Like other industries, the tech sector is navigating uncertainty about economic headwinds. The financial environment is changing as the Federal Reserve hikes rates and investors get more cautious about where they put their money. As of late October, RSM US LLP’s Chief Economist Joe Brusuelas estimated that there was a 65 percent probability of a recession over the next 12 months.
Although tech companies might need to trim expenses and manage their headcounts, they remain in a unique position to fare well through whatever economic changes may come. Technological tools will likely remain in high demand for individuals and enterprises alike, especially as companies in other sectors seek to streamline their operations and implement more automation. Below, we examine some key areas where tech companies are on strong footing and how they can remain there as the year ends.
3 Reasons Tech Is Poised for Economic Headwinds
- Strong access to capital and talent.
- Provision of key infrastructure to other industries.
- Adaptable business models.
1. Strong Access to Capital and Talent
Although investors may be growing somewhat leery of the overall economic landscape, some of the changes brought on by the pandemic remain favorable for tech companies seeking capital.
With the rise of remote operations, investors and funds have dispersed geographically to some extent. In the United States, some investors have relocated headquarters and set up additional offices in second and third markets. Silicon Valley remains the epicenter for venture capital firms, no doubt. But with the proliferation of remote meetings over the last two years, it’s no longer as crucial as it once was for startups and later-stage technology companies seeking venture funding to be located there to land their first or next round of funding.
Access to talent has also grown immensely. Since more workers have demanded remote options, tech companies are able to scour more markets to fill empty roles. And this goes well beyond smaller U.S. cities; businesses can arguably find talent globally now more easily than ever.
The data supports this optimism as well. October marked the 22nd consecutive month of employment growth in the tech sector, according to CompTIA’s October tech jobs report. Looking back a year ago to September 2021, tech employment has experienced 22 percent growth year-over-year. Job postings did dip more recently, though, according to CompTIA, with September job postings down 12 percent compared to August.
These points generally lean in tech companies’ favor, but those that want to take advantage of this environment will need to stay on top of the business implications of a dispersed workforce. As we wrote in another recent piece, considerations include:
- Regulatory and employment laws across multiple countries
- Data protection and cybersecurity practices on a global scale
- Managing cultural cohesion across regions
Regardless, amid a darkening economic picture, tech companies should also be prepared to scale their workforce as needed.
2. Providing of Key Infrastructure to Other Industries
The rise of remote work is a boon for tech companies from another angle as well; the technological solutions so many of these businesses have launched and grown are the very tools that have allowed other sectors to adapt their own operations throughout the pandemic.
Looking toward the next six months and into late next year, many companies across the economy may try to find new ways to use automation to make their operations leaner, technology to make their sales pipelines stronger and tools to elevate the level of security and privacy today’s modern enterprise requires. All these key areas could lead to new opportunities for tech companies that are ready to scale their offerings beyond their current customer bases.
Here are two key questions leadership teams might ask to help determine where to go next:
- Do we have the right balance of customer success team members and engineers to build new products and sales to support continued growth? It will be more important in the coming year to pay close attention to net retention rates and customer churn.
- To find the best talent, are we searching in the right places both domestically and globally?
3. Adaptable Business Models
With recession concerns looming, young technology companies innovating for the future may need to fine-tune their approaches to growth. This adjustment might mean more closely correlating revenue growth and cash burn, renewing the focus on customer and client retention to maximize customer lifetime value and establishing business practices that scale in a hybrid or remote-first environment.
The rise of subscription-based business models in recent years might offer one approach for teams looking to adjust and boost customer retention. These models “can provide deeper relationships with customers, more flexibility around pricing and the ability to build an annuity-based business model,” as RSM wrote in 2021. Those deeper relationships and greater flexibility will be key as consumers likely further tighten their purse strings in the coming months.
As that RSM article from last year highlighted, businesses that are in the process of adopting or want to adopt a subscription-based model should consider:
- How customer interaction will change: “Some key changes include adding a customer success function focused on customer health and growth, building out a renewals process and team to strategically manage the customer relationship, and leveraging automation through customer relationship management (CRM) and configure, price, quote (CPQ) systems, to proactively plan for touch points in the customer relationship.”
- Systems and processes: “For business-to-consumer companies, payment automation can become a huge system capability hurdle in the process of switching to a subscription-based model. Automation of provisioning and entitlements for new customers or suspending service for nonpayment can be complex. New ways of pricing and bundling offerings can provide value to customers but may also have revenue recognition implications that need to be supported by the enterprise platform.”
- Pricing and monetization: In order to take advantage of the flexibility these models allow, “leadership teams need to figure out how to put together stickier pricing patterns and be strategic about how to package complementary products or features together.”
Stay Flexibile
No sector is immune to whatever economic challenges may come. But the inherent flexibility of the tech sector, its essential role in enabling economic activity in the last two years, and its willingness to constantly change and innovate will be enormous assets as we move into 2023.
