Sales Logic
Q1) The CEO of Sales Logic, Jason Schwartz is considering to change the business model of the company because of the demand of the customers and the market, after the revival of industry clients have started to ask to license the completed analytical models so they can run them in-house.
Option No 1:
The first option is to start providing the customers with the licensed software.
Most customers have demanded for this service from SalesLogic, it would be easier for customers as they would be able to run within their data centers. Standardized model will be used by all the customers. This model has the highest gross profit margin.
This business model has the highest burn rate and need more investment before the model starts returning. The model also requires rewriting the existing demand forecasting and markdown optimization custom analytic model to create a standardized model with standardized user interface. Need to hire software developers and sales executives.
Option No 2:
The second option is consider SaaS business model with standardized back-end.
This model requires the same standardized model but will run on the developers internal server, so the cost related to quality assurance testing, no need to build a system integration team and would also need smaller number of professionals and there is no need for more investment.
The model is not in demand by the customers, as they want to run it on their own database, the gross margin is lower than the option 1.
Option 3:
The third option is to make custom models for the consulting customers.
The model has the least burn rate, and the models will be hosted in the Sales Logic servers which also mean no requirement for extra professionals.
This business model has the least demand and the customers for this service are less than other options, the gross profit margin in this business model is better than the option two, but the demand is low.
Q2)
Effect of Assumptions on Cash flow:
The assumptions made by the CEO and Executives are valid.
In short term view the cost/client affects the cash flow the most, controlling the costs means that the gross profit will also be higher however, if the cost/client is higher it will also decrease the gross profit margin of the model.
The assumption which has the most effect on the ongoing economies of the business is the new clients that will be gained by the company in next two years periods; new clients will decide the total revenue that is earned by the company, if the company is gaining one clients every 4 month, even though if it yields the more gross profit per client, the model through which the company is gaining more clients even if the gross margin is lesser than the option 3 will have more influence on the cash flows of the company.
Q3)
Advice to Jason Schwartz:
Jason Schwartz and the executives should choose the licensed software model. Even though it has the highest burn rate and company will have to raise the finance again to fund the activities for three months and hire several new employees to provide the related services but licensed software has the most demand in the industry after the revival of economy.
Choosing the licensed software model also has the highest gross margin and the customers in year one is growing by 1 customer per month and 2 customers per month in the second year.Managing a Global Team Greg James at Sun Microsystems Inc (A) Case Solution
The assumption that will be needed to make in the cash flow from 2007 to 2009 are to incorporate the burn rate in the cash flow and increasing the number of customers by one every month of 2008 and 2 every month of 2009. In 2007 the existing business of the company should be added in the forecast and burn cost should be deducted from the forecast until the development of new product is increased.
Once the initial configuration fees and one time licensed fee is charged in the first month of the customer the remaining months should be charged with the outcome of $7500 and the income of $12500.....................................
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