Recession-proof your software business – The Information
Is growth at all costs still an effective strategy in a recession-prone economic landscape? This was the subject discussed in a panel moderated by Kevin McLaughlin, journalist for The Information. His guests included Prem Ananthakrishnanmanaging director and software manager at Accenture; Anu Bharadwaj, chief operating officer at Atlassian; and Lara Caimi, Director of Customers and Partners at ServiceNow.
A change in the mindset of growth at all costs
McLaughlin kicked off the discussion by asking what companies can or should do to balance growth and profitability. The question is particularly relevant, said Accenture’s Prem Ananthakrishnan, because many companies he advises have never faced a recession. “If you look at software, it’s a really young industry. Most companies are less than 25 years old. Many companies were born in the last 10 years and they have never experienced a recessionary environment. They had abundant access to capital, and operations were never a priority for some of these companies. And now I think that has to change. How do you balance profitability and growth as you enter this new business era? »
Lara Caimi of ServiceNow added: “Even if you look at what drove valuations a year ago versus today…a year ago it was very clearly growth. Now it’s much more balanced. She added: “The rule of 40 [the principle that a software company’s combined growth rate and profit margin should equal or exceed 40%] matter now. I think that’s what you’re seeing reflected in the market, which is pushing the operational imperatives of software vendors in a different way than in the last decade.
Atlassian’s Anu Bharadwaj is also seeing a shift in balance for its customers. “Companies are moving towards sustainability now and making sure that they have a track for the next few years where you can stabilize the business and continue to grow at a reasonable pace. I think it’s actually helpful for investors as well as for companies to really focus on the fundamentals of the business, and not to over-index on one aspect of the business or the other.It really allows companies to survive in the longer term.
Which companies are well positioned to weather a recession and which are not?
In his experience, Ananthakrishnan believes that companies that strike the right balance between growth and profitability, and invest in the future, have the best chance of weathering a downturn. “These companies are definitely in a better position. And when you talk about profitability, it boils down to things like cash flow. Do you have abundant capital? How did you manage this capital? And then it also depends on your portfolio allocation. Where exactly did you invest? »
He pointed out that companies with deep cash reserves that can still invest in growth are well positioned to emerge winners from a recession. And the companies that aren’t as well positioned to weather the storm are those that have focused on growth rather than profitability. “Let’s say you’re a company that’s grown 80%, 90%, but you’ve grown at the cost of good operating margins and you have negative cash flow. Then you need to take drastic measures.
Caimi relied on the idea that companies that thrive during a recession have made significant investments in their operations. “Digital transformation remains a priority, whether in times of growth or in more difficult times, as it drives automation. This creates opportunities to increase the experience of your employees, which is essential as we have “There’s still a talent war going on. And that’s driving the customer experience. The winners coming out of recessions tend to be companies that look at their customers and treat them in a way that builds loyalty.”
Bharadwaj added two other factors that she says are key to overcoming a recession: having a large customer base and having a must-have rather than a nice-to-have item, for example, a painkiller versus a vitamin. “As we see with many of our own market partners, if customers don’t have access to the applications they need…it’s really so critical that business stops. Being in these kinds of critical segments is definitely a big perseverance perseverance.
All In on the channels
McLaughlin then steered the conversation towards distribution partners. What he’s seen time and time again is how, in tough times, companies typically back down from working with channel partners, invariably to their detriment.
Ananthakrishnan emphasized the importance of distribution partnerships. “First of all, I would say that using channels to acquire and serve customers is a great way to gain efficiency… So start investing in channels if you’re not. But I think it’s really important to figure out what the right channels are and how to optimize the channels you’ve been working with in the context of changing buyer behaviors and preferences. »
Caimi accepted. “Channel is an important way to scale, but you need to be clear about the role of channel partners and how you can engage them to drive mutual sales and delivery outcomes. For ServiceNow, a great partner is one who can take their expertise, put it on our platform, and pull the platform into new areas where, frankly, we don’t have the expertise or the resources to put some of these solutions on the market.
Bharadwaj shared his positive experiences working with distribution partners. “It’s quite difficult for companies to build and sustain an economy around them without really associating deeply and broadly with channel partners. For us personally, working with Marketplace partners has been a wonderful and constructive force – truly a force multiplier – to ensure that our users not only experience Atlassian products, but that we are able to build businesses and livelihoods for thousands of other channel partners. able to accompany us in the long term.
The right balance is the key
As companies increasingly look down on what could be a complicated long-term recession, discussions like these are crucial. Finding the right balance between growth and profitability is key to surviving, and even thriving, in a downturn.
The consequences of overstretching a business for growth in an uncertain economic environment can be severe. As Prem Ananthakrishnan said, “If you’ve focused on growth at all costs, you’re kind of in trouble right now.”