June 1, 2020 | Point of View

Where software & high-tech is focused to withstand the pandemic downturn

Nimble operating models allowed the software industry to be less impacted by the pandemic. But questions remain on how to maintain efficiency and grow post-crisis.

Though no industry has been untouched by the pandemic, software has been among the least affected. Still, a lack of significant disruptions in the current environment does not mean there aren’t risks and opportunities for the industry to consider.  

We work with software & high-tech companies every day. To take stock of how they’re responding to current economic conditions—and treading water in a volatile economy—we had conversations with several software company executives. Here’s what they said.

The reason software & high-tech is faring well? Nimble operating models. 

The recurring revenue model of most SaaS companies inherently provides protection against sudden market downturns, which is why the sector has seen so much investment over the past few decades. As industries become increasingly digitally enabled and further reliant upon SaaS products to operate and serve their customers, demand and SaaS usage will remain high across most sectors over the long term.  

Aside from software that is solely focused on sectors that have seen a drastic downturn (e.g., hospitality, travel, retail), the vast majority of our Software & High-Tech clients are well-positioned. Enterprise software has certainly been less affected than some sectors and the majority of these companies have the staying power to sustain this downturn.

Digital and cloud-first operating models also have enabled software companies to establish decentralized operations over the past decade. That allowed for a smoother-than-usual transition to managing a distributed workforce, but it came with some of its own challenges. 

Many of our clients conducted pilot tests weeks before the shutdown to ensure their systems and networks could withstand the shift to a fully remote model. For other clients, that early test exposed security vulnerabilities and security attacks due to poor security operations. For both positive and negative experiences, it was a valuable learning lesson for what has now become an everyday reality. “We are set to work from anywhere,” one client said. “From a software and delivery perspective, it is easier for us to do our jobs. When these difficult times hit, we have it easy because we can take our laptops and work from anywhere.” 

Most software execs we talked with said their workforce’s shift to fully remote work has been seamless. They’ve accepted challenges under unique circumstances and adversity to continue business as usual. One client in the middle of a merger noted the organization’s ability to rally around driving the combined business and achieving integration goals instead of teams becoming too focused on the inherent change associated with a merger. 

Another client has been happy with the initial response but understands the importance of maintaining it as stay-at-home orders continue into the summer months. What was once new and exciting could quickly become mundane and repetitive. 

“I actually feel we’ve been a bit more efficient, but I don’t know how long that will last because sometimes you have that high,” said the SVP and head of R&D for a leading SaaS application provider.  

The question is, how can they maintain operational efficiency through the crisis? And where they are focused to continue growing through 2020 and beyond?

Here are three areas:

1. Continue product launches and releases as planned—but time them with the customer's needs and mindset 

Most clients we spoke with are proceeding as planned with their Q2 product releases. But they did tell us they are carefully planning release timing through an evaluation of the market, how their customers are operating in the current environment, and any prior commitments made to customers. 

A FinTech company whose products reach individual consumers said they are proceeding without delay on its product launches given the hyper-focus on financial well-being and personal investment strategies.  

While M&A activity has slowed tremendously over the past two months, software companies that are well-capitalized and have healthy balance sheets can find new growth opportunities by partnering with competitors or adjacent products through M&A. For example, Apttus’s recent merger with Conga represents a transformative growth opportunity in the quote-to-cash and digital document transformation space for both companies.

2. Spend time refining scenario planning, forecasting, renewals, and pricing

Software company executives spent March and April modeling multiple revenue, margin, and cash flow scenarios for 2020. For those serving customer bases that cross markets, sectors, and geographies, our clients shared with us the importance of evaluating scenarios for particular segments of their customer base that may react differently than others as it relates to renewals and churn risk, pricing strategies, contract terms and flexibility, and payment timing and cash management.

Given these scenarios, our clients increasingly focused on these areas: First, initiatives with clear margin improvement outcomes, such as cloud operating cost initiatives. In most cases, a relatively small one-time investment in a cloud roadmap can yield a 15-25% annualized cloud margin improvement. As one client noted:

Still status quo and still investing on our initiatives the same way.

 ”

Second, they are focused on how to best execute on new customer/logo sales plans to boost 2020 revenue. For example, some of our EdTech clients, whose sales and implementation cycles depend heavily on new wins during the spring and summer months, have had their sales cycles significantly interrupted this year. While the short-term impact is difficult to control, that particular organization is doubling down on new feature development within its core product as well as planning to expand into new product capabilities to drive additional growth in 2021 when the sales cycle is (hopefully) back to normal. 

Our clients agreed that new customer growth will be limited in 2020, putting all eyes on renewals and net retention rates. However, there are pockets of revenue demand in some sectors, like EdTech.

Companies with subpar retention rates will certainly struggle, and those with high retention rates are hyper-focused on minimizing any potential churn due to a lack of contract minimums or cancellation penalties; while most of our clients are well-positioned, there may be certain customers with unique contract arrangements. 

Last, our clients are focused on pricing strategy. While most software companies increase maintenance or subscription prices by 3-7% annually, some clients told us they are struggling to rationalize price increases in the current environment. We expect many will pause or minimize price increases for 2020 to reduce churn risk but will strategize on how to reintroduce increases in 2021. 

3. With double-digit unemployment rates, invest in talent that is more available 

The war for talent has been a difficult one, but the current tech labor market supply will increase as a result of layoffs in certain sectors. Because of that, our clients said there’s an opportunity for their growing software companies to expand their teams to support growth and scale. 

Clients said recruiting, hiring, and onboarding continues to be challenging without the ability to meet with candidates face-to-face. One of our clients has been seeking to rapidly expand offshore operations to support an organizational shift and product investments, but their ability to source and onboard new team members was initially delayed due to in-country restrictions. While onboarding offshore talent isn’t impossible, they have had to adjust their timeline for that transition.

For now, they’re getting by with a current workforce adjusting to unique conditions and thriving because of the nimbleness of their operations and the preparedness of their organizations. 

"We gave them flexibility. We told them to do what works for you,” one client said. “The team has reacted very well. They’re working hard and a lot of people are saying because they aren’t traveling, they aren’t losing two to three hours in commute. They can give more. Not that we demand it, but they  are saying they can work a little bit longer.”

 

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