Datatec was seeking to build a managed services, network outsourcing business worldwide. It required a presence in the US and identified a start up business in New York, whose venture capital backers were considering selling. As an early stage, start up business, assessing its potential.
David’s initial work was to review data provided by the target. As a start up, David wanted to form a clear view of how well designed was the company’s business architecture, how progressed was implementation, understand what was the customer value proposition and how well it had been tested.
To inspect facilities and understand the business model, David asked for a site visit and sales pitch as though he was a potential purchaser of the company’s services. This demonstrated excellent facilities that were dramatically presented and a well communicated case for change. The company had made many such sales presentations to real prospects, but had closed very few deals despite the apparent quality of the facilities, sales support materials and people. David hypothesised that the value proposition for potential customers was poor. He took the company’s pricing structure and compared it to a number of cost scenarios modelling a company performing the same functions in house. This identified that for companies building brand new IT infrastructures, the managed service was a cost effective option. However for customers with existing solutions – the vast majority – the benefits relative to self provision were at best marginal.
David recommended that Datatec should not acquire the company, on the basis that customer uptake and independent modelling indicated that the customer proposition was not attractive enough to drive the revenue growth required to make a return.