Whether you’ve weathered the economic downturns of 2001, 2008, or 2020, this time it’s different. Here's what software product and technology leaders need to be thinking about to maintain and grow profitability through the downturn.
Why Leadership Teams New to Business Downturns need to be Thinking Differently
Many business owners have faced the pain of recessions before and feel optimistic that they can navigate their companies through turbulent waters. But these owners haven’t ever faced a market like this one. Other companies have thrived during the prolonged technology boom of 2010-2021, and haven’t yet experienced the brutal reality of slashed business spending and reduced capital investment. Whether you’re an experienced owner/executive team, or a leadership team that’s seen nothing but success and growth, you need a product and technology strategy that will enable you to meet the challenges of the 2023 business downturn amidst a dramatically different global economy.
What's Different This Time
Labor costs in India for software development have risen 43% on average over the past 24 months alone. Over 35% of US employees have resigned over the past 12 months, and it's taking longer than ever to fill even the most junior roles. New regions are emerging as software development and engineering talent hot spots, with 40% of the top emerging global talent hubs located in Latin America. The specter of global war, a severe energy crisis, and concerns over the health of some of the most renowned major banking institutions have thrown equity and fixed income markets into a storm. Real estate markets are cratering. The US Federal Reserve's battle with inflation continues to send reverberating shockwaves through the global economy. It's as if all at once we're seeing themes from economic panics of 2020, 2008, 2002, 1979, 1939 and 1929 converge into a scary forward-looking economic picture.
5 Steps To Prepare your Business for the Downturn
If you’re a business owner new to economic downturns, you need to focus on scaling your cost structure, now. Labor costs account, on average for 70-90% of a technology companies’ total operating expenditures. In a business downturn take a standardized approach to preserving your EBITDA margins by walking backward from your targeted financial goals. This is where preparation starts.
1. Look first at reducing near-term non-labor variable costs. Start with an assessment of specific non-labor expenditures, get feedback from your management ranks to fully understand the operating impact of a potential cut. Then make a joint determination between executive leadership and management on what expenses could potentially be curtailed. Marketing, events, travel, office "perks", software systems, and employee rewards programs typically fall under this category.
2. Start working with your management and HR on a "cut list", that indicates the first 5% of individuals who could be let go with minimal impact to productivity and morale, the next 10%, in 5% increments up to 25%. This should include contractors and 3rd party organizations providing SOW-based work for the firm. Having this data ready, will put you in a proactive position to scale down based on the magnitude of the forecasted business downturn.
3. Stay close to finance - use your financial experts' capabilities to forecast the financial impact to revenue, operating costs, and segment performance under various scenarios. Try to outline how economic conditions could impact your product lines, sales efforts, and use these scenarios to propose adjusted capital and operational budgets based on a forward 12-24 month economic picture. The result of this exercise is a conservative, mid-range, and moderated operating budget proposal that projects no growth (cost freeze), or a reduction in operating expenses.
4. Determine if your EBITDA and growth targets can be downwardly revised risk tolerance of the executive team, shareholders, and the Board of Directors. If you're taking a longer-term view of the business, the downturn is a storm you have to weather. If you're on a shorter-term strategic plan that involves exit or growth capital, your objective timeline is much shorter and requires more immediate action.
5. Work with Client Service, Sales, Customer Support, and Finance to determine your unprofitable and non-strategic customers. Typically, a smaller component of your customers contribute more to the profitability of the business, and as a rule, several of your customers detract from your profitability. Identify these customers and quantify your findings with actual data. Often, employees will internally "joke" about the neediness of specific customers against what they actually pay. Usually, some of your most demanding customers are paying you the least, and creating significant work throughout the organization. This typically surfaces through support ticket volume, escalations to the development organization, or the continuous need for executive attention to the account.
This financial exercise sets the stage for directives focused on preserving EBITDA targets for the following year. Some of these directives will include:
Reduction in force efforts
Variable cost reduction plans
Nearshoring and Offshoring goals
Elimination of capital projects
Termination of contracts
Termination of newly-hired employees
Offloading of unprofitable clients
As part of the new financial plan, establish control points to determine if the company is on-track or off-track by the first quarter. If the business is failing to perform as per plan, additional directives, often more aggressive, will follow in late March to mid-April.
What you need to consider NOW!
The above approach to cost management in a downturn means that departmental managers and executive leaders will face a number of challenges that they likely haven’t faced before, such as:
How do I execute a reduction-in-force effort that ranges from 5% - 25% of my labor force?
How does our company maintain top talent amidst a backdrop of firing and cost cutting?
How does our company maintain morale amidst well known members of the team leaving the business?
What does a variable cost reduction plan look like, and how do I ensure that we’re eliminating the right costs?
How can I anticipate the effects of a variable cost reduction plan?
How can we maintain product marketing efforts in a cost reduction environment?
How can we maintain competitiveness and market share amidst lack of capital investment?
How do we defend against competitor battle card/sales efforts that aim to position us as losers in this market?
How can we continue innovating and developing competitive technology under a cost reduction regime?
How can we outsource legacy parts of the business to low-cost regions?
What are low cost regions for specific development?
What do we communicate to our employees against this backdrop without sparking fear and potential loss of key talent?
Don't rest on your past experience - it's different this time!
Many experienced leadership teams have weathered the Great Recession, and may be confident that they have the skills and competencies in house to navigate the 2023 Recession.
This false confidence will lead to devastating results, and here’s why.
The 2020 Pandemic changed employees’ view of work, permanently. Remote work strategies are critical to success, and companies that are struggling adapting to this reality will face greater pain in 2023. Top employers have already anticipated a downturn, and have been aggressively recruiting and retaining top talent. Have you lost long-tenured employees in 2022 to Amazon, Google, or Microsoft, or to Silicon Valley startups? These firms have budgeted for the long game, and have the resources to sustain total compensation packages that outpace yours by 30, 50, or even 100%! Most of these companies are already operating on a virtual workplace arrangement as a default, and beating you not just on compensation, but on workplace concessions like flexibility, freedom, and virtual-only work environments.
How ShadowHornet Consulting can help you
Business distress is the result of not effectively planning for an economic downturn. If you’re an independent owner, key events can bring on a death spiral of distress extremely rapidly - catching you and your leadership team by surprise. If you’re a private equity owner, some of your cost saving and EBITDA boosting measures can damage the core culture of a high performing company, putting your entire business asset at risk of declining revenue, eroding margins, and a never-ending cycle of turnover.
Good owners can experience business distress just as frequently as bad management teams - the business world is moving too fast and the incessant storm of innovation can render disruptions to thriving parts of your business quickly. We call this “slipping into the shadows”, and our services focus on anticipating specific issues you’re likely to face, and then developing and executing strategies to counter and overcome them.
Our Services include:
Outsourcing and Near Shoring legacy product offerings
Our proprietary network of global business partners ensure that you have the right partners, not vendors, who will ensure success specifically for your business. Did you know that 90% of outsourcing and nearshoring efforts fail for 1 key reason? We know the secret that’s led to 41 successful outsourcing/nearshoring efforts, and we have 15 years of direct experience in this area, alone. .
Maintaining Research and Development with offshore and nearshore talent partners
When your business needs to cut costs, R&D is often an area that’s gravely impacted. Our knowledge and experience enable you to maintain forward momentum in Product Development no matter what financial constraints have been placed on product and technology.
Legacy Application Modernization
Your former cash cow product is now a heap of technical debt, leading to declining sales, increasing support cost, loss of hope and turnover amongst your technical staff. You think you need to kill and rebuild, but no one is going to finance the multiple millions you need to affect change. What do you do? Our experience on over 20 application modernization, new product developments and go-to-market campaigns gives you a range of options to reposition, re-architect, and see growth re-emerge quickly and at acceptable cost.
Our services can help you with: Technical debt assessment, architectural uplift, on-prem to cloud, legacy modules to microservice-driven applications, new market entry through reskinning and repositioning, re-branding legacy assets, carve-outs. Time to talk to us.
Reduction-in-force programs
We help you develop a reduction-in-force strategy that won’t destabilize your business, and will enable you to maintain key talent. A reduction in force service includes:
Financial and Business Analysis of talent, contribution margin,and business relationships
Cultural impacts
Communication strategies
RIF execution
Post-RIF planning and strategy
EBITDA preservation plans
The Board has set a seemingly unhittable EBITDA target, and it’s your job (and bonus) that’s on the line this year and next. We know that pressure, because we’ve felt it ourselves, and we work with you on an operational plan to demonstrate business discipline in management that will enable you to achieve your goals without sacrificing the stability of your business.
Client Profitability Analysis and Contribution Margin Assessment
Sometimes, it’s 1-3 clients where you spend the majority of your resources. Often, this doesn’t align to the contribution of those clients to the businesses’ bottom-line. It’s common to see that these type of clients are actually accelerating your business decline. We work with you to identify the negative contributions of specific clients, and furnish a proven strategy to improve profitability in as little as a quarter.
Contact us today for a preliminary assessment of how we can help you weather the impending economic storm in 2023. Our resources have experience in virtually every business scenario and will lead you to success no matter how dark it gets in 2023 and beyond. Ask us about our specific experiences and client business cases!
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“ShadowHornet is one of the rare firms that combines business acumen, technical expertise, strategic vision, and compassionate leadership. They seamlessly worked with all levels of our organization to promote alignment and built authentic relationships with teammates and customers that foster loyalty. ShadowHornet enabled us to lead high-performing, successful teams by empowering people to be the best version of themselves. Where ShadowHornet goes, trust, collaboration, and achievement follow.” -- Head of Product, Leading SaaS Software Business
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