Broadstuff (a blog that I follow) has a good summary of a recent McKinsey article on the differences between how technology winners and losers navigate a recession. The key take away, besides the fact that technology spending falls really fast during a recession, is that successful technology companies are smart about how they cut SG&A and thoughtful on core vs. non-core investments. I’ve listed the McKinsey findings below (as quoted in Broadstuff); see Broadstuff’s site, linked above, for a more detailed explanation of each.
Successful technology company tactics during a recession
- Manage working capital aggressively
- Rationalize SG&A expenses and overall headcount
- Make frequent, significant acquisitions (later)
- Divest non-core assets early in the cycle
- Maintain a stable level of leverage relative to equity
An important point to note is that for #2, the rationalization of headcount, successful companies actually slightly increased their headcount expenses (relative to their loser technology company competitors) during the recession.
This speaks to the need to focus on what works, get the right team on board and focused on the goal and get rid of non-core/distractions. This is very similar to what I am hearing board members say to portfolio company executives right now – figure out what the market needs now/what will be needed and cut out any other projects that are not aligned with this core task. Focus is a good thing.
It’s tough for me to give solid advice during these times. I’ve only lived (during my working career) through the dot.com downturn, and the current recession feels more dangerous/more wide spread. I welcome any suggestions/advice from the Startable readership on how smart technology executives navigate this market.
March 15th, 2009 at 10:11 pm
The "recipe" is the same recipe McKinsey pulls out at each recessions to sell some projects. The same was written in 2001-2002 with updated figures. In any case, I think it's sound advice… after all I've implemented them when I was at McKinsey…
March 16th, 2009 at 12:38 pm
Julien, thanks for the inside view on these McKinsey studies…
March 16th, 2009 at 2:10 pm
One dimension that worries many of my clients is that they don't think they have good visibility on what the world will be like after this downturn. Last time around, there seemed to be an expectation that venture life would return to "normal" — whatever that meant. I think that meant that capital markets and VCs, and others, would behave as they had before the bubble. This time there seems to be a lot of concern around whether there will be an IPO market worth talking about, whether the "venture model" works, and whether there will be a prolonged (many years) flat period. One result of this concern is that clients are moving heaven and earth to get to cash flow break even quickly. This usually means a lot of headcount reduction. One client refers to "stall speed" (the slowest speed a plane can slow down to before the engines turn off and it falls out of the sky). Their goal is to cut expenses and reduce non-core projects to the maximum possible without hitting stall speed.