Good companies survive slowdowns. Great companies innovate.
Matt Henderson, Global Product Lead, Stripe
Roaring inflation, war in Ukraine, tension with China, disrupted supply chains, and a looming recession—there is no shortage of challenges for businesses in the world right now.
This geopolitical and economic disruption demands a reaction: It’s more important than ever for businesses to be prudent and maximise efficiency. But focusing on short-term savings alone might hurt over the long term. Being strategic and finding new revenue streams is of critical importance, too—you cannot save your way out of a crisis.
Learning from the past
Looking at past slowdowns can be instructive. In the dot-com crash of the early 2000s, the Nasdaq fell 78 per cent as thousands of online companies went bankrupt. Those companies that did survive did so at much lower valuations.
But some of the most successful tech companies of our time not only survived, they thrived through the crisis. Amazon’s topline revenue almost doubled from Q1 2000 to Q4 2001. The downturn was a defining moment for the company, partly because of strategic decisions it made that positioned them for success far beyond the economic cycle.
Amazon started off in the 1990s as a direct book retailer. But in late 2000, six months after the crash began, it launched Amazon Marketplace, allowing third-party sellers on its website.
Marketplaces were not as common then as they are today, so it was not an obvious decision for Amazon to open up its platform. The move required a significant investment. At the time, building a marketplace was complex and expensive. But Amazon decided to invest despite the crisis wreaking havoc on its share price—and was rewarded with extreme success.
While Amazon’s story is impressive, there’s no lack of companies that made defensive choices when faced with a challenging environment—and paid the price.
Once the unchallenged global leader in mobile phones, Nokia faced a new threat in 2007 when Apple released the iPhone.
A year later the business climate grew even tougher with the financial crisis of 2008 and the subsequent economic slowdown. Instead of allocating resources to long-term innovation goals such as developing a new operating system, Nokia’s management went for the cheaper option: They decided to develop new phone devices for short-term market demands, keeping the outdated, unwieldy Symbian OS. We know what happened next: lack of vision led to the steep decline of the company, eventually leading it to be acquired by Microsoft in 2013.
Amazon’s decision might look obvious today, but its success was far from guaranteed, especially given the dire macroeconomic conditions. For Nokia, the temptation to focus on cost cutting and short-term profit alone must have been huge. But history shows that companies can’t afford to lower their ambitions in a slowdown. They need to attribute developer time to strategic projects, and not only think about costs in terms of immediate survival—but also in light of long-term opportunity.
Doing more, with less
A lot has changed since the dot-com crash. The proliferation of APIs and SaaS tooling has dramatically reduced the operational burden for companies, meaning big strategic projects can be delivered with low long-term fixed costs. Starting an Amazon-like marketplace, for example, does not require months or even years of software development any longer, because it can be built out of the box.
While this has helped speed up company building and innovation, the complex interplay of software today can be hard to navigate. During a slowdown, reviewing your tech stack and SaaS providers to identify where you can lower your cost structure can be a useful exercise. Which providers can help you accelerate your growth? Are there parts of your business you should be building instead of buying? And does the answer to that question hinge on whether the economy goes up or down?
Strategic decision-making today
A total cost of ownership (TCO) calculation can provide a clear picture of the actual costs of an investment and the long-term consequences of choosing one provider over another. In payments, the immediate implementation and setup costs of a piece of software do not provide a full overview—nor do the ongoing transactions costs. Consequences are much more far-reaching than that.
The value of developer time needs to be assessed against the benefit of using scarce engineering resources for more strategic parts of the business. At the same time, the software provider’s full product offering and future innovations need to be considered in order to preserve flexibility in the future.
To come back to the marketplace example: Even if starting a marketplace is not on the roadmap when a crisis hits, the option to start one in the future comes with a certain value, which a company might also want to price in.
The value of such optionality is certainly higher in times when the economy goes down: Slowdowns accelerate change, and the world will look very different when the economy picks up again. In order to thrive in that new environment, adapting will be necessary—although it might not be quite clear from the beginning what exactly needs to change.
Along with a TCO calculation, a Total Economic Impact (TEI) analysis can also help. It looks at costs as investments and considers their potential return.
The British Council, for example, was able to generate an additional £5m in revenue due to higher conversion rates and better mobile performance. And Deliveroo was able to open up a whole new revenue stream by offering subscription-based home deliveries. By introducing new business lines and allocating more developer time to the evolution of their core products, these companies become more dynamic when the economy grows, and more resilient when it goes down.
Never stop innovating
Century-old companies like Ford or Maersk have lived through multiple slowdowns, including catastrophic ones like the Great Depression. They have learned time and time again that staying innovative is the only way to come out of a slowdown on the right side of history: Ford invented the assembly line in 1914 and more than a century later, they are among the first carmakers to think holistically about the digital payments experience of their customers.
Maersk has evolved with the shipping industry, grown through multiple crises over the last century, and now successfully embraces tech to provide a fully digital logistics platform to their customers. For a long time, traditional companies have tried to learn from the success of tech companies, and use those lessons to adapt to the digital world themselves.
In the current economic climate, it might be a good idea to turn around that knowledge transfer for once: Younger tech companies can learn a lot from them about adaptability, innovation, and resilience.
The views and opinions expressed are not necessarily those of AltFi.