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Recession-Proofing Your Software Business

Is growth at any cost still an effective strategy in a recession-prone economic landscape? That was the topic at hand in a panel moderated by Kevin McLaughlin, reporter for The Information. His guests included Prem Ananthakrishnan, managing director and software lead at Accenture; Anu Bharadwaj, chief operating officer at Atlassian; and Lara Caimi, chief customer and partner officer at ServiceNow.

A Shift in the Growth at Any Cost Mindset

McLaughlin kicked off the discussion by asking what companies can or should do to balance growth and profitability. The question is especially relevant, Prem Ananthakrishnan of Accenture said, because many of the companies he advises have never faced a recession. “If you look at software, it’s a really young industry. Most firms are less than 25 years old. A lot of companies were born in the last 10 years and they’ve never seen a recessionary environment. They’ve had abundant access to capital, and operations have never been top of mind for some of these companies. And now I think that needs to change. How do you balance profitability and growth as you enter this new era of business?”

Lara Caimi of ServiceNow added, “Even when you look at what’s driving valuations a year ago versus today…a year ago, it was very clearly growth. Now it’s much more balanced.” She added, “The rule of 40 [the principle that a software company’s combined growth rate and profit margin should equal or exceed 40%] matters now. I think that’s what you’re seeing reflected in the market, which is driving operational imperatives for software companies in a way that’s different from the past decade.”

Anu Bharadwaj of Atlassian is also seeing the balance shift for her customers. “Companies are now moving towards durability and making sure that you have a runway for the next few years, where you can stabilize the business and continue to grow at a reasonable rate. I think it’s actually helpful for investors as well as companies to really focus on the fundamentals of the business, and not to over-index on one aspect of the business or the other. It really sets up companies to survive the longer term.”

Which Companies Are Well Positioned to Take On a Recession and Which Aren’t?

From his experience, Ananthakrishnan believes companies who achieve the right balance between growth and profitability—and who make future-forward investments—have the best chance of weathering a downturn. “These companies are definitely in a better position. And when you talk about profitability, it comes down to things like cash flows. Do you have abundant capital? How have you managed that capital? And then also it comes down to your portfolio allocation. Where exactly have you been investing?”

He stressed that companies with ample cash reserves who can still invest in growth are well placed to come out on top in a recession. And the companies that aren’t as well positioned to weather the storm are those that have placed outsize emphasis on growth over profitability. “Let’s say you’re a company that’s grown 80%, 90%—but you’ve grown at the cost of good operating margins and you have negative cash flows. Then you have to take some drastic measures.”

Caimi built on the idea that the companies who thrive during a recession have made strong investments in operations. “Digital transformation remains a priority regardless of whether it’s in growth times or in tougher times because it’s driving automation. It’s driving opportunities to increase your employee experience, which is critical when we still have a war for talent going on. And it’s driving customer experience. The winners coming out of recessions tend to be companies that lean into their customers and treat them in a way that drives loyalty.”

Bharadwaj added two other factors she believes are critical to riding out a recession: having a broad customer base and having a product that’s a must-have rather than a nice-to-have item—for example, a painkiller versus a vitamin. “As we see in a lot of our own marketplace partners, if customers don’t have access to the apps they need…it’s really so mission-critical that business comes to a halt. Being in those kinds of mission-critical segments is definitely a big advantage in terms of your staying power.”

Going All In on Channels

McLaughlin then steered the conversation toward channel partners. Something he’s seen over and over is how in tough times companies typically pull back on working with channel partners—invariably to their detriment.

Ananthakrishnan stressed the importance of channel partnerships. “First of all, I would say using channels to acquire and serve customers is a great way to drive efficiency.…So start investing in channels if you’re not. But I think it’s really important to figure out what the right channels are, and how to optimize the channels you’ve been working with in the context of changing buyer behaviors and preferences.”

Caimi agreed. “The channel is an important way to scale, but you need to be clear about the role of the channel partners and how you can incentivize them to drive the mutual outcomes of selling and delivering. For ServiceNow, a great partner is one that can take their expertise, put it on our platform and pull the platform into new areas where, frankly, we don’t have the expertise or the resources to take some of these solutions to market.”

Bharadwaj relayed her positive experiences working with channel partners. “It’s pretty difficult for companies to build and sustain an economy around themselves without really partnering deeply and broadly with channel partners. For us personally, working with marketplace partners has been a wonderful, constructive force—really a force multiplier—to make sure that not just our users experience Atlassian products, but that we’re able to create businesses and livelihoods for thousands of other channel partners that are able to partner with us over a longer term.”

The Right Balance Is Key

As companies are increasingly looking down the barrel of what could be a complicated, long-term recession, discussions like these are crucial. Striking the right balance between growth and profitability is the key to surviving, and even thriving, during a downturn.

The consequences of weighing a business too heavily toward growth in an uncertain economic environment can be serious. As Prem Ananthakrishnan put it, “If you’ve been focused on growth at all costs, you’re kind of in trouble right now.”

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