VFM SOLUTIONS:

ORGANIZING FOR GROWTH

Sourav Mukherji, Assistant Professor of Organization Behaviour at the Indian Institute of

Management Bangalore, developed this case solely as a basis for class discussion. The
organizations mentioned in this case are imaginary.

© 2006, Indian Institute of Management Bangalore.

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The Idea of a Business

It was in a classroom like this that the idea of a business was born. Vikas had spent five years as
software developer before he decided to do an MBA from the prestigious Indian Institute of
Management (IIM). Vikas was not keen to go back to the software industry after his MBA.
Instead, he nurtured the ambition of starting a business of his own. Unlike most of his classmates,
Vikas knew what he wanted to do – act as a value added reseller (VAR) in the personal computer
(PC) industry. The demand for PC was booming in India, yet PC was increasingly being viewed
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as a commodity. Margins for the OEMs were under pressure, which led them to concentrate on
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the premium and corporate segment. Thus, the fastest growing SOHO segment was being
served by resellers of branded manufacturers or left to the gray market.

For a customer from the SOHO segment, PC purchase was no easy decision. There was a large
variety to choose from different configurations, forms and models. Technology changed rapidly
and potential convergence among digital devices added to the complexity. Moreover, most of the
customers in this segment were first time PC buyers, and often spending their own money for the
purchase. Many of them felt the need for some handholding during their decision making process,
for understanding the technology tradeoffs and assessing the risks of obsolescence. But the
OEMs did not have the time to educate their customers; their resellers did not have the
knowledge.

Vikas decided that his company would fill this gap by helping the potential customer to make an
informed choice. This would differentiate them from the other resellers in the marketplace, and
make the customers loyal. Even if they incurred more costs upfront, they should be able to
recover it over the life cycle of the customer. There was also a feeling that the trade margins in
the PC business can be significant, since the OEMs provide substantial volume discounts. When
Vikas told about his interests to his close circle of friends, two of them – Francis and Manish
decided to join him in his venture. Both of them had worked in the industry for sometime before
joining business school and had backgrounds that were complimentary. While Manish, a
chartered accountant, had joined IIM after working for two years in an audit-accounting firm,
Francis had been a sales manager at one of the largest consumer durable organization in India.
All three decided to postpone their placement opportunity at IIM for a few years, and got down to
planning and preparing for their venture.

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Original Equipment Manufacturer
2
Small Office / Home Office

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Vikas, Manish and Francis decided to name their company VFM Solutions, after their initials.
Tapping into the alumni network, they were able to talk to several of the OEMs present in
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Bangalore. Their discussions with the head of ICS India’s PC division were very encouraging
and VFM solutions started off as being a VAR for ICS India, based out of Bangalore. They signed
a two year exclusive deal with ICS and Manish was able to get a few percentage points more of
trade discount in return. Exclusivity also ensured that ICS financed a significant portion of their
startup costs and was also able to get its bankers to finance the rest. Very soon, the trio was
looking for a suitable office space in downtown Bangalore.

The Early Days

The initial few months were exciting, hectic and fruitful. The demand for PC was rising in the
SOHO segment and with increasing complexity in technology, potential customers were keen to
talk to someone who knew about technology and its use. While ICS was helpful in directing
customer queries to VFM, Francis convinced Vikas and Manish that they should go aggressive on
advertisements during the first few months, in order to create awareness about VFM and its
business proposition. His plan was to attack the market on multiple fronts – build a web site,
advertise in FM radio channels, leverage the IIM alumni network and sponsor events at IIM.
Manish got a bit worried with the upfront investments, but the three of them decided to go ahead
after some deliberations. Vikas got down to designing a simple website that would disseminate
information and can be updated regularly by any one of them. To cut costs, he used open source
software, which were downloadable free of cost. Francis assumed the task of responding to the
web based queries. He mentally kept track of how many inquiries they were able to convert and
started taking a personal target of the conversion ‘strike rate’.

Inquiries started with a trickle, but increased dramatically after they went live with the website and
inserts in Radio and TV. In one of their daily evening meetings, they decided to make their
second recruitment – a person who can handle inquiries and help Francis with the quotations.
Manish had used a placement agency for their first recruitment, a receptionist. However, this time
they needed to be careful, since they were not seeking generic skills. Francis thus got down to
defining the profile of the ideal candidate and after inputs from Manish and Vikas, sent the same
to a more specialized placement agency. He discussed with Manish what kind of salary the new
recruit can be paid. Manish believed that for a startup, it made sense to keep most of their costs
variable, and as such performance based incentives formed a significant part of the new recruit’s
compensation. The new recruit, Parthasarathy (Partha) joined them within a fortnight and Francis

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With global revenues of more than US$ 50 Billion, International Computer Systems (ICS) Inc. is one of the
world’s largest manufacturer of Information Technology products. ICS personal computers were among the
leading international brand being sold in India.

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heaved a sigh of relief after he explained and handed over the inquiry handling and quotation
responsibilities to Partha. Now it gave him time to think a bit long term, rather than get swamped
with daily transactions. Both he and Vikas continued to interact and follow-up with the customers,
educating them and, in the process, helping them to arrive at their decisions of purchasing ICS
PCs, more often than not.

Business picked up rapidly during the next few months. Sales grew from about five to twenty five
PCs a month. While the numbers were too small for ICS to take notice, what got appreciated was
the average price of the PCs sold by VFM. VFM seemed to be doing significant value addition by
convincing customers to go for PCs of higher configuration – which resulted in better profitability
for the OEM and better margins for VFM. Manish had taken complete charge of finance, freeing
Francis and Vikas to concentrate on customer acquisition and relationship management. Vikas
spent a lot of time with officials from ICS, working on discounts, understanding nuances of market
segmentation and thinking about further growth opportunities. Soon it became necessary for VFM
to ink some relationships with software vendors, especially Microsoft resellers so that VFM could
provide software like MS Office to the customer, bundled with the hardware. Even though Vikas
tried his best to sell “Open Office” to all his customers, Francis insisted that they have a long-term
agreement with Microsoft. Vikas thus took on the responsibility of building relationship with
software vendors.

The Company Rulebook and the Pricelist

Growing demand made Francis feel the need for recruiting additional people who can help Partha
in his work. After discussing with Partha, Francis informed Vikas and Manish that they needed to
recruit two more people – one for processing the inquiries and one for making sales calls on
customers. Till now VFM had visualized a business model that had no need for a ‘field’ sales
person – inquiries were dealt with and closed over the phone and email. Francis, Vikas or
sometimes Manish would visit the customer primarily for relationship building, or if requested by
ICS. However, Francis and Partha often heard the customer asking for a demonstration –
customers preferred touching and feeling the equipment before they made up their mind,
especially in the case of laptops. There were also a few cases where competitors could sway the
deal away from VFM, just by planting themselves on customer premises, and promising to match
the prices – even after VFM took all the trouble of educating the customer! After serious
deliberations, Francis was able to convince first Vikas and then Manish to get the field sales
person.

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Given the large growth in revenues and profitability, Manish had no problems in recruiting
additional people. He was however not so sure about changing the sales model because of a few
order losses. Variable costs for a field sales person were higher and Manish was a bit
apprehensive about people of ‘sales’ variety. Since the person will be out of office most of the day,
it would be very difficult to keep track of what he was up to. He was also sure that soon he would
start receiving dubious bills, which Partha would justify as necessary evils of the profession. He
told Francis that they needed to formulate a set of behavioral and ethical guidelines, especially for
field sales people, which were to be strictly enforced. Having obtained their concurrence, he set
about the task himself. After about a week, VFM system had the its first “company rulebook”
which laid down in great details ethical norms for all employees in the organization, and
behavioral guideline for personnel on the field. Both Francis and Vikas were impressed with
Manish’s attention to details and it reminded them of their days in IIM, when Manish would
routinely impress his professors with his diligence and sincerity. Vikas made up his mind to
upload the same on the company website, but realized that there would be issues of restricted
access. He needed time to think about and resolve the same.

A typical sales person in the PC industry would carry a pricelist having two columns with
headings “list price” (LP) and “transfer price” (TP). The sales person is given to understand that
the transfer price is the cost price of the PC (bill of material), while the list price, about 30% more
than the TP is the desirable price at which the PC needs to be sold. Actually, the TP is the price
at which the OEM transfers the PC to the retailer with a markup. Thus, when the first quotation is
sent from the retailer, it is usually the LP and the sales person has a 30% margin to play with.
Over time, this pricing norm became an “open secret” with the effect that customers started
negotiating from 70% of LP. To cut down on iterations with the customer, VFM decided to quote
10% above their actual transfer price (they called it RP: realistic price) in their first quotation. It
helped them to make an immediate impact from among a clutter of quotations from different
vendors, as well as economize on the sales cycle. However, there were situations when they
were tempted to sell below RP. In such situations, Partha would get an informal clearance from
any one of the trio, who would be knowing the volume discounts.

With experience, Partha would avoid going to Manish for the discount approvals because getting
a discount either from Francis or Vikas was easier. However, there would be times when none of
them would be in office and Partha would rather wait for them to come back, than going up to
Manish (if at all he was available). Late one night, Partha showed Francis a formal price list that
he had prepared. There were two versions of it – the first one had only one column against the
part numbers, and the numbers reflected the ‘realistic price’. This, Partha said, was for the two
people who were functionally reporting to him. However, the second version had a second

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column indicating the maximum possible discounts on each of the parts. This, he said will be with
him alone, after he gets clearance on the discounts from Francis. Francis saw value in
introducing a formal document, so that there is lesser dependence on the availability of an
individual. He knew that Manish would not be very happy with the process – “ it would give Partha
a blanket clearance to give discounts”, he had said earlier; “you can forget about selling a single
piece on RP”.

Creating Structure and Processes

Francis realized that given the volume of transactions, it was becoming difficult for the three of
them to handle operational responsibilities. While a portion of the burden can be removed by
automating some of the processes, there needs to be others who can take responsibilities for
daily operations of VFM. The three of them can utilize their time better by focusing on growth
opportunities. Ideally, he reasoned with the others, they should only be involved in exception
handling. The others readily agreed and it was decided that Francis would set about the task of
automating, as far as possible, the sales processes, while Vikas and Manish would concentrate
on creating a formal organizational structure for VFM. Amidst such strategic discussions, Partha’s
price list and desired discretion on discounts got accepted without any resistance.

Francis set about working on two kinds of processes. The first related to the sales cycle
comprising creation of a customer database, tracking customer’s position on the sales cycle,
measuring how long it takes to close a deal and how many of the inquiries are being converted to
orders. He also created a column where the sales person can capture the cause for order loss
such that Francis can analyze patterns if any. While most of these were being done since the
days of VFM’s inception, it was now time to put them into systems. Essentially what he needed
was a Sales-Management software and given their growth projections, he thought it better to
purchase one from the market that is reliable and scaleable. The application should also have the
option of being distributed over front-end devices, such that field sales people can upload and
download data from remote locations.

The second system that Francis started to think about was a repository of frequently asked
questions. From his experience with customers, he knew that customer queries nearly followed
the 80-20 rule, and if he were able to put those 20% into a database, it would minimize the task of
the ‘help desk’. If this was put on their website, customers can themselves find answers to most
of their queries. Such a system can also act as a learning database for new recruits, and can shift
some burden of training from Partha’s shoulders. When he sat to discuss these with Partha,
Partha seemed very relieved. Partha informed Francis that over the past few months, there have

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been several inquiries that were not attended to because of Partha’s engagement with other
‘pressing matters’. Francis was not too happy that this was kept out of his attention, but he
realized how overburdened Partha has been. Apart from automation, he also decided to recruit
more people for Partha’s sales team.

Meanwhile, Vikas and Manish got down to defining the organization structure for VFM. Their
starting point was the necessity for creating dedicated roles and responsibilities such that the
organization can get into an ‘autopilot’ mode without having to depend upon on the presence and
idiosyncrasies of the founding members. Vikas felt the need for a dedicated person looking after
the information systems of VFM. While Vikas himself handled this all these days, over the past
few months he has not been able to give adequate attention and the existing systems seemed to
be reaching their limits. If they were able to get a suitable person for the job, Vikas also planned
to hand him over the task of liaisoning with the software vendors, especially on issues of
configuration and integration.

Probably because Manish was the most efficient of the three (that is what he claimed, ably
supported by his high Grade Point at IIM) or probably because their business model did not need
inputs from the finance department on a daily basis, Manish had, by default, assumed
responsibility of human resource function. However, this was likely to change. With growing
volumes, there needed to be someone chasing collections, as well as working regularly on sales
allowances, and incentives. Over and above, there was the task of payroll processing and
interfacing with the bank, and sometimes negotiating with the software vendors. Clearly, Manish
needed an accountant for assisting him in daily transactions, so that he can focus on issues
relating to corporate finance. It might not be long before VFM needed to raise some money for
some pending expansion. Manish also needed someone who could assist him in HR function.
Soon, the size of the organization was going to be in double digits and the only limits to growth
would be availability of capable persons. Thus, selection and subsequent training would become
a very important function, which needed dedicated attention and a certain degree of
standardization.

Having created the necessary roles and responsibilities, it was important to define the reporting
relations. By default, Francis would look after Sales and Marketing, Manish would look after
Finance while Vikas would continue to be responsible for the overall business. Francis felt that
Partha had shaped up quite well and should be made responsible for people within the sales
operations. Because of interdependency between HR function and finance, the HR manager (to
be recruited) would report to Manish. Thus, VFM, after about a year in operation, had its first
organigram (Exhibit 1). Even though the notion of a triumvirate at the top was appealing, both

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Manish and Francis were unanimous that Vikas should be designated as the CEO of the
company.

New Opportunities

In early January 2005, nearly two years after VFM had started, Vikas, Manish and Francis sat
together for a day long brainstorming session for future opportunities. There were three possible
opportunities for business expansion – getting into corporate segment with ICS PC, providing
maintenance services to its customers and getting into dealership for Orange Computers
Incorporated.

VFM had grown to 18 employees by this time and had touched US$ 1 million in revenues for the
year 2004. The ICS agreement was due for renewal soon. ICS seemed to be impressed with the
their strong performance and wanted them to cater to the corporate market as well, with ICS’s
server and networking products, along with the PCs. Some of VFM’s customers were so satisfied
with their purchase experience that they had recommended VFM’s name to their organization. In
December 2004, had ICS announced spinning off their PC business into an independent entity
because, according to their chairman, “The PC market in general, especially the segment served
by ICS, is simply becoming more and more of a high-tech commodity that cannot be profitably
serviced by a large enterprise of ICS’s nature”.

Many of VFM’s earlier installation were due for upgradation. Traditionally, maintenance services
and upgradation were directly provided by the OEMs. When it came to support services,
customers preferred the tried and tested procedures of established organizations like ICS, rather
than the garage operations of a reseller. However, VFM customers were different – they preferred
to deal with VFM for all their needs. Moreover, many a times, an upgrade can result in a second
purchase instead, and thus create a business opportunity. Francis has been making a strong
case for getting into support services and Partha had already started talking to some hardware
engineers as potential recruits. It was well known in the industry that the margins in support
services were typically more than those made in selling the actual product.

In October 2004, Vikas had received a call from the head of Indian operations of Orange
Computers. Globally, Orange Computers manufactured and sold a large portfolio of innovative
products such as their award winning multimedia PC that connected to a host of entertainment
devices. Orange, however, had met with limited success in the Indian market over the past
decade. Consumers have been slow to accept the Orange PC, which was significantly different
from other PCs available in the market. Customers also suspected Orange’s commitment to the

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Indian market, given the low profile they had maintained so far. However, over the past one-year,
things have started to change. The parent company has been delivering strong financial results,
driven by the success of portable systems and digital music players. Looking at their product
portfolio and positioning, analysts viewed Orange to be in a favorable position for leveraging the
benefits of convergence among digital devices. Globally, Orange followed the practice of
appointing knowledgeable personnel as their reseller (they encouraged their own employees to
take dealerships) in order to communicate the unique value proposition of their products. The
head of Indian operations told Vikas that they were poised for exciting growth in the Indian market
and VFM was their first choice for dealership in Bangalore. Orange had already opened its first
exclusive retail store in an up-market location in Bangalore, where footfalls were reported to be
quite high.

All three opportunities looked interesting, and can provide VFM with significant growth. While
Manish and Francis were busy looking at the projections and crunching some numbers, Vikas
was worried about the organizational imperatives. VFM as an organization was still in its infancy –
what can be the right organizational structure to handle the additional opportunities, such that
they put minimum strain on their existing business? At what level of the structure should they
differentiate in order to handle the corporate customers? Should the Orange dealership be spun
off as a separate business, so that the ‘exclusivity’ cause in ICS’s contract could be bypassed? If
they get into support services, who will be the right person among the three of them to spearhead
the operations?

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 Organigram of VFM Solutions

VIKAS
CEO

MANISH FRANCIS
Finance Director Mktg & Sales Dir.

PARTHA
Manager - Sales

MIS & Vendor Accounting

Manager - HR
Relations Executive

Field Sales Help Desk

Executives Executives
Receptionist

Exhibit 1

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