Ommune IT Solutions: make or break

Monica Singhania and Syed Ashraf Husain

Monica Singhania and Syed Ashraf Husain are based in the Faculty of Management Studies (FMS), University of Delhi, Delhi, India.

Prologue
Ommune IT Solutions[1], set up in late 2010, is known to offer an array of information technology (IT) solutions like custom Web 2.0 based web site development, online branding, search engine optimization (SEO), web marketing services, software development and IT infrastructure services that are aimed at supporting businesses locally as well as globally. As of January 2012, it is planning the commercial launch of a customer relationship management (CRM) tool which is in its nal testing phase. Santosh Singh Rathore, a computer science engineer, who started the company, aspired to be an entrepreneur. Incidentally, over the last 16 months, Santosh realized that the road to entrepreneurship, especially in a country like India, is not going to be easy. After experiencing initial losses, he took the company in a new direction by modifying its business model so as to offer outsourcing services for Indian customers, setting up low cost web sites and SEO solutions. Though an extremely low margin business model, at times especially for local customers, it guaranteed business to the company. However, Ommune was still experiencing problems with cash. The company was spending more than it earned. Santosh kept the company going by working as an independent consultant for IT companies and earning about INR 1,00,000-1,20,000 per month. This amount was largely pumped into the company. To increase margins and enjoy stability of revenues, the company invested in product development by building its rst CRM tool. This CRM tool currently is in a testing phase and needs a product evangelist[2]. Ommune IT Solutions is one of the many IT startups yet to nd a rm foothold in the crowded Indian IT industry. Although the company has a potential winner with the CRM software, the cash ows are the rst and foremost problem of the company. A change in compensation structure is also likely considering different modes of payments (xed salary, xed variable or fully variable (Exhibit 1)). The company has xed assets which are being contemplated to be disposed off if necessary to improve the immediate cash ows. After looking at all options and the opportunity cost of the CEO not working as a full time consultant nor working in any , was haunted by the other organization, Santosh while sipping lemonade at Hard Rock Cafe question should he continue to focus on building Ommune, the company of his dreams, and if so, in which direction?

The authors acknowledge the support received from Mr Santosh Singh Rathore, the CEO and founder of the company Ommune IT Solutions. Also they are deeply grateful for the ground work done on this case by Abhay Joshi a member of the MBA Class of 2013, Faculty of Management Studies (FMS), University of Delhi, India and Akhil Khanna, Investment Planner, New Delhi. Disclaimer. This case is written solely for educational purposes and is not intended to represent successful or unsuccessful managerial decision making. The author/s may have disguised names; nancial and other recognizable information to protect condentiality.

Background
The issue of cash ows with inherent uncertainties in the market is scary at times, yet exciting. One may not like to trade it for anything. Ommune may well be on the edge of strong growth having faced more than its share of issues over the past few months. For no amount of innovation can match creating a business enterprise.

DOI 10.1108/20450621211311597

VOL. 2 NO. 8 2012, pp. 1-21, Q Emerald Group Publishing Limited, ISSN 2045-0621

EMERALD EMERGING MARKETS CASE STUDIES

PAGE 1

Santosh Singh Rathore, founder of Ommune IT Solutions, quit his secure job with Infosys[3], an IT giant in India after working for two years, to start his own company. Being an engineer with primarily technical experience, he had not been exposed to managerial issues, by his own admission. With a strong entrepreneurial urge and a desire to do something more meaningful not only for himself but for others as well, made him set up his own company. The company initially looked at focusing on web sites and forums based on niche skills. It started as a web site with forums, focused on improving technical skills of engineering students through quizzes, tutorials, paper presentations, games and workshops. However, these initiatives and two other ideas that were tried on similar lines failed to take off primarily because of lack of an adequate advertising budget. The investment loss on such initiatives was very limited (about INR 1,00,000) which was funded mainly from Santoshs personal savings which had been accumulated during his limited time with Infosys. Undeterred, he began to comprehensively focus on alternative business models and focused on an outsourcing model. He realized that there was just enough space for a small new player in the market. Many successful startups adopt different business plans as cash ows from initial plans fail to materialize. Info Edge India Ltd[4], that today runs multiple successful ventures such as naukri.com, started as a set of two companies with different products. Creating a new organization is never easy. Entrepreneurs face many challenges and hurdles especially during the rst year of a startups inception. In contrast, starting an enterprise is relatively simple with founders having, in most cases, a very optimistic outlook. But soon, thereafter, reality sets in when plans generally do not work out as expected. With such a back drop, plan B of the strategy needs to be explored.

Entrepreneurial challenge in an emerging economy: Ommune IT Solutions operations in India

India, being a developing country, has beneted immensely from the rising worldwide phenomenon of outsourcing by multinational companies in developed countries. India has a technology aware talent pool that leverages entrepreneurship skills, internet and technology to become a major service provider to the world. Despite these strengths working in favor of India, in its rise as an economic power in the world today, operating in a developing country has its own set of disadvantages as well that are a major challenge for survival as far as small startups like Ommune IT Solutions are concerned. India as a country is rich with talent and unique ideas but local startups often fail due to the unfavorable circumstances of growing in a difcult environment. The majority of difculties faced by companies like Ommune in India include:
B

There is hardly any support from government for startups as the government of India has much more pressing issues to tackle with India being a developing country. Most investors or venture funds prefer to invest in the advanced stage of startup operations as the risk involved is less compared to investing in fresh ideas which have a higher risk of failure. The general population of developing countries like India have a high savings rate due to the absence of well developed government nancial support systems for individuals. High levels of savings assist entrepreneurs to fund startups from personal sources and realize their dreams and goals. In this way, most start ups like Ommune IT Solutions depend on internal nancial resources or funds they borrow from friends, family or initial customers to fund initial startup costs which are essentially limited in scope. Startups in India do not have access to seed funding, collaborative work spaces, access to mentor base, dedicated business training, networking visibility as well as key hires with built in technical expertise which are taken for granted in the case of startups in developed countries like Silicon Valley. Limited nancial resources and fragmented retail and distribution in a developing country like India force startup entrepreneurs to start their business with direct access to end customers. This keeps the scope of their activities limited and prevents the startups from vertical integration of the business.

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Another problem that startup entrepreneurs face in developing countries like India is lack benets of mentorship and apprenticeship which limits their strengths to specialized elds of their own expertise. Santosh Singh Rathore, a software professional, with good technical knowledge, started running his own company even though he had limited exposure to the managerial skills needed to run a business enterprise.

These factors are a huge disadvantage to startups in India when compared to neighboring countries like Singapore which already have a good number of angels and early stage funds in their startup ecosystem and a government that openly supports technology ventures with grants and friction reducing initiatives. Many entrepreneurs in India like Santosh Singh Rathore of Ommune IT Solutions treat these constraints as a challenge and survive in such harsh operating environment based purely on optimism and persistence. They use the advantages of cost-effective manpower and lower operational expenses in India to efciently use their limited nancial resources to keep aoat till the business models start generating prots.

Startups that reinvented themselves

Google, at one time, was searching for a stable revenue source. For quite a long period in its existence, Google had no focused business model. After making marginally protable forays into selling search applications to businesses and its own search technology to other search engines, Google radically changed course in 2003. The company launched its AdWords program which allowed businesses to advertise to people while searching on google.com. To this day, AdWords comprises a major share of Googles total revenue. Incidentally, one of the largest online companies in India, naukri.com[5], did not have an internet account, or even an internet connection, when it rst began operations. Sanjeev Bikhchandani founder of naukri.com saw a potential market for salary survey on what companies were paying to fresh MBAs. For the rst seven years, the company drifted as Sanjeev and other co-founders tried various ideas such as databases, salary surveys, feasibility studies, training and everything else that came their way, just to survive, and operated out of the servant quarter above the garage at home. His drive to solve the problem and the belief that there is potential in his idea, ensured that he did not give up even though there were many struggles, including not being able to draw a salary, in the rst six years. The support of his wife, a classmate from business school and working with Nestle then, allowed Sanjeev the time and opportunity to enjoy the thrill of following his dream. And just as they had tried half a dozen small ideas, naukri. com was also seen as just another small idea as they launched themselves as the rst online jobsite in India. Naukri.com itself grew at a very slow rate and Sanjeev accepted outside funding only when JobsAhead[6] came into the market. Then the dot com bust happened and at one time the company was losing over INR 2.5 million per month. It was the combined efforts of various teams that saw naukri.com pull ahead. Today naukri.com is among Indias better known success stories in the internet space[7].

Competitor analysis
The industry in which Ommune IT Solutions operates is a highly competitive one with numerous one man rms offering web site development and web solution services at very low costs. Some of the competitors in Delhi/NCR with whom Ommune IT Solutions competes for business are:
B

Benchmark Internet Group India[8] Pvt. Ltd. This Company offers services such as e-mail marketing, SEO, pay per click (PPC) management and web site visitor trafc analysis. It has a staff of 14. The functions and the key skill set that the company offers are in the areas of call centre, system administration, linux content/copy writers, human resource development, marketing/sales and other similar areas. FC Net India[9] Pvt. Ltd. This is an India-based development arm of Fidelio Cruise Software, the worldwide leader in Software solutions for the Cruise Industry. The ten member team of the company offer special skill sets in the areas of Dot Net, Oracle and Visual Basic.

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Initiative Technologies[10]. Since its inception, the company has provided a wide array of innovative e-business solutions and services to provide complete business solutions to organizations wanting to have a web presence. We align proven technical expertise with business insight. It has a staff of ten employees. Khushii IT Solutions[11] Pvt. Ltd. The group of eight people in this company provides turnkey IT solutions and cutting edge products to companies, institutes and individuals. Wiseassist Knowledge Solutions[12] Pvt. Ltd. The expertise of this company is in spanning biometrics, mobile technologies, RFID and hand-held devices. It has a staff of 16 people.

There are thousands of such companies which have mushroomed in the last decade which specialize in IT and internet-based services to individuals and corporations using less than 25 employees on their payroll due to low nance availability with the entrepreneur. Most of these companies have been started by passionate entrepreneurs with specialisation in their elds with little experience in business skills. These companies are low turnover startups that operate from a small setup with access to high speed internet. The nancial data of such companies is unstructured and as these companies are usually not listed on the local stock exchange, the real nancial margins, turnover, prot and other such parameters are very difcult to compile.

Market growth rate vs market share

Within Ommune IT Solutions, the independent consulting earnings of Santosh Singh from foreign clients are a valuable source of consistent cash ow to the company. Typically web site setup and maintenance work from mom and pop stores is a low prot margin business. Similar is the case with companies providing SEO solutions in developing countries where a large number of startups such as Ommune ght for securing this business leading to lower protability. As far as the future is concerned, increasingly it is difcult for entrepreneurs to develop accurate business forecasts considering the high variability in business secured from one month to another particularly in Delhi/NCR. However, the CRM tool has the potential to have a large market share and even enjoy a comparatively high market growth rate.

Business environment for achieving sustainable competitive advantage

B

Prot model. The prot model adopted by the Indian IT industry has been to acquire overseas projects at low costs and then employing inexpensive Indian manpower to execute those projects. The larger the scale adopted by the entrepreneur, the higher the protability of the company due to economies of scale. The excessive competition has led to lower quality of services provided which has led to large Indian ITcompanies becoming complete solution providers rather than just service providers. In this area, they are facing stiff competition from both local companies as well as multinational companies who are already experienced in this eld. Government support. The government of India has supported and encouraged the growth of the IT industry by providing a ten year tax holiday. The companies operating from the special economic zones (SEZs) enjoy a 15 year tax holiday as per the SEZ Act passed in 2005. Skilled manpower. The key requirement of this industry is for skilled and educated English-speaking manpower to provide efcient services at globally accepted standards. Indian engineering colleges are producing software engineers at breathtaking speed but the quality of education imparted and the soft skills (communication, language, grasping levels and such other skills) of the majority of the graduates fall well below the levels required for an industry to maintain its output levels. Cost of operations. The increasing cost of operations in India due to high property prices, the rapid rate of increasing labour costs due to prevalent high ination in the economy, poor infrastructure in terms of electricity and the connectivity network of the country is weakening the Indian IT industrys position as a cheap alternative provider of services to developed nations of the world. The cost of operations for the IT industry has increased multi-fold in the last decade whereas increasing competition has kept the prot margins in

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check thereby reducing the protability of companies. This is leading to the emergence of other countries such as the Philippines and China as cheaper alternatives and a threat to the Indian IT industry.
B

Global economic crisis. With fears of a global downturn looming large, the IT spend of companies is likely to be affected. This will denitely lead to a lowering of demand for the services provided by Indian IT companies. This also calls for a change in outlook of Indian IT companies. They should concentrate on more products based revenue earning models or concentrate on tapping the domestic IT services demand. For instance, the Indian Government is allocating huge budgets to computerize tax revenue collections to try and maximise tax collections and reduce the ongoing large-scale tax evasion.

Ommune: the new business model

Ommune adapted its business model to offer outsourcing services for Indian customers such as setting up low cost web sites and SEO solutions. Since the company was very small and had little capital to invest, the focus was on designing and maintaining web sites for local and global businesses as well as institutions. Some of these contracts were piecemeal as well. In addition, the company undertook the supply of other IT solutions to clients, on demand. These were typically very small deals in terms of revenue with nearly 40 percent of business clients being mom and pop owned stores wanting to have an online presence. The deal size was in the margin of INR 8,000 to INR 15,000 for a local client with an average of six to seven deals per month. The deal size was higher for clients based on a location outside India. As on January 2012, the companys why us[13] statement gave a very good idea of their market segment:
Being a complete Customer and Technology Driven IT Outsourcing company in India, Ommune IT Solutions Pvt. Ltd was known to offer an array of IT solutions like custom Web 2.0 based web site development, online branding, SEO, web marketing services, software development and IT Infrastructure services that are aimed at supporting businesses locally as well as globally. The cost effective services to organizations that outsource their web site development, online branding, web designing or SEO services, software development services, IT Infrastructure services, etc. were sustained by their dedicated pool of IT professionals, relieving their clients from high managing costs and manpower investments without compromising on quality.

While the company was making money on individual deals, it was still not making an overall prot as the cash outows were more than the cash inows. The company tried brick and mortar businesses as well. A commercial vehicle, purchased for about INR 6,00,000, kept standing without being put to any use. There was a bank loan with INR 15,000 equated monthly instalment (EMI) into its seventh month as of now, relating to the commercial vehicle. The loan was for a two year period with a principal of INR 3,00,000. The value of the commercial vehicle in the second hand market was estimated at INR 4,00,000 which was equal to the amount that was owed to the bank (in case of prepayment of loan) after the various EMIs that had been paid in the last two years. Although the amount was not large, for a startup it may well forgo xed assets which, although in the long term, may be useful but which tend to create a cash crunch in the short term. The company was staying aoat through cash ows by equity raised through independent IT consulting by Santosh for foreign clients. The consulting was in the form of trouble shooting and issue resolution. The consulting done by the founder brought in around INR 1,10,000 per month. This was being considered as a separate cash ow as the founder was doing it to provide the necessary cash ows to the startup. This job was not being handled by other employees of the company as only the CEO had the competency/required skill set to handle such work. The primary issue that confronted Ommune was hiring of employees skilled enough to handle ad hoc tasks independently. Over the last 12 months, the founder estimated he had pumped in at least INR 12,00,000 into the company and still had to work as a consultant to manage the cash ows.

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As an interim measure, the company started recruitment of staff with dedicated personnel for marketing and designing. The company now had a total strength of more than ve people and had no external equity, other than that of the founder. The core team comprised two developers, one being the founder himself, a graphics designer and a general executive. Because of a cash crunch and unstable revenues, the company was having difculty in hiring and retaining employees. Realizing thin margins and the cut throat competition, the company felt the need to focus on marketing for contracts in the Delhi/NCR. For sales and marketing executives that the company wanted to hire, it proposed to pay a xed salary of INR 10,000 plus 15 percent of sales above INR 40,000 generated by them (Exhibit 1). It estimated that each marketer can bring in business that will keep decreasing as the number of marketers increases (Exhibit 2). The estimates are based on the performance of the staff they already have. A healthy mix of telesales and site marketers (who will go to customers and personally meet them) was needed. The company could only service a limited number of clients without employing more developers. A developer in the area of expertise that the company needed would cost at least INR 50,000 a month in terms of salary. Also, as the company is fairly new and had a small ofce space, sufcient only for the people currently employed (excluding the CEO), it cannot accommodate more than eight employees in any case. To increase margins and stability of revenues, the company invested in product development. The companys rst product, a standalone CRM tool, was in testing phase and it was looking for a product evangelist. For this product, the company was looking for product evangelists in different locations. The CRM tool was built with signicant development costs (Exhibit 3). The company was contemplating the best model for remuneration to the product evangelist (namely xed pay or xed pay plus incentive or entirely percentage of sales, see Exhibit 3). To compute sales, it referred to sales directly pushed by the sales team or the online evangelists, who were not full time employees of the company but were product afliates in a way and were working on commission basis. While the product had generated excitement in the market, the CEO felt there were no reliable estimates for future sales once the product is commercially released. He wanted an online product evangelist for different locations and believed the different incentive models could directly inuence sales. He felt (on the basis of data from exclusive beta reviews of the product), that each product seller could drive sales anywhere between INR 50,000 and INR 3,00,000 (Exhibit 4). Based on past market research undertaken by the CEO, he assumed a different probability for different level of sales (telecaller based). The market potential was estimated by analyzing the sales of other companies dealing in similar products (Exhibit 4). As of January 2012, the company had a monthly ofce rental of INR 25,000. The net assets of the company in terms of equipment were approximately INR 2,50,000 with present market value of an estimated INR 1,40,000 (depreciation on IT equipment is generally faster as compared to other assets). The company was spending around INR 80,000 in salaries and INR 40,000 in other expenditure for its existing employees. The CEO took a comparatively smaller salary of INR 30,000 compared to his overall contribution to the company. He estimated that if he was working all by himself as an independent consultant full time he could earn up to INR 2,00,000 monthly (essentially what the CEO is presently doing part time and earning approximately INR 1,10,000 per month). This estimate is based on income that he is generating presently as an independent consultant. While the CEO wanted to be an entrepreneur, he wonders if the returns from his business justied the opportunity cost he was incurring. The company was presently earning monthly revenues of around INR 1,00,000. This amount was highly variable and had seen a minimum of INR 50,000 and a maximum of INR 1,80,000. As per plan, the company stated the cost of supporting customers for different issues with standard hourly rates, but these were negotiable (Exhibit 5).

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Final lap: lessons to be learnt

In the absence of structured MBA inputs in a business school, the CEO wondered what the present situation meant for his company. Often his thoughts revolved around the future path for Ommune IT Solutions. Was it the right time and did it make sense to focus on more products? Alternately, the risks in product development made him wonder if the company should move towards a complete outsourcing model jettisoning all independent product development. Santosh kept deliberating on these decisions and wondered if he needed a more detailed analysis in order to reach a nal decision to determine the ultimate fate of Ommune IT Solutions. Santosh did not take the risk factor into consideration while deciding the future course of action for Ommune IT Solutions. By working part time, he was hedging his risk both in terms of money and time. Had he invested the entire sum of money at time zero, he would have incurred interest cost and the risk of going burst. By working as consultant, he gave time to his business plans to nurture on one hand and buying time to understand the nuances of business on the other. As Ommune IT Solutions was only 16 months old and still was generating revenue, Santosh thought he should give more time to his dream by focusing on new markets, new products and giving ownership to employees in the company instead of giving them salary, a plan oriented towards reducing his immediate cash outows.

Notes
1. http://ommune.com/ 2. A technology evangelist is a person who attempts to build a critical mass of support for a given technology in order to establish it as a technical standard in a market that is subject to network effects http://en.wikipedia.org/wiki/Technology_evangelist 3. www.infosys.com/ 4. www.infoedge.in/ 5. www.naukri.com/ India 6. www.jobsahead.com/ 7. Details sourced from: http://peoplematters.in/articles/cover-story/business-of-jobs

Keywords: Business strategy, Entrepreneurship, Cost benet analysis, Financial management, India, Outsourcing, Competitive strategy

8. www.benchmarkemail.com/ 9. www.fcruise.com/ 10. www.initiativetechnologies.com/ 11. www.khushiiit.com/ 12. www.wiseassist.com/ 13. http://ommune.com/

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Exhibit 1
Table EI Description sales and marketing executive
Designation: sales and marketing executive Candidate prole Candidate should have sales and marketing attitude. Who thinks she/he can sell anything and everything to anyone Candidate must have zeal to work hard for personal as well as companys growth Candidate must have excellent communication skills Candidate must have basic understanding of the computer software terms Work prole Work involves marketing site development work of company to various clients Getting requirement from clients and selling web development products Convert leads into sales by contacting clients and making business relations Generate business by various modes of communication and networking Additional information Telemarketers Functional area Sales/business development Experience One to two years Location Delhi, National Capital Region (NCR) Company name Ommune IT Solutions Pvt. Ltd Salary and INR 10,000 per month xed 15 percent incentives after INR 40,000 compensations business Note: Interested folks can send their resume to the company

Exhibit 2
Table EII Estimate of revenues from hiring new staff
Number of marketers or telecallers hired 1 2 3 4 5 6 Business targets monthly (in INR) 70,000 65,000 60,000 55,000 48,000 44,000 Number of new developers needed 0 0 1 1 2 2

Exhibit 3
Table EIII Estimate on upcoming CRM software
Estimated cost of developing the software License type Fixed amount incentive model INR 16,00,000 Two machines (INR 15,000), up to six machines (INR 30,000), unlimited (INR 1,00,000) INR 30,000 if sales less than or equal to INR 1,50,000; else INR 50,000 above sales of INR 1,50,000 INR 15,000 xed plus 12 percent of sales above INR 50,000 18 percent of all sales

Variable plus xed incentive model Completely variable

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Exhibit 4
Table EIV
Total sales (in INR) Upto 50,000 50,001-1,00,000 1,00,001-1,50,000 1,50,000-2,00,000 2,00,000-2,50,000 2,50,001-3,00,000 Probability 0.80 0.70 0.55 0.45 0.30 0.25

Exhibit 5
Table EV Ommunes pricing plans for clients
Plan name Elites Pricing $30/h Features 3 years experienced dedicated resource One of the best member of the team 24*7 availability on skype/gtalk/YMessenger/RBol/Windows Live or any other messenger Highly procient soft skills 2 years experienced dedicated resource Competent enough to ensure 100 percent client satisfaction Available in IST (GMT 5:30) hours only Highly procient soft skills An experienced resource/team of resources will be allocated. No direct point of contact Competent enough to ensure 100 percent client satisfaction Available in IST (GMT 5:30) hours only Highly procient soft skills For already existing customers For the projects associated with us

Palladins

$25/h

Cavaliers

$20/h

Monks

$15/h

About the authors

Dr Monica Singhania is Associate Professor, Faculty of Management Studies (FMS), University of Delhi. She is a graduate from Shri Ram College of Commerce, post-graduate from Delhi School of Economics and a Fellow Member (FCA) of the Institute of Chartered Accountants of India. She has the distinction of being placed in the merit list of the examinations conducted by both the University as well as the Institute. She has been awarded a PhD in the area of corporate taxation from the University of Delhi. She is the author of ve books on direct tax laws and has had many research papers published in leading journals. She teaches management accounting, management control systems, project management and corporate taxation to MBA students at FMS. Monica Singhania is the corresponding author and can be contacted at: [email protected] Syed Ashraf Husain belongs to the MBA Class of 2013, Faculty of Management Studies (FMS), University of Delhi. He is a Computer Science Engineer from Pune University. He has worked in the insurance and healthcare domain in information technology sector for nearly three years. In 2012, he attended the international summer business program (ISBP) at IAE Lyon, France. He was part of the team that represented India at the international nals of the KPMG International Case Competition in Hong Kong in 2012. He has interests in nance and strategy and in his free time loves to read.

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Teaching notes
Monica Singhania and Syed Ashraf Husain

Subject area
The case provides valuable insights on emerging market challenges faced by small entrepreneurial startups like Ommune by comprehensively providing the complete business environment backdrop in sections such as emerging market challenges, Porters ve forces model, BCG matrix and competitor analysis. In addition, this case study looks at the strategy of performing a cost benet analysis to arrive at a decision on whether to go in for business expansion by a relatively new company in the fast changing and competitive dynamics of the internet and software industry. The case considers the various alternatives available to the founder of the company with respect to the number of employees that can be added, the additional sales likely to be generated and the cost of taking on additional employees. It evaluates the combination of all the variables required for undertaking a comprehensive analysis and aims at identifying the best possible level to which the business can be expanded to maximize prots under the known constraints in which the business has to operate.

Study level
The case can be used in the following courses:
B

Post-graduate program in entrepreneurship. Students can be introduced to different cost concepts to be considered in cost benet analysis while undertaking managerial decision making. Executive training program for middle and senior level employees to highlight the concept of looking at various cost and revenue factors that inuence the decision making process and can be applied to new projects as well as projects not performing as per the objectives of the organization. MBA/post-graduate program in management in strategic management. It can be used to introduce the concept of SWOT analysis, competitor analysis, Porters ve forces model and BCG matrix. In addition, students learn the technique of cost benet analysis, collection of relevant cost data, forecasting revenues and using them to arrive at a decision aimed at meeting the companys objectives.

Case overview
Ommune Solutions was founded in late 2010 and is today focusing on providing Web 2.0 solutions to customers and at the same time developing a CRM tool which is in its nal testing phase. The Company was started by Santosh Singh Rathore a computer science engineer who wanted to venture out on his own. After the initial losses, Santosh took the company in a new direction that modied its business model to offer outsourcing services for Indian customers, setting up low cost web sites and search engine optimization (SEO) solutions. This was an extremely low margin business model at times especially for local customers but guaranteed business to the company. However the entire cash ow was still negative. The company was spending more that it was earning. The CEO generated more revenues by working as an independent consultant to information technology (IT) companies and earned approx. INR 1,10,000 per month which he pumped into the company. To increase margins and stability of revenues, the company has also invested in product development by building its rst customer relationship management (CRM) tool which currently is in testing phase and thus needs a product evangelist. The company is one of the many IT startups that are yet to nd a rm base in the industry. Although the company does look like having success with the CRM software, the cash ow seems to be the rst and foremost problem of the company. It is also looking into the salary of the employees and considering different modes of payments (xed salary, xed variable, fully variable). The company also has xed assets which it can consider disposing off, if required. After looking at all these and the opportunity cost of him not working as a full time consultant or as part of another organization, Santosh needs to decide should he continue to build the company and, if so, in which direction?

Expected learning outcomes

B

Use of SWOT analysis to identify the strengths, weaknesses, opportunities and threats to a company and use it as a tool to strategic decision making. Highlighting the importance

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of strategic tools such as Porter model and BCG matrix within an emerging economy backdrop.
B

Use of cost benet analysis as an effective tool for strategy deployment and achieving organizational objectives. The methods by which the cost and revenue data can be used to take nancial decisions regarding the levels of business expansion and prot maximization. To illustrate the complexities involved in a strategic planning process of identifying costs that can be cut, the additional revenue generation and the costs to be considered in order to expand the business and maximize protability.

Supplementary reading
Cost Accounting: A Managerial Emphasis, 14th ed., Charles T. Horngren, Srikant M. Datar and Madhav Rajan, Publisher: Prentice-Hall, 2012.

Social implications
This case helps students realize the difculties in realizing a strategic goal and keeping the company on the path to achieve desired objectives despite adverse changes in business environment. It introduces students to the concept of sustainability in the organization and emerging global challenges.

Introduction
The audience should be asked to read about the changes in the internet based and software industry in the last ve years and try to identify as many reasons as they can as to why most of the small and medium-sized companies in the industry have failed or are facing tough times in generating revenues and prots. A look at the performance trends of these companies over recent years would help them in their quest. The audience can then proceed to identify the companies which have done exceptionally well like Google, naukri.com and other such companies and list the right initiatives these companies have undertaken to emerge as leaders in their respective areas despite the stiff competition and changing dynamics faced by them as the rest of the industry. This would assist them to get an idea of the business and the industry prole in which Ommune IT Solutions is operating. Students have to thoroughly understand the nature of various xed and variable costs in the company, their nature and their effect on prots of the company under various levels of operation.

Teaching plan/process
Method 1 Students should be told to read the case before coming to class and they should be given the suggested reading of Horngren et al. (2012). Also, they should be given the assignment questions as home work in order to have a full edged discussion in class. The case can be taught in the following manner (considering one 90-min class session with a 10-min break). The students can be divided into groups of four or ve and they can be made to present their analysis of the case based on discussion questions. This will help them to become familiar with the case so that they will be able to better discuss the analysis parts in class and each group will give a different solution to the problems faced by Ommune IT Solutions which would make a great way to exchange strategy formulating ideas. Considering a 90-min session, we have the situation shown in Table I. The entire analysis/discussion questions and topics can be taken from the set of the questions given below in the discussion section. A thorough knowledge about the case is necessary for a fruitful discussion. Table I Session 1
Instruction Group presentations Discussion of analysis questions Time period Total time of 60 min 30 min

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Discussion questions
1. Carry out a SWOT analysis and Porters ve competitive forces analysis for Ommune IT Solutions. 2. Develop a BCG matrix for Ommune IT Solutions. 3. What are the sources of revenues for the company? 4. What are the main problems being faced by Ommune IT Solutions? 5. Is the present cash ow of the company positive or negative? 6. What steps can the company take to improve its cash ow under the present circumstances? 7. Should the revenue earned by the founder from consultancy services be considered as revenue of the company for the purpose of decision making? 8. How many telecallers should be hired by the company for business expansion and why? 9. Can a better decision model be developed by assigning probabilities to different level of sales likely to be generated? 10. Which model of remuneration would be suitable for Ommune (xed, xed variable or variable)? 11. Should Santosh Singh Rathore continue with the company or start working as a full time IT consultant? 12. Suggest any other strategy which can result in a better decision for Ommune IT Solutions?

Suggested solutions to Ommune IT Solutions problems

SWOT analysis Strengths
B

Santosh Singh has the expertise in technical know-how and is passionate about his business. Investment in research and development to develop the CRM. Regular ow of business from mom and pop stores assured regular business. Direct interaction with customers helps better understanding of needs and increases efciency by reducing response time. Helps in relationship selling. Low overheads in business operations.

B B B

Weaknesses
B B

Currently have a small customer base with few customers. No other vertical market CRM tool is yet to be marketed and response unknown. Negative cash ow only being sustained by consulting work done by Santosh Singh. The nancial capital required for marketing and expanding business is limited. Lack of marketing and business experience.

B B

Opportunities
B B B

The developed CRM has the potential to become a success. Create an add on to existing products or services. Offer consultancy and training.

PAGE 12 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 8 2012

Threats
B B

Highly competitive industry with similar web design competitors. New technology changes due to which software products becoming obsolete within a short period of time. Price wars between Ommune IT Solutions and its competitors.

Porters ve competitive forces model Porters ve competitive forces model[1] when applied to Ommune IT Solutions identies the following key areas: 1. Competition in industry. Indian IT industry acquires overseas projects at low costs and then employs inexpensive Indian manpower to execute those projects. The larger the scale adopted by the entrepreneur, the higher the protability of the company due to economies of scale. The excessive competition has led to lower quality of services provided which has led to large Indian IT companies becoming complete solution providers rather than just service providers. In this area, they are facing stiff competition from both local companies as well as multinational companies who are already experienced in this eld. 2. Potential of new entrants into industry. Abundance of skilled manpower within the IT sector, global economic turmoil leading to rise in unemployment, high population and ination in India and requirement of low xed investment to begin with have all led to a very high potential of new companies entering on an everyday basis within this industry. The government of India has also supported and encouraged the growth of the IT industry by providing a ten year tax holiday. The companies operating from special economic zones (SEZs) enjoy a 15 year tax holiday as per the SEZ Act passed in 2005. 3. Power of suppliers. The industry in which Ommune IT Solutions operates is a highly competitive one with numerous one man shows offering web site development and web solution services at very low costs. This results in acute rivalry among competing enterprises, thereby considerably reducing the power of such IT service providers. In addition, with fears of a global downturn looming large, the IT spend of companies is likely to be affected. This will denitely lead to lowering of demand for the services provided by Indian IT companies. This also calls for a change in outlook of Indian IT companies. They should concentrate on more products based revenue earning models or concentrate on tapping domestic IT services demand. For instance, the Indian Government is allocating huge budgets to computerize the tax revenue collections to try and maximise tax collections and reduce the ongoing large scale tax evasion. 4. Power of customers. Customers seem to enjoy all powers since they have plenty of choice in terms of selecting an IT service provider. Due to stiff competition, the customer generally takes advantage of bargaining hard and in most cases tends to get the work done at a fairly competitive price. However, the increasing cost of operations in India due to high property prices, the rapid rate of increasing labour costs due to prevalent high ination in the economy, poor infrastructure in terms of electricity and the connectivity network of the country is weakening the Indian IT industrys position as a cheap alternative provider of services to developed nations of the world. The cost of operations for the IT industry has increased multi-fold in the last decade whereas the increasing competition has kept the prot margins in check thereby reducing the protability of companies. This is leading to emergence of other countries such as the Philippines and China as cheaper alternatives and a threat to the Indian IT industry. 5. Threat of substitute products. There is a high threat for all companies focusing on providing Web 2.0 solutions to customers as essentially the end product delivered to customers tends to be comparable and there is largely no novelty associated with seeking services of any one particular company. The key requirement of this industry is skilled and educated English-speaking manpower to provide efcient services at globally accepted standards. Indian engineering colleges are producing software engineers at breathtaking speed but the quality of education and the soft skills (communication, language, grasping levels and such other skills) of the majority of the graduates fall well below the levels required for an industry to maintain its output levels.

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BCG matrix The market growth rate-market share matrix[2] analyzes different divisions within a corporation and compares their growth rates and market shares with those of competitors. It classies business products or services into four categories namely star, question mark, cash cow and dog (Figure 1). Sources of revenue There are three sources of revenue for the company: 1. Telemarketers and developers for the web site or the Web 2.0 solutions. 2. Potential sales from the newly developed CRM product. 3. CEOs contribution from independent consulting. The main decisions to be made include:
B

Number of telemarketers and developers to be hired for sales in the web site development area. Model to be followed for product evangelists to push sales of CRM software across different locations. Future of the company.

The current revenue and expenditure details of the company are as shown in Table II.

Figure 1
Market Share Low High
Market Growth Rate
Stars: (Potential to have large market share) Customer Relationship Management (CRM) Tool Cash Cow: (Consistent Cash flow producing) Consulting earnings of Santosh Singh from foreign clients

High
Question Mark: (Future Uncertain) Marketing contracts in the Delhi/NCR region

Low

Dogs: (Small Market share in mature industry) Website setup and maintenance work from Mom and Pop Stores, Search Engine Optimization (SEO) solutions

Table II
Monthly cash outow (INR) Rental Salary Other expenses EMI (commercial vehicle) CEO salary Total cash outow Monthly cash inow (INR) From sales of Web 2.0 solutions CEO consulting Total cash inow Net cash prot 25,000 80,000 40,000 15,000 30,000 1,90,000 1,00,000 1,10,000 2,10,000 20,000 (positive)

PAGE 14 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 8 2012

We will consider the data in Table II as the existing income (i.e. prot of INR 20,000) which will remain constant as the hiring process progresses. The companys net cash outow is INR 1,90,000. The companys net cash inow is INR 1,00,000. This leads to a net cash crunch of INR 90,000 (without considering the independent consulting income of the CEO). However, by adding the consulting income of the CEO, the net cash prot is INR 20,000. But the operating loss is INR 90,000. The loss is something that is not unexpected as most of the companies incur losses during the initial phase which the CEO hopes will change with the introduction of the new CRM software. However, it is suggested that the CEO sell his vehicle and payoff the outstanding loan of the bank. This will improve the cash ow by INR 15,000. For a startup company, this kind of unutilised depreciating asset can be avoided. This will lead to the following expenditure and revenue detail (Table III). Although the company seems to be making a prot of INR 20,000, it is actually incurring a loss of INR 2,00,000 in the original scenario and INR 1,85,000 in the second scenario as we look into the prot and loss statements (Table IV). The xed variable model of the marketers for the web solutions is as: **the xed component of telemarketers is INR 10,000 and the variable component is 15 percent of the sales above INR 40,000; the cost of the developers will be included as the sales increase; depending upon the number of the employees to be hired is xed to a maximum of eight (six marketers two developers) as the present ofce and market conditions do not allow us to consider us more. Fixed cost. Fixed costs are costs that do not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of a good or service, along with variable cost. Table III
Monthly expenses (INR) Rental Salary Other expenses CEO salary Total cash outow Monthly revenues (INR) From sales of Web 2.0 solutions CEO consulting Total cash inow Net cash prot 25,000 80,000 40,000 30,000 1,90,000 1,00,000 1,10,000 2,10,000 35,000 (positive)

Table IV
Prot and loss Total income Other income (consulting) Total income Employee cost (80,000 30,000) Administrative cost Rent Total expenses Operating prot/loss Depreciation EBIT Interest Prot/loss before tax Year 1 (original scenario) 1,00,000 1,00,000 1,10,000 40,000 25,000 1,75,000 2 75,000 1,10,000 2 1,85,000 15,000 2 2,00,000 (loss) Year 1 (consolidated considering CEOs income) 1,00,000 1,10,000 2,10,000 1,10,000 40,000 25,000 1,75,000 35,000 1,10,000 2 75,000 15,000 2 90,000 (loss) Year 1 (if selling the vehicle) 1,00,000 1,00,000 1,10,000 40,000 25,000 1,75,000 2 75,000 1,10,000 2 1,85,000 2 1,85,000

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Variable cost. Variable costs are corporate expenses that vary with the production output. Variable costs are those costs that vary depending on a companys production volume; they rise as production increases and fall as production decreases. Variable costs differ from xed costs such as rent, advertising, insurance and ofce supplies, which tend to remain the same regardless of production output. Fixed costs and variable costs comprise total cost. In our case, the xed cost would include the sum of the cost being incurred in paying salaries and rent being paid. The employees are being paid a xed amount of salary irrespective of the amount of sales. The developers salary is xed but at the time of counting sales it will be counted as a variable as the number of developers will be different with different level of sales (number of new developers would vary from 0 to 2). A part of the salary is variable (15 percent of the sale above INR 40,000). At the time of calculating the variable component percentage, the monthly sales target reduces with the increase in the number of telesales. This is because of the limitation of the company operating in a localized area where the total target customers are limited. Therefore, with the increase in the number of telemarketers, the number of customers/telecallers would reduce and this would also lead them to poach the others customers. This, however, is not a limitation of the telecallers potential and actual sales. The CEO has estimated it on the basis of data he has presently (Table V). It is seen very clearly that the revenue maximization is seen at the hiring of four new marketers and one developer on top of the current level of employees (net revenue INR 1,41,000). Which would still give us loss of INR 44,000 (1,85,000 2 1,41,000) but that is offset by the money that the CEO is putting into the company. Revenue calculation with respect to the CRM software Similar to the concept of xed and variable cost, the revenue is seen with respect to the three models for the CRM software is seen as below: 1. Fully xed. 2. Fixed variable. 3. Fully variable. The xed model has two different salary brackets: 1. Fixed salary of Rs 30,000 up to sales of INR 1,50,000. 2. Fixed salary of Rs 50,000 for sales above INR 1,50,000. The xed variable model has a xed component of INR 15,000 and a variable payment of 12 percent of the sales in the bracket of INR 50,000, INR 1,00,000, INR 1,50,000, INR 2,00,000, INR 2,50,000 and INR 3,00,000. The fully variable model has a complete variable payment of 18 percent of the sales in the bracket of INR 50,000, INR 1,00,000, INR 1,50,000, INR 2,00,000, INR 2,50,000 and INR 3,00,000. There are two things to be considered here: 1. There is no xed estimate of sales; hence we have done an analysis of the gains in case of different level of sales. 2. It is clearly seen that the 100 percent variable model delivers higher revenue to the company with zero xed cost at revenue levels of INR 2,50,000. Since the sales cannot be predicted for a startup, it makes sense to keep the cost low and make the salary payment more in the variable component which is directly linked to sales. This should also act as a strong motivator for higher sales and at the same time keep the revenue high at low sales for the company. The xed model is divided into two brackets: INR 30,000 for sales up to INR 2,00,000 and INR 50,000 for sales above INR 2,00,000. The xed and variable mix model has INR 15,000 as xed and 12 percent of sales as variable payment.

PAGE 16 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 8 2012

Table V
Variable component (15 percent of sales above 40,000) (8) 15 percent of (4) 2 40,000 (2)

Fixed variable Number of Business Number of marketers telecallers targets new Existing hired (over and monthly/ Total developers Developers Total xed salary income above the existing) telecaller revenues needed salary (telecallers) (1) (2) (3) (4) (2) (3) (5) (6) (5) 50,000 (7) (2) 20,000

Total salary Net prot paid (to (business target 2 telemarketers) total salary) (9) (7) (8) (10) (1) (4) 2 (6) 2 (9)

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20,000 20,000 20,000 20,000 20,000 20,000

1 2 3 4 5 6

70,000 65,000 60,000 55,000 48,000 44,000

70,000 1,30,000 1,80,000 2,20,000 2,40,000 2,64,000

0 0 1 1 2 2

0 0 50,000 50,000 1,00,000 1,00,000

10,000 20,000 30,000 40,000 50,000 60,000

4,500 7,500 9,000 9,000 6,000 3,600

14,500 27,500 39,000 49,000 56,000 63,600

75,500 1,22,500 1,11,000 1,41,000 1,04,000 1,20,400

PAGE 18 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 8 2012

j
Fixed payment 30,000 30,000 30,000 50,000 50,000 50,000 0 0 0 0 0 0 20,000 70,000 1,20,000 1,50,000 2,00,000 2,50,000 15,000 15,000 15,000 15,000 15,000 15,000 Fixed Variable payment Net prot Fixed payment Fixed variable Variable payment 0 12,000 18,000 24,000 30,000 36,000 Net prot 35,000 7,30,00 1,17,000 1,61,000 2,05,000 2,49,000 100 percent variable (based on sales) Fixed payment Variable payment Net prot 0 0 0 0 0 0 9,000 18,000 27,000 36,000 45,000 54,000 41,000 82,000 1,23,000 1,64,000 2,05,000 2,46,000

Table VI

No. of people hired

Total sales

1 2 3 4 5 6

50,000 1,00,000 1,50,000 2,00,000 2,50,000 3,00,000

Table VII
Fixed

Probability

Total sales Net prot

Fixed Variable payment payment

Fixed variable 100 percent variable (based on sales) Expected Expected Expected prot net Fixed Variable prot net Fixed Variable prot net prot * probability payment payment Net prot prot * probability payment payment Net prot prot * probability

VOL. 2 NO. 8 2012 EMERALD EMERGING MARKETS CASE STUDIES PAGE 19

0.8 0.7 0.55 0.45 0.3 0.25

50,000 1,00,000 1,50,000 2,00,000 2,50,000 3,00,000

30,000 30,000 30,000 50,000 50,000 50,000

0 0 0 0 0 0

20,000 70,000 1,20,000 1,50,000 2,00,000 2,50,000

16,000 49,000 66,000 67,500 60,000 62,500

15,000 15,000 15,000 15,000 15,000 15,000

0 12,000 18,000 24,000 30,000 36,000

35,000 73,000 1,17,000 1,61,000 2,05,000 2,49,000

28,000 51,100 64,350 72,450 61,500 62,250

0 0 0 0 0 0

9,000 18,000 27,000 36,000 45,000 54,000

41,000 82,000 1,23,000 1,64,000 2,05,000 2,46,000

32,800 57,400 67,650 73,800 61,500 61,500

Note: *Assumption that the present telecallers make these sales over and above the work that they are doing and hence would be only be able to meet the lowest amount of sales/prot

The 100 percent variable model has 18 percent of sales as variable model (Table VI). For the convenience of calculating of xed payment, we would assume that the telemarketer would sell the higher bracket. For example, in the bracket of 1,00,000-1,50,000 he would be able to bring in an order of INR 1,50,000. The CEO by looking at the sales gure decides that up to the sales of 2,50,000 the most protable payment would be in the form of variable and between 2,50,000 and 3,00,000 the payment will be in the form of xed variable as it is most protable in that range. As per the future of the company, the sales and prot from the new product and regular operations have the potential to be greater than the opportunity cost. Also, until the sales from the product are very strong, it does not make nancial sense to move away from outsourcing contracts. Also, as products have higher prot margins and potential for nonlinear growth, strategic products should continue to be developed irrespective of the success of the about to be launched product, i.e. the CRM tool. Assuming the probabilities at different point of sales, we get the expected prot by the CEO at different point of sales (Table VII). We see that the CEO can expect a maximum prot of INR 73,800 per telecaller at a sales gure of INR 2,00,000 and the minimum prot of INR 32,800 at sales gure of INR 50,000. By taking the worst case scenario, i.e. no other telecaller apart from the four telecallers (which the CEO is going to hire as seen in the rst analysis) in the ofce make the sales (assuming minimum prot of INR 32,800 telecaller) Total prot in the CRM software will be 4 32,800 INR 1,31,200 Total cost of the CRM software INR 16,00,000 BEP 16,00,000/1,31,200 12.19 months. Notes 1. Michael E. Porter developed a model which identies an industrys structure in order to determine corporate strategy. This model identies and analyzes ve competitive forces that shape every industry and helps determine an industrys weaknesses and strengths. The ve forces are competition in industry, potential of new entrants into industry, power of suppliers, power of customers and threat of substitute products (Porter, 2008). 2. BCG matrix was developed by Boston Consulting Group.

References Horngren, C.T., Datar, S.M. and Rajan, M. (2012), Cost Accounting: A Managerial Emphasis, 14th ed., Prentice-Hall, Englewood Cliffs, NJ. Porter, M. (2008), The ve competitive forces that shape strategy, Harvard Business Review, Vol. 86 No. 1, pp. 78-93.

PAGE 20 EMERALD EMERGING MARKETS CASE STUDIES VOL. 2 NO. 8 2012

Abstract Title Ommune IT Solutions: make or break. Subject area Accounting and nance, entrepreneurship and business strategy. Study level/applicability The case is suitable for the following courses: post graduate programs in entrepreneurship; executive training programs for middle and senior level employees; and MBA/post graduate programs in management in strategic management. Case overview The case deals with an entrepreneurship venture whose initial business model appeared to be faltering with the founder wondering about the future of the company. After Ommune Solutions (founded 2010) initial business plan failed, the company started offering IT outsourcing services to Indian customers. However, the company was spending more that it was earning and the CEO generated additional revenues through independent consulting. By 2012 a customer relationship management (CRM) tool was also ready for release. The company was another IT start up yet to nd a rm footing. The CEO wondered whether he should continue to build the company and, if so, in which direction? Expected learning outcomes These include: the use of SWOT analysis as a tool to aid strategic decision making along with Porters ve competitive forces model and the BCG matrix; using cost benet analysis for evaluating business decisions; understanding the complexities involved in a strategic planning process; and identifying unnecessary cost and increasing revenue generation for expansion and maximizing protability. Social implications The case provides insight on challenges faced by a venture at an early stage in the business environment and the venture is analyzed in depth. It gives students a perspective on decision making and adapting to scenarios where initial business plans appear not to have succeeded. Supplementary materials Teaching notes are available for educators only. Please contact your library to gain login details or email [email protected] to request teaching notes.

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