July 7, 2020

What’s the recipe for surviving the pandemic-triggered downturn?

Written by Tyler Moore

The recipe for bouncing back from a COVID-19 downturn includes a large dose of disruption and a healthy dash of cash

In a previous post I wrote about how the pandemic has obliterated most data models and so building a predictive model to forecast how it will all shake out would be next to impossible. No one can say for sure when the pandemic emergency will begin to subside. No one knows if economic activity will bounce back to pre-pandemic levels once the heavy restrictions have been lifted. No one can say with any certainty which businesses and industries will survive.

Based on a number of surveys here is what we do know:

  • Nearly half of companies will reduce office space with many expecting to reduce it by more than 25%.
  • Companies are preparing for a long period of altered working conditions with roughly 20% expecting to require masks, protective equipment, and social distancing through 2021 and beyond. Some 15% say conditions have been altered permanently and another 20% have yet to establish a plan.
  • Nearly 80% of companies agree that social distancing practices will be the biggest challenge to returning to previous normal operations.

Those are the superficial knowns but in this climate what is a company to do to survive? Survival factors will likely vary by industry so for the sake of brevity lets narrow the view of this piece to the technology industry. One way to look at the factors that contribute to survival is to examine the services and products necessary for businesses in going forward. That is to say, which companies are offering essential products and services that enable survival. 

Disruption a key factor

Companies often go out of business because their products or services fail to match what the market demands and we all know that market demands tend to change. A business can also be at risk when its operating processes become obsolete in the face of technological changes that give a persistent advantage to rivals that have disrupted the competitive landscape by embracing new technologies. Digital transformation is one such disruption. When customers prefer the new ways of doing business, such as online, mobile, self-service, digital, streaming, AI, machine learning, and so forth, companies that hang on to older technologies are likely to lose customers, revenues, and market share until they adopt the new ways.In any case, agility is key and successful business will leverage technologies, namely the cloud, to attain a high level of agility.

We essentially live in a virtual world now and the vendors that provided the virtual lifelines for us during the pandemic will bounce back earliest and strongest. Similarly, the SaaS vendors and cloud service operators supporting this virtual world, will be in a solid position and poised for runaway growth. 

Our new world is online, on-demand, self-service, mobile, social, streaming, virtual, and cloud-centric. The forward thinking vendors have made major investments in AI, automation, robotics, edge computing, and the Internet of Things. These are all key enablers for a world where we won’t need to interact closely with other human beings. The forward thinking vendors will emerge into a tech marketplace in which vendors that weren’t agile or prepared for change will have succumbed to COVID-19.

The need for cash and a big war chest

The pandemic has created bottlenecks and inefficiencies in the marketplace making it difficult for companies to complete or close business in a timely manner.

When companies have to take more time than normal to close revenue or secure the necessary cash to stay above water in tough economic conditions then they are more at risk. Tech firms that had healthy cash positions going in, or that currently have ready access to credit and other funding to keep going will bounce back fastest. They can hire, invest in new operating capital, and otherwise grow to meet what’s sure to be a lot of pent-up demand from frustrated customers as the pandemic subsides.

If there is any good news it is that the crisis hit at the end of the longest bull market in history and coincidentally at the end of a long period of full employment, meaning that there is a good bit of cash out there. Therefore the investment community will not need to search too hard to find enough capital to fund whatever firms survive the crisis and are ready to get back to work. Here again, the cloud services businesses should be in a great position.

Weathering the storm

Whether a tech company can survive any COVID-19-triggered downturn depends upon how well it weathers the challenges noted above. It also depends on whether it maintains a healthy enough balance sheet during this emergency and in the immediate aftermath.

Another recovery factor is whether a company can retain enough valuable assets on its balance sheet during the worst of the crisis. If the going gets tough and it drains its cash reserves, it can bounce back effectively if it can sell or leverage key assets in order to raise the cash necessary to stay afloat until business conditions improve.

Serving it on the plate

When demand falls, sales cycles lengthen, or prices decline, the companies that have a war chest of cash or a treasure trove of valuable products, services, and IP that they could conceivably liquidate, will survive. 

The period we’re going through also amply demonstrates the value of cloud, digital, streaming, edge, artificial intelligence, and other digital transformation technologies. After the financial crisis in 2008 it was the companies that embraced digital automation and digital transformation, and maintained or amped up marketing and sales that not only survived but emerged victorious. 

In this pandemic the companies that have embraced the cloud, become disruptors, and held on to cash will be the clear winners. 

You may also like…