IT leaders must target revenue, not cost to fight recession

There is a consensus among economists that a recession is imminent, although its longevity is disputed. For the fifth time, information technology (IT) CEOs must prepare for tough times in two decades.

Preparing for a recession almost always starts with cost, especially discretionary spending, such as travel and non-essential services. Most CEOs aim to protect jobs by cutting recruitment and improving productivity (we’re talking old-fashioned, money-driven companies, not venture capital-fueled startups).

While cost control is important, it shouldn’t be the starting point. The starting point should be customers, existing and potential. The reason is simple: customers, too, begin their preparation for the recession by controlling costs. For CEOs of IT services companies, the primary goal should be to avoid being classified as non-essential and unnecessary.

This forces senior management to counterintuitively increase travel to visit important existing customers, often multiple times. The purpose of these visits is to develop a visceral understanding of the client’s strategies for the recession, including cost control plans. Based on this understanding, services need to be reframed to align with the client’s downturn strategy. For larger customers, these visits should be led by the CEO.

This not only protects existing revenue, but also makes the company a true partner. We have seen instances where such commitments have led customers to consolidate their work with the proactive vendor, to the detriment of other vendors.

If it is not possible to reframe services as strategic services, discounts or deferred payments should be proactively negotiated. The fundamental objective is to reduce the likelihood of falling victim to the customer’s cost control plans.

This approach is also applicable to the pipeline of potential customers. As cost becomes the key lever for selecting new vendors, IT services companies must be prepared to deprioritize opportunities where they cannot be cost leaders. Conversely, they should proactively seek market share in segments where they have a cost advantage. Senior managers must work closely with potential customers to execute such reprioritization of the pipeline. Salespeople are expensive and they need to be redirected to the most likely opportunities to increase their productivity, as part of recession preparedness.

These close engagements with customers should produce reliable revenue scenarios during the recession. First-hand customer input should enable realistic low-base-high scenarios, rather than purely mathematical modeling. These scenarios should then form the basis of cost planning. And just as important, for investment planning. Securing income often requires investment, especially in difficult markets. Reducing investments without alignment with future scenarios is a sure path to low results.

We recommend planning costs and investments for the baseline revenue scenario. These plans should have built-in triggers to move into low or high scenarios as the market situation evolves.

This is important because we often see knee-jerk reactions, where costs are dramatically reduced, without any alignment to revenue scenarios. Such drastic cost reduction impacts the organization’s ability to pursue plausible revenues, leading to a self-fulfilling vicious circle. This is one of the main reasons why cost and investment planning should begin once the revenue scenarios are reasonably clear.

We have seen this first hand during the first quarters of covid-19. As the shutdowns began, most IT and services companies began preparing for tough quarters. But it quickly became clear that IT services companies were looking at some of the best quarters in their history. Companies, which have closed the hatch to control costs, have been slow to capture this growth.

This process of proactively engaging customers, developing factual revenue scenarios, and creating associated cost and investment plans is expected to take two months. This should be the primary focus of senior management and the exercise should be governed by the office of the CEO. During these two months, when the outsized costs must be reduced, the instinct to suppress all costs must be resisted. For example, travel costs are likely to increase during this period, as customers need to be visited multiple times. External media may be required to create these plans, as internal bandwidth may be limited.

The true effectiveness of corporate leadership becomes evident during recessions. True effectiveness begins with controlling emotions and instincts leading to strategic clarity.

Abhisek Mukherjee is co-founder and director of Auctus Advisors

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Sallie R. Loera