RESILENCE IN TMT: WINNING IN DOWNTURNS
The technology, media, and telecommunications (TMT) sector has enjoyed unprecedented growth over the past decade. Seven of the ten largest companies by market value are TMT companies. Incumbents such as Apple, Disney, and Verizon have been joined by a quickly scaling group of disruptive players such as Alibaba Group, Alphabet, Amazon, Facebook, Netflix, and Sales force, all of which have been buoyed by consumers’ and businesses’ growing appetite for technology products and services.
Yet the current growth outlook is uncertain. Business investment in the United States contracted in the second quarter of 2019, as did the GDPs of Germany and the United Kingdom, two of the largest economies in the world. Although we cannot predict when a downturn will occur and there is no way to know how damaging it will be most people agree we are closer to the next one than we are to the previous one.
Of course, every downturn is different, and each company will play the next one differently. Any upcoming slowdown will be a significant opportunity for a company to set itself up on a long term trajectory of outperformance. Well capitalized disruptors will likely go on the offense, using the slowdown as an opportunity to strengthen their long-term strategic positions. Incumbents many of whom have been using much of their cash flows to drive returns to shareholders through share buybacks and dividend increases will need to start making some hard choices on where to keep investing and put more emphasis on new digital and analytics tools to drive the next leg of efficiencies.
Regardless of their starting position, leaders of TMT companies need to start planning and taking action. Execution of strategic preparations will take time, as will securing critical buy from management teams, boards, and shareholders. Successful strategic plans will need to take a long term view and not give in to short term impulses and pressures. In order to succeed, companies cannot afford to wait for the onset of a downturn to make no-regret moves.
Lessons in resilience from recent downturns
To understand how executives should approach the next downturn, we analysed around 3,000 companies in TMT over the past 20 years across nine subsectors. What we learned is that how you operate heading into and during a slowdown matters greatly. In recent downturns, only about 20 percent of companies in TMT “got it right” and accelerated their performance relative to peers.
Increasing productivity while also increasing sales and marketing investments
Increasing the productivity of sales and marketing investments includes boosting investments alongside revenue growth, but always at higher productivity. For example, during the 2008 down cycle, resilient in software, such as Ansys, Citrix, and Sales force, increased sales and marketing productivity by three percentage points from about 34 percent of revenue at the start of the recession to about 31 percent by 2011 while growing their revenues. From 2007 to 2011, Ansys improved sales and marketing productivity by four percentage points while also raising dollar sales and marketing spending by 54 percent. Sales force saw productivity gains of five percentage points while tripling the dollar spend.
What companies need to do now: Build a resilience action plan and start executing
Companies tend to put off preparing for slowdowns as they focus on the day-to-day tasks of increasing revenue and total shareholder returns. Continuing to wait, or wallowing in analysis paralysis, will be considered an egregious mistake in retrospect. Leaders must adopt a bias toward action and a steadfast mind-set that looks beyond any potential downturn and envisions the company’s path through the economic cycle toward sustained, stable growth regardless of market conditions.
The most critical aspect of such a proactive approach is building a formal resilience plan and gaining top leadership commitment to it. For each company, this plan needs to be grounded in an understanding of the impact a slowdown will have not only on the company but also on its ecosystem including customers, competitors, and suppliers. For example, IT hardware companies need to understand the stresses in their supply chain that may get introduced in certain scenarios. Software companies need to understand which customer segments are more likely to pull back and which ones are likely to stay stable or grow. Given the unique nature of TMT, in which players continuously make moves into new adjacencies, companies need to understand their competitive landscape and how it may evolve as new and existing players take actions in a slowdown. In addition, the plan must include a thorough assessment of the company’s own strengths and weaknesses (operational, organizational, and strategic) and a financial plan that incorporates scenarios based on these elements.