Decoding SBL Pre-seen in December 2023

The pre-seen material for the December 2023 exam of SBL has been released. Although the questions in the exam will be mostly based on the exhibits to be made available during the exam on December 05, 2023, an ideal candidate should take a well-thought-out approach based on what’s available in the Pre-seen for the sake of better exam preparation.

This article will deconstruct the case study company and its business through the lenses of several business models. Using such tools can help someone brainstorm ideas and unlock different perspectives to craft their answers.

• The Company: The name of the case study company is NCTech, which is listed in Farland. NCTech is operating in the Cloud Services Industry, which is essentially a facility offered over the internet to transfer data, data storage or access to applications.

• The Business of NCTech: NCTech has been growing dramatically over the last decade led by 3 of its founders. The company has been providing services only at the infrastructure level (or IaaS). Please note that IaaS is a relatively basic service offering compared to PaaS and SaaS, which are considered to be more complex services and require advanced capabilities as a service provider.

• Business Development: NCTech has only been providing IaaS services since the last decade, hence, there may be a proposal to further expand the horizon of their business to a more premium/ sophisticated level, e.g., PaaS and/or SaaS. The call to move towards a higher margin segment of the business may possibly come from the shareholders as a result of the wealth effect coming from the downward trajectory of the company’s share price. The performance pressure may also be realized by its management in the midst of declining GPM as presented in the financial performance dashboard. From another viewpoint, in the wake of plummeting market share as presented in the operational performance dashboard, the company may come up with a plan to increase its market share via acquisition. In light of such developments, students may explore business strategies with the help of the Ansoff Growth Vector Matrix, e.g., whether to take penetration strategy or market development or product development. Such moves can also be assessed with the help of the Suitability, Feasibility & Acceptability (SFA) matrix of Johnson and Scholes or Cost Benefit Analysis. Please keep in mind that the target customer base of NCTech is small to medium-sized companies (SMEs) wherein, their ability and appetite to spend extra money for a premium service, e.g., PaaS or SaaS is subject to a lot of scrutinies. In case of any acquisition /expansion /Joint Venture (JV) for NCTech, students may need to think from the perspective of prudential financial management, i.e., the financing component of the deal. Please note that debt servicing is very costly when interest rates across the globe are going through the ceiling at this point in time. From the project management perspective, preparing a PID may be an ask for the complete delivery of acquisition /expansion /JV, considering such initiative as a project. Students may be required to perform a complete assessment of the business position of NCTech using the SWOT model before suggesting an appropriate future strategy. From the NCTech's clients' perspective, whether to outsource a particular line/operation of the business or continue in-house, should be evaluated with the help of the Harmon Process Model.

• Industry Forces: It is reported that the top 10 companies captured 74% and 85% market shares globally and in Farland respectively. To run such a technology business, a company requires building up appropriate technological infrastructure, attracting (and motivating) a workforce with the right expertise who are capable of understanding and delivering the requirements of the clients, and huge investments to finance all these. These points underscore a significant entry barrier for a new entrant into the Cloud Services industry. Students not only should think about analyzing these forces in their answers but also should comment on how relatively severe are these threats. Internet service providers are considered the backbone for Cloud Service businesses as the ultimate service delivery to the clients is being done through the internet. This particular area can become a choke point for the business of NCTech but it is perhaps unlikely to become one considering the fact that Farland is a developed country.

• Gaining Efficiency: Depending on the requirement of questions, students may need to think about achieving competitiveness for NCTech business. Porter’s Generic Strategies may allow some food for thought on whether to follow cost leadership, differentiation or focus strategy. Achieving Economies of Scale and exploring cost-effective solutions would be an absolute necessity in an environment where competition is growing within the industry, as mentioned in the pre-seen. Because rising competition accompanies lowering prices which leads to margin erosions.

• Security & Service: Strong cybersecurity is absolutely vital for the Cloud Service business because it provides clients with the assurance that their data is safe. The operational performance dashboard tells us that NCTech had at least one security breach every 3 days in 20X3. The IaaS services of NCTech were also unavailable to its clients for more than 14 days during the same year. These either represent outdated security measures or a lack of oversight/due process in place. Students should have an idea of the best practices for cybersecurity and data protection measures in the Cloud Services business. They should also explore why ensuring on-demand service availability is at the prime of the client's comfort. Service Level Agreements (SLAs) with the clients should be reviewed by legal experts so that clients cannot leave every now and then and a minimum commitment can be ensured based on fairness.

• Governance: NCTech apparently seems to have a decent board structure in place in terms of the combination of EDs and NEDs as well as the different constituent Board Committees. However, the independence of the NEDs is subject to confirmation/verification. The fact that the members of the Board have not been changed since the company was listed 5 years ago still remains unanswered. The apparent lack of fresh ideas from the strategic level (the Board) of NCTech may have permeated down to the company results in terms of declining profitability, recurrent security breaches, unavailability of on-demand services, tumbling market share, and so forth. The preclusion of the HR Director in the Remuneration Committee cannot be considered ideal in good governance practice. Moreover, it is a fair anticipation to form an IT/Technical Committee, in addition to the four committees that NCTech currently has, given the nature of its business. As the pre-seen mentions about the Vision, Mission, and Values of NCTech, students may have to assess how far those have been achieved. Shedding some light on the Cultural Web by Johnson & Scholes and 5 Ethical Principles of ACCA on NCTech’s mission and values may help students to remain ahead with their preparation.

• ESG: The pre-seen makes absolutely no mention of any environmentally responsible/ sustainable areas of the business. No operational KPIs of NCTech can be linked to the ESG theme. However, the fundamental of the Cloud Services business is premised upon electricity consumption, and producing electricity can leave environmental footprints. Therefore, it should be advisable to have a basic understanding of ESG implications in Cloud Services business wearing the hat of Integrated Reporting (IR) and Balanced Scorecard (BSC) models. Demonstrating consistent improvements in all 6 capitals of IR can generate long-term value for NCTech and make the company more acceptable due to higher transparency and sustainability. Similarly, students should explore how the BSC approach can help NCTech transform the company strategies into measurable performance indicators.

Please share this article with anyone who's sitting for the SBL exam of ACCA in December 2023.