The once rosy outlook for tech companies globally has turned recently. Apple CEO Tim Cook admitted in early January after a particularly tough quarter that “[...] we did not foresee the magnitude of the economic deceleration”. After banner bull market runs, Bilal Zuberi, partner at Silicon Valley powerhouse Lux Capital, has warned: “I’m 100 percent sure there’s some kind of downturn on the horizon...it will be a massive correction.”
It’s said that money hides a multitude of sins. That is, when things are good, companies get away with budget bloat and lenient operations. But when things are bad, poor habits and excess can quickly compromise company health. Perhaps the biggest issue this year will be changes in customers’ budgets. Regarding near-term spending appetites, the Wall Street Journal, citing a Duke University study, reports:
“Sentiment among Chief Financial Officers, who help set budgets and hiring decisions, has also soured. Half of CFOs believe a recession will start within a year and 80% think a recession will hit by the end of 2020.”
Nobel laureate Paul Samuelson once quipped that “Economists have correctly predicted nine of the last five recessions.” So while it’s impossible to forecast the details of the next downturn, companies should prepare for the economic uncertainty and prospective slowing that is to come.
Whether calamitous or corrective, companies need to take steps now to become more cost conscious in preparation for an economic slowdown. Companies trying to gain traction or expand market share are going to find that improving revenues and adding customers is going to get (even more) difficult. Recession threats are real – and require that companies prepare to navigate tepid VC activity, customer hesitancy, budget cuts, rising interest rates and an inevitable cash crunch.
So, what can companies do?
To understand the behavior that matters for longevity, McKinsey studied the characteristics of companies that outperformed in past recessions. They observed what these companies did before, during and after a downturn that ultimately made them successful.
Two of the top three strategic focus areas in their findings?
- Balance Sheet Flexibility
- Operating Flexibility
These companies preemptively cut costs, reduced SG&A spend during the downturn while maintaining employee productivity and refocusing spend to high value activities. They had higher cash balances than peers which led them to land attractive contract terms with cash-strapped vendors. They had financing capacity to take advantage of cheap asset acquisition as opportunities came up. At Lux, Zuberi has encouraged portfolio companies to trim costs, to be disciplined in reporting and to stockpile cash – in case weaker companies fail and are easy, cheap acquisitions.
And what happens to the underperformers?
The study noted that those companies who enter into recessions with bloated budgets and unproductive people carry greater risks. When tough times hit, they were forced to make the easy, but long-term damaging changes, like cutting R&D and advertising. And because they had low productivity, they had to layoff more people too. This crushed morale, employee engagement and the future ability to attract talent.
What can companies do to find economic relief in uncertain times?
As companies wade into economic uncertainty, following McKinsey’s blueprint to control costs and productivity will improve chances for strengthening market position. One immediate opportunity is controlling the growth of software spend.
The enterprise SaaS market is generating $20 billion in quarterly revenues for software vendors. New apps and services are remarkably easy to buy and deploy – the market is growing 30% year-over-year. The challenge is effectively using, renewing and managing the SaaS software.
Few leaders can answer the question: how much software is my company or my department using? Fewer still have means to view, manage, optimize and control their SaaS spending. This, despite the fact that the average 350-person US company will spend more than $4.8 million dollars on cloud apps and services this year and will waste over $3,000 per employee (over 20 percent of total SaaS spend) in excess software licenses or suboptimal contracts.
While SaaS burns cash fast, the issue can be quickly addressed. By introducing Cleanshelf’s SaaS management platform, companies can reduce license redundancy, foster collaboration and productivity, track renewals and get market intelligence on what they should be paying for the software they use. Everything from compliance to cost-savings can be solved. No longer do IT or finance leaders need to email around static spreadsheets to manage SaaS use. Nor will they continue to stamp “approve” on any invoice from AP because it’s easier than tracking who is buying and what is being used.