As discussed in my previous post, the impact of COVID-19 has been uneven for tech companies. Now they face a period of uncertainty as the economy begins to emerge from the disruption. We believe tech companies can navigate the resulting challenges by considering their response across three coordinated actions: 1. Resilience, 2. Recovery, and 3. New Reality.
Here I will focus on the approach tech companies are taking to build resilience as they reset and begin recovery as the economy reopens. With the looming uncertainties about the speed and strength of recovery, tech companies should continue to take actions to give confidence to customers and employees, preserve cash, and be prepared for an uneven recovery until a coronavirus vaccine allows a true return to normal activity.
Our model for thinking about building resilience is organized around the “Four Cs”: Customer, Cash, Cost, and Capital. Companies must take actions that strengthen operational agility and efficiency in the Four Cs in a manner consistent with both their risk management practices and business culture. For example:
- Customer. B2B customers have been under stress, particularly small and medium-size businesses, and sectors such as hospitality. As a result, tech vendors can expect increased churn, reduced revenue and delays in new purchases. During the 2008 financial crisis, tech spending fell 20 percent across all sectors.1 Consumer spending on tech will also be impacted as households revisit their budgets in the face of economic uncertainty. Any new spending on tech by enterprises and consumers will be highly contested.
It is therefore a matter of urgency for tech companies to re-evaluate customer experience and go-to-market approaches. Leading tech companies are using advanced analytics to identify tactical opportunities to protect high-value and at-risk customers, optimize renewal win rates and commitments, and reallocate constrained marketing and sales resources to focus on the best channels and opportunities.
- Cash. Early on in the disruption, many companies built or refined 12-week cash flow forecasts. Leading companies are continuously modeling a range of disruption scenarios to understand how changes in customer demand and/or their ability to pay can impact the company’s cash position. This is especially common among suppliers that are more exposed to the most impacted sectors or demographics. It’s certainly better to understand in advance what a worst-case scenario could look like as the company navigates through the reopening and identify actions to take should the need arise.
Our recent paper showcases the many levers Tech CFOs have that could be used to enhance working capital, from operational actions such as managing payment terms or offering incentives for customers to pay early, to financial actions such as eliminating stock buy-backs, tapping credit lines or reducing dividends.2
- Cost. Many tech companies have taken actions to reduce cost. A week has not gone by without layoff announcements coming from companies in the Silicon Valley and other tech hubs. However, as conditions continue to evolve, leading tech companies are continuously re-evaluating costs. Marketing and advertising – where spend has historically shown a direct correlation to GDP growth – is an obvious area of focus. In the last recession tech companies reduced advertising spend by 17 percent (from 2007 to 2009).3
- Capital Once companies have addressed immediate liquidity issues, they should review long-term capital plans to adjust to the new reality. To begin building resilience and position tech companies for the new reality, leaders should evaluate and reprioritize their current capital spending and projects, especially in the areas of IT technology upgrades and R&D investments.
Finally, it’s important to note that compliance and risk management processes have also been impacted. We’ve seen many companies take tactical actions to manage risk and compliance in an unplanned, remote-work model. It’s time to revisit risk processes and adjust for the new reality. While market dynamics are shifting quickly and the future remains uncertain, companies that focus on moving from short-term challenges to recovery and preparing for the new reality, will emerge in the best position.
Learn more about how KPMG can help companies navigate to a new reality as the economy emerges from the current disruption here.