Root Problem Analysis Using MECE Principle

The primary issue faced by the company is low year-on-year margin improvement (11% vs. 26% of
competitors). To explore the root causes, we break the problem down into the following mutually
exclusive categories:

1. Revenue Growth Issues

o Are there untapped revenue streams?

o Is the revenue distribution optimal?

o Can new customer bases be reached?

o Are there new market opportunities?

2. Cost Management Issues

o Is the cost structure optimized?

o Are there inefficiencies in resource allocation?

o How are contractor costs affecting the margin?

o Is the current operating model scalable?

Profitability Tree Breakdown

We can break down the company's profitability into two major branches: Revenue and Costs,
followed by deeper layers.

1. Revenue Breakdown

Revenue is split into IT Solutions and Maintenance (60%) and Product-based revenue (40%). Here’s
a further breakdown:

1.1 IT Solutions and Maintenance (60% of Revenue)

 Sector Breakdown:

o BFSI (46% of total revenue) → High margin sector (42%)

o Healthcare (21% of total revenue)

o Retail, Public Sector, Manufacturing, Travel, Entertainment (rest)

 Geography Breakdown:

o US (32% of total revenue) → High margin (48%)

o Middle East (27%)

o Europe (20%) → High margin (44%)

o India (9% margin) & Asia Pacific (14% margin) → Low margin

Key areas for growth:

  BFSI: High-margin, strong growth potential in India and international markets.

 Healthcare: Growing demand in US and Europe, especially in digital health solutions.

 Geographical focus: The US and Europe offer high margins, while India and Asia Pacific are
challenging due to lower margins.

1.2 Product Revenue (40% of Revenue)

 Current Breakdown:

o Digital Marketing (90% of product revenue): High revenue contribution.

o DevOps and Cybersecurity: Smaller shares, potentially low-margin but high-growth

areas.

 Revenue Growth Opportunities:

o Digital Marketing: Expanding into US and Europe, where demand for digital
marketing products is growing.

o Cybersecurity: Growing demand globally, especially in BFSI and Healthcare.

o DevOps: Increased automation and cloud infrastructure adoption in BFSI and

Healthcare sectors.

2. Cost Breakdown

2.1 Employee Costs (Permanent Employees & Contractors)

 Permanent Employees:

o 5000+ employees globally, majority (73%) in India (low-cost region but lower margin)
and the rest in higher-cost regions (US, Europe, Asia Pacific).

 Contractor Costs:

o 690 contractors globally, with 60% based in India, 5% in Australia, and 7% in Asia
Pacific. Contractors are 1.4x costlier than permanent employees, affecting margins.

o India: 60% of contractors are based in India, where cost pressures on margin are
high.

 Cost Optimization:

o The company needs to reduce reliance on contractors, especially in India, where

margins are already low.

o Consider outsourcing non-core activities to reduce contractor dependency.

2.2 Operational and Infrastructure Costs

 Regional Cost Variations:

o India and Asia Pacific: Low margin, high operational costs in these regions.
 o US and Europe: Higher margins, but operational costs are also higher. However,
these regions offer better growth potential and more affluent customer bases.

2.3 Technology Investments

 Investment in R&D and product development (DevOps, Cybersecurity, Digital Marketing)

could significantly reduce product-based costs in the long term and improve profitability.

Revenue and Cost Drivers - Analysis and Growth Areas

Revenue Growth Focus Areas

1. BFSI in India:

o BFSI is a major contributor to the company's revenue and has high margins.

o India is expected to continue its digital transformation in BFSI, and the company
could leverage this to cross-sell its product offerings (cybersecurity, digital
marketing).

2. Healthcare in US and Europe:

o The healthcare sector is seeing strong growth in the US and Europe, especially post-
COVID. This presents an opportunity to expand both IT solutions and product
offerings like cybersecurity and digital marketing.

3. Retail and Other Sectors:

o The retail sector (particularly in the US and Europe) also holds potential, with high-
margin opportunities.

o New sectors like AI, Cloud, IoT should also be considered for future expansion.

Geographic Focus for Growth:

 US and Europe: High-margin regions that should be the focus for both IT solutions and
products.

 India and Asia Pacific: Low-margin areas that need to be handled carefully to ensure
profitability.

Cost Management Strategies

1. Reduce Contractor Dependency:

o In regions like India where contractors are costlier, it would be beneficial to hire
more permanent employees. This would improve cost efficiency over time.

o Offshoring non-core tasks to lower-cost regions might help.

2. Optimize Operational Costs:

 o Focus on automation to reduce the operational overhead. Leverage AI, machine
learning, and other technologies to streamline operations, especially in maintenance
services.

o The company should look to centralize and standardize operations in regions with
high margins (US, Europe) while reducing non-value-added costs in low-margin
regions (India, Asia Pacific).

3. Increase Investment in High-Margin Products:

o The company should invest more in the cybersecurity and DevOps offerings, as
these can expand beyond just BFSI and Healthcare.

o AI and automation within these products can drive down long-term costs.

Acquisition Strategy

Acquisitions can potentially help expand the product portfolio, improve margins, and increase
geographical presence. However, strategic acquisitions should focus on:

1. Niche Technologies:

o Target smaller companies specializing in cybersecurity and digital marketing,

especially those with strong customer bases in BFSI and Healthcare sectors in the US
and Europe.

o AI and cloud startups could help enhance the product offerings in DevOps, digital
marketing, and cybersecurity.

2. Geographical Expansion:

o Look for acquisitions in Europe and the US to boost presence in high-margin regions.

o Smaller companies with existing customer bases in US and Europe could provide
ready access to new customers and faster entry into these markets.

Recommendations

1. Revenue Focus:

o Expand in BFSI (India) and Healthcare (US/Europe) sectors through increased

investments in both IT services and products.

o Push for product growth in cybersecurity and digital marketing in high-margin

markets (US, Europe).

o Explore emerging sectors (e.g., AI, Cloud, IoT) for cross-selling opportunities.

2. Cost Optimization:

o Hire more permanent employees in India and reduce contractor dependency to

improve long-term margin.
 o Invest in automation to reduce operational costs in low-margin regions.

3. Strategic Acquisitions:

o Acquire niche players in cybersecurity, DevOps, and AI technologies, particularly

those with a strong presence in high-margin regions (US, Europe).

o Target companies that bring in both technology and customer bases, facilitating
cross-selling opportunities.

By focusing on these strategies, the company can address its margin improvement issues, optimize
costs, and drive higher revenue in profitable sectors and regions.