Fluctuating market forecasts are a major source of concern, and in anticipation, high-tech companies are cutting costs. From venture-capital-backed startups to industry giants – everyone seems to be implementing headcount reductions to ready themselves for a “rough patch.” But are they doing the right thing?
Although controlling costs when experiencing – or anticipating – a downturn is smart, laying off seasoned workers could be the wrong move, especially when thinking long-term. In many cases, such layoffs eventually cost more money than simply keeping workers on, as businesses are forced to recruit, rehire, and retrain workers when the economy recovers – in effect, paying their acquisition and onboarding expenses twice. Companies can also lose invaluable knowledge and experience to the competition when the impacted employees pursue other opportunities.
Instead of cutting costs, companies can invest in new ways to curate incremental organic revenue across their portfolio of products or customers, which is validated by research. In a recent Wall Street Journal article MKM Partners analyst Rohit Kulkarni said, “you want to have the bandwidth to keep the innovation engine churning,” meaning that companies who continue “will be able to recover the fastest.” In another study, McKinsey identified firms that thrived during downtimes as “resilients,” calling them the “digital haves” because they continued investing in technology that would drive efficiencies and cut costs even during recessionary periods.
In particular, deploying advanced analytics along with sophisticated process automation tools can help businesses with all-important revenue optimization and compliance, which includes sales execution, pricing operations, incentive programs, commercial intelligence (AI/ML), and data automation. These “resilients” invested in technology at a time when their markets were in flux. The key to why revenue management help them stay ahead is because it can help answer strategic questions such as: Do we discount prices to push higher volumes? Should we increase prices to protect margins? What business processes can we automate? What data silos can we eliminate?
When sales start lagging or stay slumped for a period of time, it presents a great opportunity to shift focus and target your time and attention on improving existing business processes and supporting them with enterprise software solutions. Adopting a digital-first company mindset will allow your team to identify the right prices for each segment of customers, redirect problematic supply chains, and prevent your sales team from leaving any money on the table during delicate price negotiations.
“Manufacturers realize the importance of moving to become digital-first organizations, and this continues to translate to increased IT investment to remain competitive, regardless of economic conditions,” says Simon Ellis, VP, Manufacturing Insights and Worldwide Supply Chain, at IDC. Continuing on to say that, “there are rising fears of a recession in 2023, and discrete and process manufacturing are two of the most exposed industries to watch.”
Investing for competitive advantage
A landmark study in 2018 by the Harvard Business Review (HBR) found that companies who invested in automation, advanced analytics, and other digital technologies during the Great Recession of 2008-2009 were able to increase productivity and lower costs, which helped them weather the downturn. Among 900 B2B companies tracked by HBR, the “winners” were four times more likely to see significant growth in both absolute revenue as well as growth in market share due to their prior investments in embedded digital tools, which powered core business functions like revenue operations.
Even during the recession, the winners continued to grow even as the losers stalled out. The performance gap widened significantly during the recovery period and competitors could not catch up.
Another case in point: McKinsey’s “resilients” saw their revenues decrease as much as their peers when we were in the 2008 recession’s early days. But by the time the recession hit its peak in 2009, the “resilients’” earnings rose by 10%, while the others (digital laggards) had seen theirs drop nearly 15%. McKinsey found that these “digital haves” were connecting more intimately with their high-value customers. Better able to meet customer needs at lower cost while also managing pricing better and avoiding costly emergency IT solutions at an economically uncertain time.
Where do you start? With pricing and selling
During challenging economic times, your sales will become more volatile, and to win deals, sales reps will turn to offering deeper discounts. This type of discounting obviously erodes margin, which gives you even fewer dollars to invest in forward-looking initiatives. You also risk decreasing brand value, which can cause customer loyalty to waver.
Consultancy Bain & Co. advises to solidify new pricing during inflations and to increase prices to match the rising costs of supplies. But we may well have reached the point where it is simply not possible to raise them even further. If stagflation descends upon us, you will need to manage pricing in a more sophisticated manner.
Bain recommends companies should start by creating a center of excellence (CoE) for revenue optimization and compliance, one that oversees revenue activities such as sales, pricing, incentives, and partner channels. They also need to deploy dynamic price adjustment tools, optimize structural pricing levers, and perform more sophisticated analyses and calculations that are well beyond short-term pricing discounts. “Next-generation data analytics provides a larger arsenal this time around to set pricing at different levels and move quickly to adapt, based on how different customer segments value a company’s products or services.”
Sales & Marketing consultancy Simon Kucher also believes in raising prices in times like these. But this must include careful margin management aligned to identified areas of strategic pricing growth. Among other things, they identify and up the prices of more complex products and services for which customers will pay more, adjust the cost structures of low-margin products and services, and perhaps even abandon categories that aren’t strategically fit for them in the long term.
How Model N can help
Given today’s current economic environment and the advice above, companies should mature their revenue optimization and compliance operations to succeed tomorrow. This includes activities that span sales execution, pricing operation, incentive programs, and revenue data automation, including commercial intelligence and reporting. These are large projects that require multi-stakeholder support, but once successfully implemented, the return on investment is significant. Best-in-class companies from around the globe, “the resilients,” the digital “haves,” and “winners,” as observed in published research, are investing because it works and is a proven path to success. This is why high-tech companies continue to partner with Model N despite evidence that an economic downturn is coming. Here are some of the benefits to explore:
- Effectively manage sales negotiations to streamline and win.
- Realize better prices throughout the product lifecycle.
- Systematically communicate upcoming price and payment changes.
- Intelligently review real-time analytics with commercial reporting capabilities.
- Execute a revenue optimization strategy tied to corporate objectives.
- Manage contract and financial compliance across your channel ecosystem.
- Drive targeted rebate and incentive programs to boost sales and co-sales.
- Leverage a team of global revenue management experts at Model N.
When done right, these moves can deliver streamlined operations and lower costs, as well as increase customer loyalty and growth. High-tech manufacturers become better equipped to optimize revenue and manage compliance across the channel, no matter the market conditions.
To learn more on this subject, join us for our session titled Navigating Profitability in a Turbulent Market at Model N’s Rainmaker 23 event later this year.
If you want to talk strategy and learn more about how Model N can support you, feel free to schedule a 1:1 meeting with one of our experts.
