The disruption resulting from COVID-19 may forever modify certain market behaviors, providing opportunities for those who are ready for the new reality. In this blog post, we will focus on how tech companies can position themselves to succeed in this new reality (my previous post on the impact of COVID-19 focused on more near-term effects).
While it’s impossible to say at this point exactly what the new reality will entail, we know enough to see that the following actions can prepare tech companies for what comes next:
- (Re)Emphasis on profitable growth. Over the past few years, many tech companies and platform companies have prioritized growth and market share over profitability. COVID-19 has forced many companies to rethink their investments in customer acquisitions and delivery. Based on the experience from the 2008-09 recession, companies that focused on efficient growth fared better.1 A re-focus on profitable growth as tech companies emerge from the downturn is key.
- Acceleration of digital transformations. With employees, customers and other stakeholders getting used to engaging virtually and remotely, enterprises will need to accelerate the digitization of customer experience, deliveries, and operations. This will present opportunities for tech companies to bring unique value to their customers as they accelerate their digital transformations.
- Everything as a service. One lesson companies have learned during this downturn is the importance to operate with agility, resilience, and the ability to flex or relocate capabilities and operations. Continued uncertainty and variance in demand will require companies to react quickly in both directions—scaling up and cutting back. Demand for “everything as a service” (XaaS), with flexible capacity and pricing models will increase, and tech companies that are not currently able to provide XaaS may need to accelerate the transition to on-demand services and flexible pricing models.
- Global decoupling and increased geographic diversification. Even prior to COVID-19, geo-political uncertainly and increasing costs had forced companies to rethink their physical supply chain, data and processing centers and talent hubs. The current disruption may accelerate that decoupling as companies seek to create geographical diversification of their operations as one of the mitigation strategies.
- Evolving footprint of demand. Driven by the desire for geographic market diversification—and now the potential shift to a larger work-from-home workforce--many companies have started to reconsider their real estate footprints. This may involve reducing office space or shifting to smaller, distributed locations. These footprint changes may require tech companies that provide products and services that are tied to physical locations to realign their offerings, operations and geographic coverage.
- Battle for new customers. As in previous downturns, the current economic disruption will unleash creative destruction that will spawn new competitors and benefit companies that reposition their businesses to adapt to the new environment. Many of these companies could be digital and cloud-natives and could become new customers for tech companies. At the same time, during recession existing customers may re-evaluate their vendor relationships and create potential opportunities for tech companies to win new business.
- New model for talent. Before the current disruption, tech hubs tended to be a great source of talent for tech companies, leading a battle for talent and higher costs. As more enterprises get used to remote work, companies can cast the net more widely. And, cutbacks by distressed companies could add to the pool of available talent. New tech hubs may also emerge as engineers and professionals relocate away from high-density (and high-cost) areas.
- A case for inorganic growth. Leading up to the downtown, high valuations had limited inorganic options for growth and M&A returns for tech companies. The current disruption may lead to a reset of valuations and improve the prospect for tech companies to explore acquisitions as a strategic option for growth.
As tech companies navigate through paths to reopening, they will likely face a new reality that requires them to adapt to evolving customer needs, cost structures, and investment constraints. This will force tech companies to make critical, strategic decisions so they can navigate the new reality with speed and agility. Learn more about how KPMG can help companies navigate to a new reality here.