DOUGLAS COLLEGE

GROUP ASSIGNMENT

HOSTED SP: OUTSOURCED

SHAREPOINT

Instructor: Shirley Mauger

Prepared by: Truong Hung Dang

Abhiroop Cheema
Sanchit Razdan
TABLE OF CONTENTS

A. PROBLEM STATEMENT .................................................................... 2

B. ANALYSIS .............................................................................................. 2
INTRODUCTION AND INDUSTRY OVERVIEW .................................. 2
PROBLEM STATEMENT DISCUSSION ................................................. 4
DISCUSSION OF COST ALLOCATION .................................................. 4
POTENTIAL CHANGES TO HOSTED SP’S MARKET FOCUS ........... 6
C. ALTERNATIVES AND EVALUATION............................................. 7
D. RECOMMENDATION ......................................................................... 8
APPENDIX A ................................................................................................ 9
HOSTED SP TEMPLATE......................................................................... 11
ANALYSIS ................................................................................................ 13
HOSTED SP ACTIVITY-BASED COSTING OF EIGHT
CUSTOMERS ......................................................................................... 13
HOSTED SP MONTHLY EXPENSES.................................................. 14
HOSTED SP MONTHLY EXPENSES - CLOUD CLIENT .................... 15
HOSTED SP MONTHLY EXPENSES - MULTI-TENENT ................... 17

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 A. PROBLEM STATEMENT

Problem is that the owner is unsure what the individual customer’s profitability is and

what customer base to target to maximize profitability.

B. ANALYSIS

INTRODUCTION AND INDUSTRY OVERVIEW

Hosted SP was founded in 2002 by Patrick Burke, who has deep knowledge in the

information technology sector and is also the founder of ERP Advisors Inc in 1988,

which focused mostly on deployments and migrations of enterprise resource planning

systems for large enterprises. This is where Patrick Burke had realized promising

opportunities motivating him to establish Hosted SP with a quite significant initial

investment.

Hosted SP provides integrated communication services within businesses through the

network. Not only taking advantages from Hosted SP's proprietary software-as-a-service

(Saas) solution, Cloud Control, it helped companies which were big and complex for a

regular household could system by providing benefits of a flexible solution while also

maintaining data integrity, privacy, and security. Hosted SP seems to be heading for a

bright future ahead as more and more customers, including both enterprise

customers/private cloud and Small to Medium Businesses (SMBs)/multi-tenant, are

opting for cloud offerings over their in-house software and hardware. Its evidenced by the

company's revenue surged from $673,701 in 2009 to $1,191,002 in 2012 and there are 86

customers in 2012, compared to the number of 61 in 2009. This is due to many benefits

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of the cloud services such as affordability, scalability, reliability, security and virtual

access from anywhere regardless of distance. When customers choose cloud services they

get rid of or lower their IT department expenses as there is no in house maintenance for

the system anymore nor are higher level IT skills required when a cloud service is opted

for. Usually, the provider of the cloud services will provide training, maintenance,

upgrading and scaling at a monthly fee which usually runs lower than what in house IT

department costs. Reliability is another reason why in future more and more customers

would opt for cloud services. Customers rely on the cloud service provider for backups

and service providers usually have a solid backup system in case of power outage or file

fragging. This also helps customers save on the cost of in-house servers and/or power

backups that might need to last over a few days in case of emergency situations. Security

and virtual access are the other two pros for choosing a cloud service. Service providers

usually store all of the customers' data encrypted on their servers which makes it highly

stable and hard for hackers to hack into, all of this with the added benefit of being able to

run a virtual session from anywhere in the world(with a reliable internet connection) and

being able to access their files or program as needed as all this data is provided from the

secure servers. Since Hosted SP is the pioneer in providing SaaS delivery model and

CloudX, a cloud-based software panel monitoring and controlling in separate individual

enterprises which helps to save the cost of delivering third-party applications, the

company's strategy could be defined as a Value leadership. These are also the reasons

why customers have chosen Hosted SP's cloud-based offerings rather than their in-house

solutions as well as its competitors. In addition, the gradually increasing global economy

facilitates the development of the industry as well as the company. Particularly, the

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global cloud market is expected to bounce to approximately 160 billion US dollar in 2020

(Exhibit 1) and flexible licensing models like SaaS contributed about 40% of average

expenditure for software licensing budget.

PROBLEM STATEMENT DISCUSSION

Since the owner of SP Hosted has knowledge in Information Technology sector and

has led the company for so many years, he is wondering if the customer base that Hosted

SP is targeting, the Multi-Tenant customers, whether they are as profitable as the

company had thought they were? Mr. Burke doesn't want to go off intuition anymore, in

the sense that since Multi-tenant customers require lesser resources, it means they are

more profitable as well. If this indeed is the case, then Mr. Burke needs to analyze where

they are losing money with the Multi-Tenant customers- Driver costs.

DISCUSSION OF COST ALLOCATION

Hosted SP is currently pricing their customers, both the Cloud and Multi-Tenant based

on the Hosted SP's staff time alongside with an estimate for the initial hardware set up

costs for the customers. Hosted SP has different variable costs for both the customer

types. For Cloud customers, it sources the Microsoft Licensing Fee at $1.15 per seat(user)

and for Multi-Tenant Customers, it gets charged $0.55 per seat. For Cloud Customers,

Hosted SP then takes the Data Centre, IT Operational Support expenses and Hardware

expenses divide it up per total seats Hosted SP currently manages and based on the driver

of that cost. For e.g., Data center cost is divided amongst the total number of seats SP

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Hosted manages. On Hosted SP's average cost for the month for the aforementioned, it

then adds its desired margin (30%) and calculates its final price to charge the customer.

Hosted SP follows a similar analogy with the Multi-Tenant Customers. Apart from

charging Customers the base cost of $0.55 for the Microsoft Licensing fees, all the fixed

costs are allocated based on a preset overhead allocation rate and then sticks on its own

desired margin of 30% to come up with the final price to charge per user.

The pricing strategy seems to be ineffective as it is applying fixed costs based on a

predetermined rate for both the type of customers but, in reality, these two customer types

and way different in terms of the seats they bring in and just the difference between the

actual customers in both the categories. By applying the traditional costing system, what

might seem like a valuable venture - The Multi-Tenant Customers, when we did the ABC

analysis, turned out to be way less profitable than the Cloud Customers. With the

traditional costing, SP Hosted in not able to correctly identify the problem areas where

the expenses are being wasted on unprofitable customers.

Based on the activity-based costing analysis, we realize that Hosted SP indeed is able

to maintain and stay within the target margin of 35-45%. However, for the Multi-Tenant

Customers, Hosted SP is well below the target range and in some cases even incurring a

loss. The main difference between the activity-based costing applies costs to all the

different components and activities such as Software Development, IT services, etc.…

and then comes up with the final price of the service. The current costing system applies

all the fixed costs as per the predetermined overhead rate. With the activity-based

costing, we see that the costs get allocated per driver and not a preset rate as per the

analysis. This allows allocating the costs per driver per customer rather than 1 rate for all

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the customers. By taking this approach, Hosted SP can then add their margin at the end to

finalize the selling price to its customers which would help alleviate the lower margins

into optimal margin % range.

POTENTIAL CHANGES TO HOSTED SP’S MARKET FOCUS

Currently, Hosted SP's market focus looks like most on SMB's, selling multi-tenant

Saas which comprises of 82 customers out of their total Customer dale of 86 customers

and this represents that most of the demand is comprised by SMB's as they are widely

spread all over the industry in comparison to large enterprises which are just a few in

number but the thing is that multi-tenant SaaS has a very compact margin when

compared with private cloud enterprises. As we know that Hosted SP's target margin for

SMB's/multi-tenant and private cloud/enterprise customers is between 25-35% and 35-

45% respectively but the current scenario reflects that multi-tenants are unable to reach

their mark generating lower profits and sometimes even losses whereas all private cloud

customers have their margins between the target line. This explains to us that Hosted SP

has focused effectively in its marketing and sales efforts in case of large enterprises

suggesting the requirement of more focus on its not well-performing area i.e. SMB's.

ROI for private cloud customers = 91,886*12*100/ 2,225,254= 49.6%

ROI for random multi-tenant customers selected to represent the whole

population = 5,362*12*100/ 226,449 = 28.4%

As we can see that there is a large difference between the ROI's around 20% when

compared between SMBs and enterprises, we can only foresee that there could be a

potential shift on their focus for the private cloud customers in the search for more

customers like these instead of the multi-tenant ones.

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C. ALTERNATIVES AND EVALUATION

There are two options that Hosted SP’s can concentrate on, as following:

i. Focus on Enterprise/Private Cloud customers:

 Advantages

 ROI and residual earnings for each Private Cloud customer are higher than those

of Multi-Tenant customer and meet the target.

 Time to recover the hardware cost is shorter in general (see months of payback in

Hosted SP Template).

 Disadvantages

 If the company just solely focus on Private Cloud customers, it will lose market

share to other competitors.

 Require significant initial investment capital.

ii. Focus on Small/medium business/Multi-Tenant customers

 Advantages

 Require less capital and the sale cycle is faster.

 Focusing on Multi-Tenant Customers can help the company increase the number

of customers and hence dominate the market.

 Disadvantages

 The profit margin per customer is lower than expected.

 Since the data of multiple SMB customers is stored in the same server, it would

be harder to control security and privacy. Once there is a problem with one

customer’s data, there seems to be persuasive impacts to other customer’s data.

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 D. RECOMMENDATION

We would like to recommend Hosted SP to focus on the private cloud customers for now.

For instance, private cloud customers tend to be just 4 out of its total customers which

tends to bring the highest margin among all its customer pool, which is why it has to

bring more of these in the bus in order to increase its overall profitability as also it takes

comparatively less time and money to commence as per their profitability basis. They

have an average margin of 44% over its cost with the highest being up to 46% for

Webvan. Despite focusing on private cloud customers, it should also give a thought on

multi-tenant customers at a bit later stage as they comprise around 95% of its customer

pool but only bring about 10% average margin for the four random customers that

represents its population. So, the things that can be done for them is either to drop off the

customers that are generating losses for the company just like Pets.com else (but also

should consider about how it will affect market share extension) or increase the selling

price (if it is possible) in order to make up for the low margins as per the situation such

that it doesn't affect its reputation as well.

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APPENDIX A
Team Reflections

At the end of the project your team will discuss and provide responses to the following:

1. Overall, how effectively did your team work together on this project?

1 2 3 4 5

Not at all Poorly Adequately Well Extremely well

2. Describe 2 ways you did well in functioning as a team.

 Setting the shared goal: At the beginning, our group discuss about each

individual expectation in this assignment outcome as everyone in our group

has distinct goal to archive in this course. However, we finally can set a same

goal together. We think that is the most important part to optimize our

performance in teamwork.

 Setting effective group meeting: Despite having different schedule, we still

set aside to be able to meet up on time and work together efficiently. We

together resolved concern regarding the case.

3. Describe 1 problem you had interacting as a team.

The biggest problem our group had to face is the time limit. Its mainly because

everyone has their own hectic schedule as there are some other projects, quiz and test

in last two weeks of the semester.

However, we still try to conduct a good few meetings, mostly after the evening class.

Moreover, thanks to Google Docs online application, we were able to work on the

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 project at the same time remotely. It allows us to work in group more effectively and

save the time to express the ideas each member has in the in-person meetings.

4.

a. Fill in the following table with team names and the predominant DISC

characteristic.

Team member Truong Hung Dang Abhiroop Cheema Sanchit Razdan

name
S D I
DISC rating

b. Describe 1 situation where knowing each teammate’s DISC classification

assisted in working as a team.

One of the situations were where we were all stuck with different timings in

regards to different classes, work, other projects etc.. and there was no traction

on the project due to this. Abhi being a D directed the project to gain some

momentum and Sanchit who is an I with his friendliness and optimistic nature

drove this further and Henrik who is an S, showed patience with the team

agreements and decisions and brought more stableness into the whole

directive of things.

It helped to know the DISC personalities of each other as when somebody

would suggest something that we all would in the hindsight tried to

understand where the person is coming from and/or what is the intention

behind the actions. This really helped mitigate the risk of friction within the

group.

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HOSTED SP
TEMPLATE

EXHIBIT 3: DEVICES UNDER MANAGEMENT

Client # of Devices
Boo.com 45
GovWorks 33
InfoSpace 35
Webvan 30
Multi-tenant 270
Total 413

EXHIBIT 4: CUSTOMER ANALYSIS

Monthly Initial
Recurring Hardware
Clients Cloud Revenue Costs Seats Tickets

Boo.com Private Cloud $ 55,232.00 $ 458,425.60 13,020 106

GovWorks Private Cloud $ 54,018.45 $ 637,417.71 12,963 104

InfoSpace Private Cloud $ 48,863.40 $ 547,270.08 12,036 94

Webvan Private Cloud $ 53,407.35 $ 582,140.12 13,689 101

Inktomi Multi-Tenant $ 13,408.80 $ 56,316.96 8,036 75

MicroStrategy Multi-Tenant $ 13,231.65 $ 78,066.74 8,603 76

Pets.com Multi-Tenant $ 10,500.65 $ 48,302.99 8,123 69

Think Tools Multi-Tenant $ 11,827.50 $ 43,761.75 8,210 80

Other Tenants $ 930,532.20 672,210 384

Total $ 1,191,022.00 756,890 1,089

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EXHIBIT 5: RECURRING EXPENSES

HOSTED SP Monthly Expenses

Microsoft Licensing Fees $ 447,363.80
Data Center Costs $ 82,900.00
Sales & Marketing $ 79,659.00
Software Development $ 57,632.00
IT Delivery $ 36,937.00
Technical Support Services $ 35,467.00
Management $ 34,885.00
IT Operations $ 16,987.00

CLIENT-SPECIFC TIME LOGS OF HOSTED SP'S IT DELIVERY

EXHIBIT 6: TECHNICIANS

IT Delivery
Client Hours Escalated Minutes
Boo.com 10 61
GovWorks 8 67
InfoSpace 9 60
Webvan 8 50
Inktomi 5 43
MicroStrategy 5 38
Pets.com 7 42
Think Tools 6 40
All other Multi-
Tenent 365 521
Total 423 922

PAGE 2 DATA
FY 2001 FY 2005 FY 2009 FY 2012
Monthly Recurring Revenues $150,096 $250,034 $673,701 $1,191,022
# of Employees 5 16 29 40
# of Clients 25 32 61 86

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ANALYSIS
HOSTED SP ACTIVITY-BASED COSTING OF EIGHT CUSTOMERS

Devices IT
Managed Delivery Escalated
Customer analysis Monthly Revenue Initial Hardware (*) Seats Tickets Hours Minutes
Private
Boo.com $ 55,232 $ 458,426 45 13,020 106 10 61
GovWorks $ 54,018 $ 637,418 33 12,963 104 8 67
InfoSpace $ 48,863 $ 547,270 35 12,036 94 9 60
Webvan $ 53,407 $ 582,140 30 13,689 101 8 50
Multi-Tenant
Inktomi $ 13,409 $ 56,317 3 8,036 75 5 43
MicroStrategy $ 13,232 $ 78,067 3 8,603 76 5 38
Pets.com $ 10,501 $ 48,303 3 8,123 69 7 42
Think Tools $ 11,828 $ 43,762 3 8,210 80 6 40
Others $ 930,532 257 672,210 384 365 521
$ 1,191,022 413 756,890 1,089 423 922

*Assuming that all MT customers have the same number of devices

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HOSTED SP MONTHLY EXPENSES

Escalated minutes % 80%

Client minutes % 20%
Activity Driver Number of drivers Monthly Expense Cost per driver
Microsoft Licensing Fees variable based on seats $ 447,364
Data Center Costs devices managed 413 $ 82,900 $ 200.73
Software Development (80%) escalated minutes 922 $ 46,106 $ 50.01
Software Development (20%) clients 86 $ 11,526 $ 134.03
IT Delivery delivery hours 423 $ 36,937 $ 87.32
Technical Support Services ticket 1,089 $ 35,467 $ 32.57
IT Operations seats 756,890 $ 16,987 $ 0.02
OVERHEAD
Management clients 86 $ 34,885 $ 405.64
Sales and Marketing clients 86 $ 79,659 $ 926.27

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HOSTED SP MONTHLY EXPENSES -
CLOUD CLIENT

Microsoft Licensing Fee per $

seat 1.15

Enterprise Boo.com GovWorks InfoSpace Webvan

Cost
per No. Total No. Total No. Total No. Total
driver Driver Drivers Cost Drivers Cost Drivers Cost Drivers Cost
$ $ $ $
Total Revenue 55,232 54,018 48,863 53,407

Microsoft Licensing $
Fees 1.15 per seat 13,020 14,973 12,963 14,907 12,036 13,841 13,689 15,742
$ per device
Data Centre Costs 200.73 managed 45 9,033 33 6,624 35 7,025 30 6,022
Software $ per escalated
Development (80%) 50.01 minute 61 3,050 67 3,350 60 3,000 50 2,500
Software $
Development (20%) 134.03 per client 1 134 1 134 1 134 1 134
$ per delivery
IT Delivery 87.32 hour 10 873 8 699 9 786 8 699
Technical Support $
Services 32.57 per ticket 106 3,452 104 3,387 94 3,061 101 3,289
$
IT Operations 0.02 per seat 13,020 292 12,963 291 12,036 270 13,689 307
$
Management 405.64 per client 1 406 1 406 1 406 1 406

32,213 29,798 28,524 29,099

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Profitability 23,019 24,220 20,339 24,308
Target 35-
Margin % 45% 42% 45% 42% 46%
Number of
seats 13,020 12,963 12,036 13,689
$ $ $ $
Cost/seat 2.47 2.30 2.37 2.13

$ $ $ $
Hardware costs 458,426 637,418 547,270 582,140

Payback (months) 19.92 26.32 26.91 23.95

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HOSTED SP MONTHLY EXPENSES -
MULTI-TENENT

Microsoft Licensing $
Fee per seat 0.55

Enterprise Inktomi MicroStrategy Pets.com ThinkTools

Cost
per No. Total No. Total No. Total No. Total
driver Driver Drivers Cost Drivers Cost Drivers Cost Drivers Cost
$ $ $ $
Total Revenue 13,409 13,232 10,501 11,828

Microsoft Licensing $
Fees 0.55 per seat 8,036 4,420 8,603 4,732 8,123 4,468 8,210 4,516
$ per device
Data Centre Costs 200.73 managed 3 661 3 661 3 661 3 661
Software Development $ per escalated
(80%) 50.01 minute 43 2,150 38 1,900 42 2,100 40 2,000
Software Development $
(20%) 134.03 per client 1 134 1 134 1 134 1 134
$ per delivery
IT Delivery 87.32 hour 5 437 5 437 7 611 6 524
Technical Support $
Services 32.57 per ticket 75 2,443 76 2,475 69 2,247 80 2,605
$
IT Operations 0.02 per seat 8,036 180 8,603 193 8,123 182 8,210 184
$
Management 405.64 per client 1 406 1 406 1 406 1 406

10,830 10,937 10,809 11,030

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Profitability 2,579 2,294 (309) 798
Target 35-
Margin % 45% 19% 17% (3)% 7%
Number of
seats 8,036 8,603 8,123 8,210
$ $ $ $
Cost/seat 1.35 1.27 1.33 1.34

$ $ $ $
Hardware costs 56,317 78,067 48,303 43,762

Payback (months) 21.84 34.03 (156.51) 54.87

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