CASE STUDY 14/12
Can a Strategic Finance Office add
10% to your bottom-line
by rethinking your business verticals?
About the client
Leafo*, Inc. ( 'Leafo' ), was in a relatively mature stage of their business operations from an organizational life-cycle standpoint. They had been steady in terms of growth YoY without much change to their asset base.
Operationally, they were profitable at 1.7x the industry standards. They have a well functioning Finance Team of 20 members with an experienced CFO from the Information Technology Industry who had been with Leafo for over 5 years and knew the ins and outs better than anyone else.
Industry: Information Technology
Location: United States
Size: 500+ employees
Disclaimer: Considering the nature of work, client names & organizational specifics have been changed to protect client confidentiality.
The company had 5 lines of business (LoBs) which it had classified as independent functions that only depended on centrally for management time, governance, and support functions. The business & sales teams were separately allotted to each LoB as it required domain expertise to make a sale. The marketing team was a shared function whose time was allocated across all the LoBs based on the revenue generated by each LoB.
Despite achieving over 20% CAGR over the last 5 years, the accrual of cash was reducing. The company continued to maintain profitability above its industry peers and hence were unaware that there could be an issue. During the same 5 year period, the company had also not made any sizable infrastructure spends.
Something was amiss.
We were brought on board to recognize opportunities for improving profitability with a perspective of cost optimization and boost the overall reporting frameworks for performance. Within 6 months of working with the business, we realized that while the business continued to grow, the profitability seemed to stay hovering around the same figure, though the time utilization numbers improved. This meant that the problem was less tactical and more strategic.
Knowing the why
The power of looking at a business outside-in is something that businesses tend to forget to do after a period. As the management gets busier in day-to-day operations, they forget to re-evaluate periodically what they are doing right and what they are doing wrong. Further, what worked in the past may not be what is working at this point in time for them. The value of the SFO, which functions as an external problem-solving crack team comes in here.
Because something worked well in the past does not mean it will work well today. Every few years, a company needs to look inward at everything they're doing and evaluate 'why'. Here, an external team can be the difference between knowing and actually doing something about it.
Pradyumna Nag, Partner
We were brought on board to recognize opportunities for improving profitability with a perspective of cost optimization and boost the overall reporting frameworks for performance.
Within 6 months of working with the business, we realized that while the business continued to grow, the profitability seemed to stay hovering around the same figure, though the time utilization numbers improved.
This meant that the problem was less tactical and more strategic.
The first step to solving a problem is understanding how the business was making money mathematically.
Introduce a more structured method at capturing costs relating to business operations of each LoB (right from the marketing team to post-sale support) + standardize reporting languages across all the LoBs
Execute a detailed LoB study of all the LoBs with an eye for moving from allocations (distributed by share) to the allotment (identified for a specific purpose)
Identify under-performing/ unprofitable/ onerous LoBs and deep-dive to understand the reasons for their impact on overall profitability
It was observed that one of their core LoBs on which over 20% of their workforce was allotted, was leaking over $50k a month of leakages while being managed by one of their most talented executives, who was constantly trying to improve efficiencies. The Executive was effectively running the most efficient sinking ship. Further, the referral value and cross-sell opportunities estimated was less than 12% on over 80% of their accounts.
Once the leaky tap is identified, you don't go with a sledgehammer to fix it. Neither do you run to switch off the water for the whole building? Transformation is also like that.
Careful analysis, followed by a clearly orchestrated action plan.
Followed by action.
The Prequate Difference
Execute 'The Leap' (Prequate's signature study) - a well-constructed simulation of scenario modeling on the key reasons and understand the impact on cash accruals including 'if this, then that' of each scenario, both on long-term business and short-term cash flows.
We generated 5 scenarios with 3 sub-scenarios that included all decisionmaking elements, revenue & cost drivers, and key reasons for inefficiency. After generating the scenarios, we ran simulations of all the scenarios to develop a decisioning grid across 90, 120 & 360-day horizon.
Discontinue all relationships with a relationship value of less than $250k. Divisions would roll up into a smaller vertical with similar technology expertise but more improved billing rates. Re-skill resources over the next 90 days with previous client engagements with 8+ CSAT scores as sample exercises. Key executives would be promoted to manage a smaller vertical.
$1.2M over 12 months
Craft a clearly thought out '100-day plan' of the chosen strategy to pursue, keeping in mind the impact on morale and inhibitors to the strategies achieve-ability.
Deploy. Don't just consult.
We got on board with the client with a single purpose mission - Execute the transformation. Prequate's team played point with all management members over the 90-day period to help them achieve the planned outcomes.
Over the last year, Prequate is now ingrained in our core business and our go-to-guys before any business decision. It’s powerful to have a partner who understands what we do and brings together such advanced skill-sets to our company.
Andy Rodley *
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