A looming recession doesn’t need to pause growth for software companies
There’s no question that the market is struggling. The Nasdaq is down 29% this year, and the S&P 500 is down 15% since January. If a recession isn’t here yet, it will be soon. But that doesn’t mean growth is impossible.
In fact, there are proven strategies that software and tech-enabled companies can leverage to weather the storm and continue to grow—doing so in an efficient, cost-effective manner.
Focus on selling to your install base—the most cost-effective way to drive growth. Leverage data from your existing install base to find and execute on upsell and cross-sell targets. Plan to prioritize key product features that will directly drive those opportunities. To do this effectively, have the right insights and data to guide your decisions. And remember—the best way to get to market quickly is focusing on the customer and leveraging human-centered design.
As valuations come down from historic highs, opportunities to add to your platform through tuck-in acquisitions with better price tags should appear. Seek M&A opportunities if valuations soften. PE firms will also make one-time investments below the line that can help with margin improvement such as automation and product/feature consolidation plays.
Preserving—or even improving—margins is even more critical in a down market. There are a few levers to pull that can help. Begin by reviewing existing contracts, hosting arrangements, licensing costs, and third-party costs—the easiest areas to cut unnecessary spend. A framework such as ACE (Action for Cost Elimination) prioritizes four areas: identifying errors, rationalizing spend, applying flexibility, and negotiating quick wins.
Next, eliminate redundancies in platform efforts. Product and platform consolidation can have clear margin improvement outcomes.
Finally, focus on efficiency around sales and revenue operations. With expansion of subscription models, Net Revenue Retention (NRR) becomes a key business driver. Optimizing NRR requires alignments across all parts of the business that are responsible for driving revenue, from the first marketing touchpoint to initial sale, to renewal. Find ways to reduce friction throughout the revenue process by leveraging better data and analytics. Effective revenue operations leads to revenue predictability and margin improvement.
Whether you’re continuing to face challenges attracting top talent or are preparing for the recession by slowing hiring, now is the time to think about how to optimize and upskill your talent. As some companies are pausing hiring, an opportunity arises for others to strategically add talent in critical areas.
One of the biggest costs that companies incur is labor—which makes driving down labor costs an important factor to consider. In addition to your onshore talent pools, companies should optimize offshore/nearshore resources, contract talent, and drive optimization by looking at changes to talent strategy and organization design. Also, consider leveraging automation as a way to free up existing talent and have them focus on more value-add work. Don’t forget about company culture during this time, either—while focusing on retaining your top talent.
Product engineering talent will continue to remain in high demand as the pandemic-driven push toward digital in all industries continues. Focus on quality for product engineering, and don’t wait to find the right partner—doing so helps with quick projects and time to value. If you’re not currently able to run the product function well, consider outsourcing ticket and trouble issues to allow employees to focus on more important tasks.
Recessions have proved to serve large tech companies well. While the stock market plummets, the largest companies are business as usual. In prior down years, it has served as a time to widen their market lead. During the Great Recession, Facebook, Amazon, Google, Apple, and Microsoft acquired more than 100 companies from 2008 to 2010. Looking at the months ahead, Microsoft, Google, Apple, and Amazon are all expected to boost hiring, with Microsoft even doubling the employee bonus pool this year. These tech giants will buy more businesses during this time to emerge stronger.
While smaller companies and start-ups might not be able to raise money as VC funding slows, these companies become ripe for acquisition. YC, an investment firm with a long history that includes Dropbox, Coinbase, and Airbnb, urged start-ups to cut expenses and focus on extending their runway for the next 30 days. In its letter to portfolio founders, they urge companies to plan for survival with lack of fundraising over the next 24 months.
The strategy is likely different for tech and software companies at various sizes. But the above list applies to each one of them. Drive growth where you can, protect your profitability, and optimize your talent to withstand recession-like conditions that will arrive—if they aren’t here already.
Enjoy this piece? Learn more by listening to the Reel Talk Podcast where Managing Partner, Will Wu, talks about this topic more in depth with host, Jennifer Vogel
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