McKinsey notes that just as the Tech sector grow rapidly in the good times, it
contracts rapidly in the bad:
From the peak to the trough of recessionary periods, spending on the goods and services that the high-tech sector generates traditionally drops four to seven times more than GDP does. In three of the past four major downturns, IT spending fell twice as much as GDP did; after the dot-com bubble burst, in 2000, IT spending fell by 27 percent, GDP by 3.7 percent.
What is really interesting in their research is that good old macho "slash and burn" management in tough times is not a good answer and can actually lose ground:
Our research shows that the competitive position of companies in the high-tech sector can change radically in a recession, depending on how well their executives understand its dynamics and take forceful action swiftly. We found, for example, that 69 of the 146 high-tech companies entering the 2000–02 contraction as leaders—47 percent—emerged from it as laggards
because....
Our analysis shows that making obvious moves (for instance, cutting costs) as well as counterintuitive ones (such as increasing sales and marketing expenditures) quickly can improve a company’s position when the recovery begins.
In short, managing one's way to success by cist cutting alone is not going to help. They then outline 5 strategems wot have worked in the past:
Manage working capital aggressively
By the end of the 2000–02 downturn, high-tech leaders had made their cash conversion cycle 23 percent shorter, shaving off two or more weeks of waiting time for capital to become available. A leading networking company, for instance, reduced its sales outstanding and accounts receivable by more than 40 percent, while a struggling competitor allowed its accounts-receivable cycle to balloon by 50 percent.
Rationalize SG&A expenses and overall headcount
The companies in our study managed their sales, general, and administrative (SG&A) expenses in a much different way than anything else we investigated. Controlling operating expenses is critical for all companies, but leading ones that maintained their positions in the 2000–02 recession actually increased their SG&A costs by 6 percent more, in absolute dollar terms, than leaders that lost their positions
Make frequent, significant acquisitions (later)
Companies that emerged as leaders invariably used the downturn to make significant acquisitions that strengthened the product portfolio. Their acquisitions were both more frequent and more substantial than those of companies that ended the 2000–02 recession as laggards: they were 30 percent more likely to make acquisitions and racked up 26 percent more deals. These companies also tended to wait until later in the downturn, when the valuations of their targets were most attractive
Divest noncore assets early in the cycle
Despite this penchant for acquisitions, leaders also used the 2000–02 downturn to streamline the number of battlegrounds in which they competed. These companies, which were 50 percent more likely to divest noncore businesses than laggards, improved their overall positions in the remaining businesses.
Maintain a stable level of leverage relative to equity
Our research shows that maintaining or improving the debt-to-equity (D/E) ratio throughout the 2000–02 recession was a hallmark of high-performing companies; some leaders even managed to pay down debt. But the central point is that the D/E ratio of laggard companies increased on average by 950 basis points—almost doubling their level of leverage.
So - controlling cash, and selling your f*cked companies early for pounds lots and buying others' ones late for pennies is hardly rocket science, but it has worked in Tech (and, we would argue, in any other sector you care to research) since time immemorial and will probably work again.
The one that is missing in these 5, and yet is implicit in their earlier research, is if one can hang on to ones own sales at a better rate than one's competitors do. We in Broadsight have been through 2 major Tech recessions (90-92, 01-02 - see a pattern?) and would remind people that in both previous ones, another core lesson was around revenue retention - so customer retention and service, and being very savvy about changing customer needs, are also key in our experience.
In addition, we are working with a number of other people ad NESTA to understand the role of real Innovation in recessionary times, as that is too often neglected in favour of battening down the hatches. Early reserach implies that some of the great company competitive leaps forward have been made in Hard Times, and some of the really great technology companies have been founded in the teeth of recerssions (as in any idiot can run a company when the going is good, but when it gets rough.....)
