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 response.

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 advantages.

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.

BY SRIDHAR SRIDHARAN

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