What the recession means for the software business: five things to think about

3 comments

Today’s guest post is from Dan Nunan. Dan is Chief Marketing Officer at Red Gate, an advisor to several UK government bodies on marketing and a visiting lecturer at Cranfield university. He also spoke at Business of Software 2007. This is a re-post: unfortunately I had to pull the original.

Did you hear the one about the French guy who bet $73billion on the stock market and lost? You have? Of course. Financial doom and gloom has, primaries aside, been front page news for weeks. The general consensus is that a recession is inevitable in North America, and very likely in Europe. So let us assume that the economic pundits break a habit of a lifetime, and actually get this one right. What might it mean for folks in the software business? Here are five things to think about.

1. Overall, recessions aren’t good news
Let’s start by being pessimistic, and look at what happened to the software business in previous downturns. In 2000/2001 firms that got into trouble lacked a viable business model, weren’t able to generate cash, and relied on too much external funding. In short, the sort of things that will drive businesses to the wall even in good economic times. So, let’s go back to the last ‘proper’ recession in the early 1990’s. The software business was much smaller then, but in his book ‘The Business of Software’ Michael Cusumano describes at length how in the early 1990’s recession companies reliant on product revenue were harder hit than those who had substantial services revenue, such as renewals on support contracts or consultancy agreements.

The bulk of software spend comes from business rather than consumer markets, and Gartner is already advising CIOs to have a plan ready for making cuts in 2008. But the CTO/CIO can only cut what s/he knows about. So if you sell at the enterprise level, and require senior management sign-off, then expect a harder sell and longer sales cycles over the next year. If your sales are ‘under the radar’, such as on corporate credit cards, then things might not be so bad. However, companies are increasingly aware of their expenses bills. Management consultants will point to personal expenses as an easy target for cuts, as it has the smallest impact on customers or staff.  It’s expenses like 1st class flights, not to mention the all-important team building events in luxury hotels, that the bean counters are after but software purchases will inevitably be caught in the crossfire.

2. Get some perspective
When economic pundits talk about recessions they are talking about a whole economy. Unless you are responsible for a whole economy – and I’m guessing you aren’t – then you should be more interested in your own business. Say the economy shrinks by 3%. This would be bad, although hardly Armageddon. Does that mean that your business will shrink by 3%? No. The macro economic climate is just one of the factors that decide how well your business does, and it’s probably not even the most important factor. If you write software, the provision, or lack of, high quality snacks and caffeinated beverages for developers will probably have more than a 3% impact on the bottom line. Great software, produced for the right market is still going to count for a lot. Looking at the current forecasts from big software firms, a software recession might just mean that things don’t grow as quickly as they have done over the last few years.

3. Don’t panic
Douglas Adams was right. If you walk around the office constantly reminding people of how bad the economy is and how uncertain their jobs are, don’t be surprised if your best people start to have other ideas. The last time a recession loomed in the US applications for business schools went up 70%. Talk about ‘battening down the hatches’ and even the best employees are going to start revisiting those alternative career plans that sit at the back of everyone’s mind. Whether it’s doing an MBA, setting up a Web 2.0 organic chicken farm, or fulfilling that life long dream of starting a brewery, good people always have options. So stay focused on your business.

4. Less is more
Research shows that in smaller companies innovation is more likely to happen in an environment of limited resources. As companies grow, inefficiency creeps in. It becomes about “what’s the easiest way to spend” rather than “how do we get the most out of this money”. As more technical employees become available, miraculously the number of resources required for projects goes up. Marketing starts talking about superbowl ads, and you notice a drastic reduction in the golf handicap of your best salespeople. Having to make do with more limited resources means that your people are more likely to find those innovative solutions to problems that require persuasion rather than just checkbooks.

5. Think ahead
Conventional wisdom says that a recession is a terrible time for business, but economic downturns don’t last forever. But, assuming you are in the right market, a recession is a great time to grow market share. Some of the most successful businesses ignored the news and kept investing through a recession, whilst their competitors were busy scaling back. If you have a strong balance sheet, and your competitors are short of funding, then they are likely to become increasingly short-term in their outlook. It’s also a great time to think about opportunities and attack the new markets that your competitors are scared of.  Build a reputation as a company that’s ambitious and growing and you’ll find also find that recessions are a great time to hire.

Meanwhile, make the most of the $1 coffee at Starbucks whilst it lasts…

3 responses to “What the recession means for the software business: five things to think about”

  1. This blog is related to Stock Market Investing Courses that one must invest their money so that one can use it in the future. For the beginners they must invest properly.

  2. jnny says:

    Software spend comes from business rather than consumer markets.Research shows that in smaller companies innovation is more likely to happen in an environment of limited resources.
    ——————
    jnny
    NEW, NEW, NEW

  3. Infrastructure and maintenance spend will continue. Consulting budgets will open up, as businesses hesitate to commit to fulltime hires, and state governments go on hiring freezes. Not a great time for mISVs maybe, but a great time to be a meat and potatoes infrastructure consultant. You can’t do without what you can’t do without.