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CASE STUDY 14/12

Can a Strategic Finance Office add

10% to your bottom-line

by rethinking your business verticals?

The Challenge

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. Enter Prequate.

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 NagPartner

The Engagement

 

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 Approach

 

The first step to solving a problem is understanding how the business was making money mathematically.

 

Step  1

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

 

Step  2 

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)

 

Step  3

Identify under-performing/ unprofitableonerous LoBs and deep-dive to understand the reasons for their impact on overall profitability

CASE STUDY 14/01

Good Business modeling
can drive 10x more income
with 40% less investments.

Download this case study as a PDF >

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About the client

Quattro * Private Limited (Quattro) is a 4-year-old company providing hardware development services with a team of over 20 employees. Quattro had just developed a great product which was a healthcare product aimed at making available basic health-care related services to hard to reach areas in rural & semi-urban across the world.

The devices were to be contract manufactured and hence capital required would be lesser there.

 

Industry: Health-Tech

Location: India

Size: 20+ employees

Disclaimer: Considering the nature of work, client names & organizational specifics have been changed to protect client confidentiality. 

Before

The initial plan of the company:

  • EBIT of 27% of $10Mn by Year 5 

  • EBITDA positive from Year 3

  • Raise amount of ~$10Mn to finance their inventories, continue product R&D and deploy a good sales team for a pan India launch

They had begun approaching investors for scaling the reach but had faced slow progress. 

 

Enter Prequate.

Prequate was brought in to help Quattro remodel their business for proposed PE/VC investments.

Step 1

Developing a deep understanding

 

Prequate started off with a deep-dive into the fundamentals of the product, its possible utilities – today and 3 years from now, its potential uses and type of data it was capturing. 
 

Prequate noticed:

  • Product had been designed with abilities to remotely manage the software backend

  • Model was built on a product sale model that netted cash on each product sold

  • Working capital requirement bloated due to lead time payments

  • Profit needed scale which needed continuous inflow of money

The product could, over time potentially deliver various benefits, but the revenue model was built on one-time transaction only – revenue on sale.

"

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 NagPartner

Step 2

Asking the right questions

 

Prequate deduced that the fundamental business model was a value-in-use as compared to value-on-sale. It meant that the business model needed to be able to address key questions such as >

  1. Is the model rewarding usage while de-risking delivery?

  2. Who gains from using the product?

  3. Are we profiting from the continuing value of the product?

  4. Can contracts become onerous someday?

Step 3

Getting to brass tacks

 

Prequate worked with all key stakeholders over a period of 2 months including engaging with key investor fraternity & advisors. The work, covering the breadth of the business, included:

▴  Perform a scalability assessment

Identify the key variables that provide sustaining value to the business

▴   Fit an ecosystem fundamental to test

Develop a new business model to boost the NPV of the business using an eco-system approach

▴   Redesign the revenue model

Developing continuing revenue streams based on usage

▴   Develop a new fundraise strategy

Create a new raise plan in a tranched manner with different financing methods using balance sheet strength for shorter-term capital needs and project financing

 
 
 
 

The Prequate Difference

 

Step 4

Getting to brass tacks

 

Prequate derived a:
 

▴  a new business model:

of a local entrepreneurship model based on the principles of franchising with a revenue share arrangement with local partners (primarily, those who run local stores) who would look at it as an investment opportunity; and

▴  Re-strategized their product roadmap:

to include vernacular support and 100% self-service using visual aids require little to no human interference in operation and maintenance & complete self-service modules.

IMPACT

Business modeling was able to drive 10x more returns with 40% less in
investment needed.

▴  Shortlisted for a coveted technology grant of $400k

▴  Projected Y5 EBITDA grew by over 1,000%

▴  PAT% increased from 17% to ▴ 37% in Y5

▴  Cash required as equity dropped from $10M to $6M

▴  Big data opportunities unlocked in Y3

 
 
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