Learning from the past, looking to the future
Since its inception in the 1950s, the technology industry has
followed a nimble and adaptive business model due to compressed
product lifecycles and a competitive environment
The economic crisis hit technology companies with falling demand
for both corporate IT and consumer technology products. The
industry’s tradition of high speed and agility combined with
still-fresh lessons from the dot-com bust is helping its leading
companies to execute an extraordinarily rapid, effective
While the industry continues to evolve rapidly, the crisis
actually accelerated movement toward managed services and
adoption of some of the newest business models – particularly
the various forms of cloud-computing models because of the
pricing advantages they offer. In addition, the increasing
pervasiveness of technology in everyday life has helped put a
floor under falling demand.
When an industry that normally enjoys growth is hit by
double-digit revenue declines, it’s fair to expect a period of
adjustment before an effective response is developed and
implemented. But leading technology companies could be touted as
models for rapid response and excellent execution in the face of
the economic crisis. Technology companies are used to being lean
and moving fast. And thanks to the severe ups and downs
historically experienced in the technology sector, they also
know what it’s like to have the bottom drop out. These two
factors, when combined, afforded technology the speed to react,
and with few exceptions, companies in the sector were able to
take decisive action on many fronts simultaneously.
In the current global economic environment, technology companies
are primarily focused on two issues:
Building and maintaining a flexible business model
Staying ahead of trends to meet future demand
Due to the industry’s history and dynamics, the typical
technology company sees more opportunity ahead and is taking
action to position itself to benefit from it.
Technology’s balancing act
Technology companies have a higher tolerance – perhaps even an
appetite for strategic risk. That appetite is fed not only by
low operational gearing but also by low financial gearing (the
amount of a company’s debt relative to equity). As such, leading
technology companies have a different approach to risk
management – an approach that, overall, appears to be working
for them. Leading companies also are dealing with global
currency fluctuations and considering plans to license yet
maintain protection for intellectual property. Balance is the
common key issue across all these areas.
Among the leading companies, cost-control efforts have not
distracted their focus on generating revenue. A handful of
companies even maintained revenue growth through the crisis. In
addition, some companies found their own cost-cutting
initiatives contributed to their strategies for revenue growth.
As they innovated in their own use of technology to cut costs
and increase flexibility, they were in position to take those
ideas to their customers quickly.
Another common factor among technology companies that have done
well through the crisis so far is the rapid deployment of
performance improvement programmes to extract additional cash
from current assets. Certainly, many technology companies enjoy
greater flexibility, or more specifically, lower levels of
financial and operational gearing, than other industries. But
the point is that they moved quickly to exploit their
One specific action for asset performance improvement that we’ve
seen emerging from the crisis is the rapid adjustment of pricing
strategy. A premium approach is viable in good times, but among
the most successful technology companies this year are those
that aggressively pursued a switch to a value-based pricing
strategy. Technology companies, generally, have very
well-managed supply chains. During the downturn, however,
leading technology companies were increasing their ongoing
reassessments of strategic sourcing by identifying the right mix
of outsourcing, near-shoring and in-house activities for a full
range of core and noncore functions and processes.
IP protection and revenue potential
Technology companies fiercely protect their IP in good times and
in bad. During the current downturn, however, companies
increasingly are considering selling or licensing IP to generate
cash flow. If properly managed and protected, the availability
of such IP for sale or license has the potential to spur
innovation based on or around the technology, even while it
generates additional cash for the seller/licensor.
The biggest and toughest IP protection issue for the software
sector is piracy. Meanwhile, working with governments around the
world to crack down on piracy and vigorously prosecute offenders
is beginning to accrue benefits. In August 2009, a Chinese court
jailed and fined prominent software pirates in a landmark case,
and the UK announced it is considering a plan to join France in
cutting off internet access to users who repeatedly download
content in violation of copyrights.
Tax regulations affecting technology
Now, more urgently than ever, technology companies must be
prepared to adapt to rapidly changing tax and regulatory rules
and the associated risk resulting from these changes.
Governments that made big economic stimulus investments to help
counteract the downturn, both in spending and tax “holiday”
measures, have run up historic deficits. Next, they are likely
to accelerate efforts to tighten tax enforcement and compliance
and consider revenue-enhancement actions.
Given the current environment, leading technology companies are
becoming more proactive in dealing with tax issues. They are
focusing on cash management, looking for incentive programmes
that support business goals, actively monitoring tax policy
developments and working to improve relationships and
communications with tax authorities.
Most successful companies recognise that proactive tax-cost
management can offer significant bottom-line performance
improvements, particularly in challenging times. Further, they
recognise the importance of understanding the full impact of
current tax proposals and the need to get involved in the
policy-making process. It’s no surprise that transfer-pricing
controversies dominate tax conversations. With global supply
chains, products can be sourced and moved around the world with
a single mouse click. Cross-border migration of intangibles is
commonplace and complex new derivative transactions are being
designed to hedge and improve investment returns.
Sustaining the future
Hindsight, as the saying goes, is 20/20. So let’s look back,
from the vantage point of 2014, to see what lessons from the
economic crisis of 2008 to 2009 shaped the technology industry
winners and losers over the last five years.
One of the biggest lessons that heralded success in 2009 can be
summed up in two words: high performance. Increasing global
competition and the rapid pace of technological change set high
performance as the minimum cost of market entry. In an era in
which market volatility strengthened the axiom that “cash is
king,” these companies were able to increase cash reserves, even
in the face of direly adverse markets. These are the companies
that are well positioned to acquire others. As mentioned
previously, they became the “consolidators” of the industry.
Perhaps the most important lesson of 2008 to 2009, however, was
a bit more subtle and, therefore, harder to grasp except in
hindsight. That lesson’s catchphrase was, “information is
power.” As information technology became more deeply embedded in
the products and services of other industries, the technology
industry began to transform rapidly from a source of innovation
to an enabler of innovation in other industries.
The increasing recognition of the ability of sustainability
initiatives to increase efficiency and cut costs is worth
calling out as a separate lesson. Efficiencies derived from
sustainability activities served as a way for technology
companies to cut their own costs and raise performance, in the
same way that these activities served as a strategic growth
opportunity to empower similar results for other industries.
The power of information – properly managed and made widely
accessible via different types of communications networks – led
to important value creation in those industries. Consequently,
technology accelerated innovation in all other industries,
helping them grapple with the huge social and economic dynamics
of our time.
A big lesson was to tap into social networks in a fearless way
to learn what customers really valued and to make technology far
more usable to broader populations of users. Winning technology
companies learned to leverage the flexibility built into their
organisations in order to adapt rapidly to these changes-and to
identify the right moments (i.e., when strategic risk was
falling) to exploit their low financial and operational gearing
and grow market share.
Adapting and leading change
Our look back illustrates the ability of the technology industry
to adapt and lead change. At the same time, continued economic
volatility will require technology companies to focus on areas
such as cost, flexibility, operational efficiency and customer
management in order to sustain a prosperous, high-growth future.
The economic crisis already is causing realignment in the
technology industry, and a situation of “haves” and “have-nots”
is starting to emerge.
The “haves” – those that will live long and prosper
are companies that create extraordinarily flexible operating
models to complement good strategic plans, and that constantly
reevaluate both. They focus on cost management/reduction,
improving cash flow and working capital and controlling
liquidity – but not at the expense of product innovation that
focuses on customer needs and thereby generates revenue growth,
either today or in the immediate future.
The “have-nots” are stressed companies. In order to secure their
future, they are restructuring and divesting assets. They also
focus on working capital and cash management but typically
require drastic remedial measures.