No one knows how long or deep the current downturn will be, but TMT companies are wasting no time trying to manage significant downside risks from a much weaker U.S. and global economy. Starting in Q3’22, many pulled back on hiring or initiated layoffs, reduced discretionary spending, and delayed large capital outlays. Indeed, a recession compels companies to build their resiliency to get through leaner times. However, leading organizations also use this opportunity to rethink and upgrade their businesses to better position themselves for an eventual economic recovery.
Focusing on building resiliency now could increase the flexibility TMT companies have when pursuing an M&A strategy down the road. For strategic buyers and PE platform companies looking to acquire, greater resiliency allows them to withstand a longer period of uncertainty, preserve capital, and reap the benefit of more assets becoming available at more attractive valuations. Similarly, for companies seeking new investment or looking to sell, greater resiliency enables them to weather the downturn longer and wait for valuations to bounce back to secure more attractive bids.
KPMG has been working with our clients on helping to improve their resiliency by going beyond the obvious. These are some of the lessons we learned that are most relevant for TMT companies:
- Identify customer segments under potential stress: Look for concentration risks to your revenue. Running high-level analytics by sector and subsector within your customer base could inform a different perspective on how to view your customer, revenue, and accounts receivable risk in a downturn.
- Be invaluable to your most valuable customers: Understanding true customer contribution through detailed cost-to-serve analysis is an important part of knowing where your earnings come from. For customers that provide most of your cash flows, invest in closer partnership to increase stickiness and make your offering (not just technology, but also your people) invaluable.
- Revisit contracting and contract renewal processes: Attempt to lock in customers for a longer period to ride out any short-term economic volatility. Segment your product lines and get aggressive where most of your cost is depreciation and your variable incremental expense to deliver is low. Give a little on price to get a little revenue certainty.
- Take advantage of a strong dollar: For U.S.-dollar denominated businesses, pushing work outside the U.S. (even to Canada or Western Europe temporarily) where you already have a footprint can be a very attractive form of arbitrage to lower overall labor costs.
- Cost control “what if” scenario planning: Plan cost controls in a forward-looking fashion in potentially two or three tranches. Go through the exercise of “what goes first” and is discretionary and expendable if revenue were to decline 10, 20, or even 30 percent. Do the work to fully understand what “keep the lights on” mode might look like, and ensure that your management team and board are fully aligned with the decisions to be made should this scenario come to pass.
- Revisit overall strategic business portfolio: Building on the actions above, institute and reinforce the discipline and process of constantly and proactively assessing your business portfolio—the customer segments you serve, the product categories you provide, and the business model you have—to weather the uncertainly and set up yourself up for growth as the clouds clear.