Case Study

An Indian IT Service and product company has an employee base of 5000+ resources all over the globe.
Around 73% of the resources are based out of India (Mumbai, Pune, Hyderabad and Ahmedabad). Total
employee strength includes 690 contractors out of which 60% are in India, 5% in Australia and 7% in Asia
Pacific centres. These contractors are on an average 1.4 times costlier than permanent employees.

Its customers are across 35 countries mainly in the US (32%), Middle-east (27%) and Europe (20%).

Its main business is providing IT solutions and Annual Maintenance Services. Though they provide IT
solutions in all the domains, 46% of their revenue comes from BFSI sector, 21% is from the Healthcare sector
and the rest from other sectors like Retail, Public sector, Manufacturing, Travel, Entertainment etc.

Its product-based business is providing pre-made softwares and applications for companies. The three
products they offer are DevOps bundle, cybersecurity and digital marketing. 90% of revenue comes from the
digital marketing product.

It enjoys a good margin from BFSI (42%) and Retail (39%) sectors and also from business in the US (48%)
and Europe (44%) region. The margin is very low in business in India (9%) and other Asia Pacific countries
(14%).

It is finding it difficult to be at par with its competitors on a year-on-year margin improvement rate which is
11% v/s 26% by other comparable IT companies in India. To address this, it is thinking of acquiring smaller
organisations which specialise in niche technologies and having a larger customer base which will help them
in increasing its employee base and expand the business with cross-sell opportunities.

Will the acquisition help in the improvement of margins? If yes, then why? If not, then what alternate strategy
should the company follow?

Instruction Set

1. Identify the root problem and use the MECE (mutually exclusive, comprehensively exhaustive) principle,
discussed already in the module videos, to break down the problem.
2. Using the profitability tree down structure, divide it in two parts ‘Revenue’ and ‘Cost’.
3. Further branching can be done according to your logic but do keep in mind that those parameters shouldn’t
overlap. Eg. Revenue and profit are overlapping parameters.
4. For revenue, 60% of it comes from IT solutions and maintenance, and rest comes from its products.
5. The company is looking forward to investing in India, US and Europe. See the potential growth for
different sectors in these geographical locations.
6. In the US and Europe, the healthcare sector seems promising and the same for India with the BFSI sector.
Explore other options and see what could be done differently.
7. Finally, provide recommendations for where the company should invest and what kind of acquisitions it
should do.
 Root Problem
The root problem for the Indian IT Service and product company is its inability to achieve a year-on-year
margin improvement rate comparable to other IT companies in India (11% vs. 26%). This indicates that the
company is facing challenges in increasing its profitability and staying competitive in the market.

Factors Contributing to the Problem

Heavy •The company heavily relies on the digital marketing product, which contributes
Dependence on 90% of its revenue. While this product has been successful so far, such high
the Digital dependence on a single product can be risky. Any fluctuations or changes in the
Marketing market demand for digital marketing solutions could significantly impact the
company's revenue and margins.
Product

Low Margin in •The company experiences low margins in its business operations in India (9%)
India and Other and other Asia Pacific countries (14%). This might be due to intense
competition in these regions and pricing pressures from local competitors.
Asia Pacific Inadequate differentiation strategies or inability to cater to the specific needs
Countries of these markets may be contributing to the low margins.

Inefficiencies in •The company employs 690 contractors, with 60% of them in India. Contractors
are on average 1.4 times costlier than permanent employees. Inefficiencies in
Contractor managing and optimizing the utilization of contractors may be adding
Utilization unnecessary costs to the company's operations.

•While the BFSI sector contributes a significant portion (46%) of the company's
Limited Growth revenue and enjoys a good margin (42%), there may be limited growth
in Sectors Other opportunities in other sectors such as Retail, Public sector, Manufacturing,
Than BFSI Travel, Entertainment, etc. Focusing on a broader spectrum of industries and
diversifying the revenue stream could improve overall profitability.

Challenges in •The company has a strong presence in the US (32%) and Europe (20%), where
Expanding to New it enjoys high margins (US - 48%, Europe - 44%). However, penetrating new
geographical markets and establishing a foothold in regions like the Middle
Geographical East and other Asia Pacific countries may be challenging due to competition,
Markets regulatory hurdles, and cultural differences

•Although the company offers three products, 90% of the revenue comes from
Lack of Product the digital marketing product alone. Limited diversification into other
Diversification products like the DevOps bundle and cybersecurity could limit revenue
growth potential and margin improvement.

Inability to Keep •The company's year-on-year margin improvement rate (11%) is significantly
Pace with lower than that of other comparable IT companies in India (26%). This may be
Competitors in attributed to a combination of the above factors, including heavy dependence
Margin on a single product, regional margin challenges, and limited product
diversification.
Improvement
 MECE (Mutually Exclusive and Completely Exhaustive

It is a problem-solving technique that divides the problem into various parts and forms a kind of an Issue Tree.

BFSI Sector
(46% of Revenue)

IT Solutions and Healthcare Sector

Maintenance (21% of Revenue)

Other Sectors
(Remaining
Revenue)
Revenue
Analysis Digital Marketing
Product
(90% of Revenue)-
High Margin

Product-Based
Business DeveOps Bundle

Profitability
Analysis Cybersecurity

Permanent
Fixed Costs Employees Salaries

Cost of Goods Sold

(COGS) for Product-
Cost Analysis Based Business

Sales and
Marketing Expenses
Variable Costs
Product
Development and
Marketing Costs

Contractor
Expenses
 Geographic Revenue Distribution

Geographic Revenue Distribution

14%
Other Asia Pacific Countries

9%
India
Countries

44%
Europe
20%

Middle-East
27%

48%
US
32%

0% 10% 20% 30% 40% 50% 60%

Other Asia
US Middle-East Europe India
Pacific Countries
Margin 48% 44% 9% 14%
Percentage of Customers 32% 27% 20%

% of Customers & margin

Margin Percentage of Customers

Revenue Analysis

1. IT Solutions and Maintenance:

• BFSI Sector: Explore opportunities to expand IT solutions and maintenance services in the BFSI
sector, leveraging the company's expertise and reputation in this domain. Targeting new BFSI clients
and increasing the scope of services can boost revenue.
• Healthcare Sector: Invest in specialized IT solutions and services tailored to the healthcare sector in
the US and Europe. Develop partnerships and alliances with healthcare organizations to increase
revenue from this segment.
• Other Sectors: Identify potential growth areas within the other sectors and develop customized IT
solutions to cater to their specific needs, increasing the customer base and revenue diversification.

2. Product-Based Business:
• Digital Marketing Product: Continue to invest in the development and marketing of the digital
marketing product, targeting new clients globally. Explore opportunities for upselling and cross-selling
to existing customers to maximize revenue from this product.
• DevOps Bundle and Cybersecurity: Allocate resources to enhance the features and capabilities of
the DevOps bundle and cybersecurity products. Conduct market research to identify customer needs
and tailor the products accordingly to increase adoption and revenue.
 3. Geographic Revenue Distribution:
• US and Europe: Strengthen sales and marketing efforts in the US and Europe, especially targeting the
healthcare sector. Focus on building strong relationships with existing clients to foster repeat business
and referrals.
• India and Other Asia Pacific Countries: Explore opportunities to increase revenue in India and other
Asia Pacific countries by targeting high-margin sectors and promoting the company's product-based
business.

Cost Analysis

1. Employee Cost:
• Contractor Management: Assess the need for contractors and optimize their utilization. Identify
areas where permanent employees can handle tasks traditionally assigned to contractors, reducing
overall costs.
• Operational Efficiency: Implement measures to enhance operational efficiency, which can lead to
cost savings. Streamline processes and workflows to minimize waste and redundancy.
• Cost-effective Alternatives: Consider outsourcing certain non-core functions to regions with lower
labor costs, allowing for cost reduction while maintaining service quality.

Potential Growth for Different Sectors

a) India:
• The company has a significant employee base in India, and it can strategically leverage this advantage
to explore various sectors for potential growth. While the BFSI sector seems promising in India, there
are other sectors worth considering as well.
• BFSI Sector: The company can further strengthen its position in the BFSI sector by offering
specialized IT solutions and services tailored to the unique needs of financial institutions. This could
include advanced analytics, digital transformation, and cybersecurity solutions to cater to the evolving
demands of the sector.
• Healthcare Sector: While the BFSI sector is strong, the company can also tap into the growing
healthcare industry in India. The healthcare sector in the country is witnessing rapid digitization and
technology adoption, creating opportunities for IT service providers to offer solutions in electronic
health records, telemedicine, healthcare analytics, and patient engagement platforms.
• E-commerce and Retail: India's e-commerce and retail sectors have seen significant growth in recent
years. The company can develop IT solutions to support e-commerce platforms, supply chain
management, inventory optimization, and customer experience enhancement.
• Government and Public Sector: The Indian government's focus on digital initiatives presents
opportunities for the company to provide IT solutions for e-governance, smart cities, and public service
delivery.
b) US and Europe:
The US and Europe are lucrative markets for IT services, and the company can focus on specific sectors to drive growth
in these regions.

• Healthcare Sector: The healthcare sector in the US and Europe is technologically advanced, and there
is a continuous demand for IT solutions to improve patient care, data security, and operational
efficiency. The company can target electronic health records, telehealth solutions, health information
exchanges, and healthcare analytics.
• Banking and Financial Services: Similar to India, the BFSI sector in the US and Europe offers
significant growth potential. The company can offer advanced banking software solutions, payment
processing systems, fraud prevention tools, and regulatory compliance solutions.
• Manufacturing and Industry 4.0: With the ongoing Industry 4.0 revolution, manufacturing
companies in the US and Europe seek IT solutions for process automation, IoT integration, predictive
maintenance, and supply chain optimization.
• Cybersecurity Services: Given the increasing cyber threats, there is a growing demand for
cybersecurity services in both regions. The company can expand its cybersecurity offerings to cater to
the unique needs of businesses in various industries.

Exploring Other Options

While the BFSI sector in India and the healthcare sector in the US and Europe offer promising opportunities,
the company should also explore other options to diversify its revenue streams and improve its margins:

• Retail and E-commerce: Expanding IT solutions for the retail and e-commerce sectors in all regions
can drive revenue growth. Offering services like personalized marketing, inventory management, and
omnichannel customer experience can be beneficial.
• Digital Transformation and Cloud Services: Emphasize digital transformation and cloud services
across all sectors and regions. Many companies are undergoing digital transformation, and the demand
for cloud solutions is increasing. The company can position itself as a reliable partner for businesses
looking to adopt modern technologies.
• Emerging Technologies: Invest in emerging technologies such as Artificial Intelligence, Machine
Learning, Internet of Things (IoT), and Blockchain. Offering cutting-edge solutions in these areas can
attract new customers and improve margins.
• Partnerships and Acquisitions: Collaborate with strategic partners and consider acquiring smaller
organizations specializing in niche technologies. This can expand the company's capabilities and
customer base, enabling cross-selling opportunities and revenue growth.

By diversifying into various sectors and focusing on specific growth areas in India, the US, and Europe, the
company can improve its revenue streams, achieve higher margins, and stay competitive in the IT industry.
 Will the acquisition help in the improvement of margins? If yes, then why? If not,
then what alternate strategy should the company follow?

To determine whether the acquisition of smaller organizations will help in the improvement of margins, let's
analyse the potential impact on both revenue and costs. We'll also consider the company's current challenges
and the effectiveness of this strategy in addressing them.

Revenue Analysis:
Acquiring smaller organizations specialized in niche technologies with a larger customer base can potentially
lead to several revenue-related benefits:

• Increased Customer Base: Acquiring companies with a larger customer base can expand the IT
service and product company's reach, enabling cross-selling opportunities for its existing products and
services. This can result in increased revenue from both the IT solutions and maintenance business and
the product-based business.
• Access to New Markets: If the acquired companies operate in different geographic regions or
industries, it can open doors to untapped markets, allowing the IT company to diversify its revenue
streams and reduce reliance on specific sectors and regions.
• Leveraging Niche Technologies: Acquiring organizations with niche technologies can enhance the
company's service offerings and product portfolio, potentially attracting more clients and generating
higher-value contracts, leading to increased revenue.

Cost Analysis:
While the acquisition may offer revenue benefits, it's essential to consider its impact on costs:

• Integration Costs: Acquiring and integrating smaller organizations can involve significant costs,
including due diligence expenses, legal fees, and integration efforts. These costs can initially impact
the company's financials.
• Operational Efficiency: The success of the acquisition depends on how effectively the company
integrates the new resources and optimizes their productivity. Inefficiencies during integration can lead
to increased operational costs.

Addressing Margin Improvement:

The company's main challenge is achieving a year-on-year margin improvement rate comparable to other IT
companies in India (11% vs. 26%). While acquisitions can contribute to revenue growth, they may not directly
address the root cause of the margin challenge. To address the margin improvement issue effectively, the
company should consider the following alternate strategies:

• Cost Optimization and Efficiency Improvement: Instead of solely focusing on acquisitions, the
company should assess its current cost structure and identify areas for optimization. This may involve
streamlining operations, reducing redundant expenses, and enhancing employee productivity.
• Investment in Research and Development: Investing in research and development can lead to the
creation of innovative products and solutions. New, unique offerings can potentially command higher
margins and strengthen the company's competitive advantage.
• Strategic Pricing and Contract Management: Reviewing pricing strategies and contract
management practices can help the company negotiate more profitable deals and avoid revenue
leakage.
• Client Retention and Satisfaction: Improving customer retention and satisfaction can lead to repeat
business and positive word-of-mouth referrals, reducing customer acquisition costs and contributing
to sustained revenue growth.
• Focus on High-Margin Markets and Products: The company should prioritize its efforts on high-
margin markets, such as the US and Europe, and focus on its high-margin products, like digital
marketing. This targeted approach can yield better financial results.
• Enhanced Sales and Marketing Efforts: A stronger sales and marketing strategy can help the
company attract higher-value clients and effectively communicate the value of its products and
services, leading to improved revenue and margins.

Potential Strategies and Recommendations

1. Investment in Promising Sectors: The company should focus on investing in the promising sectors
in each geographic region to maximize revenue and margin potential. This includes:

• India: Further investment in BFSI sector, considering its potential growth.

• US and Europe: Capitalizing on the growth potential of the Healthcare sector.

2. Product Focus and Cross-Selling: Since the digital marketing product brings in 90% of the revenue,
the company should continue to focus on this area and explore opportunities for cross-selling the other
two products (DevOps bundle and cybersecurity) to existing customers.

3. Acquisitions in Niche Technologies: To address the margin improvement challenge, the company
should consider acquiring smaller organizations that specialize in niche technologies. These
acquisitions can provide access to a larger customer base and offer cross-selling opportunities, leading
to potential revenue growth and improved margins.

4. Geographic Expansion: The company should strategically expand its presence in the US and Europe
to tap into the higher-margin markets and leverage the potential growth in the Healthcare sector.

5. Efficient Cost Management: Since contractors are 1.4 times costlier than permanent employees, the
company should focus on optimizing its workforce mix and try to minimize the dependency on
contractors where possible.

6. Competitive Benchmarking and Innovation: The company needs to closely analyze its competitors
and identify areas where it lags behind, particularly in terms of margin improvement rates.
Emphasizing innovation and staying ahead in the rapidly evolving IT industry can contribute to
improved margins.

7. Customer Retention and Satisfaction: Retaining existing customers and ensuring their satisfaction
is crucial for generating recurring revenue and maintaining long-term relationships. Happy customers
are more likely to provide repeat business and refer new clients.

8. Market Diversification: While BFSI and Retail sectors provide good margins, the company should
explore opportunities to diversify its market presence across other industries and geographies. This
diversification can reduce dependence on specific sectors and regions, providing more stability in the
long run.
 Conclusion
In conclusion, the acquisition of smaller organizations with niche technologies and a larger customer base,
along with a strategic focus on promising sectors and geographic expansion, can help the Indian IT company
in improving its margins and staying competitive in the industry. To achieve sustainable margin growth, the
company should focus on optimizing costs, investing in R&D, refining pricing strategies, improving customer
satisfaction, and strategically targeting high-margin markets and products. A well-rounded approach
encompassing these strategies can position the company for improved financial performance and enhanced
competitiveness. Additionally, efficient cost management and customer-centric strategies will play a vital role
in achieving sustained growth and profitability.