By Boris Korenfeld, CTO and Tech Executives Advisor at Sphere Partners
Winston Churchill once said, “Never let a good crisis go to waste.”
Churchill’s insight can be applied to the rapidly deflating tech bubble. While the previous decade fueled amazing investment and innovation, it also created overvaluation, irrational exuberance, and misallocation of resources:
- Engineering headcount skyrocketed (not always because it was needed, but because there was money).
- Employee retention was a challenge – employees were chased by competitors. As a result, some engineers were promoted to managerial roles (without the required managerial experience).
- A highly competitive job market combined with the massive perks offered by many employers actually encouraged job-hopping.
- Companies lost focus on core products and became distracted by unnecessary agendas and projects.
- Engineering productivity, and efficiency metrics were under-appreciated (because it was believed that brute force and a fat wallet could solve all inefficiency problems).
- Operational and production cost-effectiveness was not a high priority – allowing many overly expensive solutions to be created (that now require a major effort to re-engineer).
- And many more…
Congratulations, the bubble popped.
When life gives you lemons, make lemonade.
In the words of Andy Grove, “Bad companies are destroyed by crisis, good companies survive them, great companies are improved by them.”
Investors are shifting their focus from growth at any cost to sustainable profitability. Even at profitable companies, organizational structures are being recreated right before our eyes as Meta, Amazon, Netflix, Alphabet, and Salesforce reduce headcount and increase shareholder value. You can track all the tech layoffs in this database.
How are you finding the right balance of growth and profitability?
It is worth looking at some simple financial models to understand how you can rebalance your company. No single model works in all situations or for all companies. Every company should find the model (or models) that work best for their unique circumstances.
One of those models is the Rule of 40 which states that a SaaS company’s growth rate when added to its free cash flow rate should equal 40 percent or higher. The rule neatly distills a company’s operating performance into one number. A company that meets the “Rule of 40” is considered to have a healthy balance of growth and profitability.
Another alternative metric from venture capital firm Norwest suggests that 3GP (3 * revenue growth + EBITDA profitability) is a more accurate measure of SaaS performance compared to 1GP (or the traditional “Rule of 40” metric). While profitability should not be ignored, they believe revenue growth should be valued more highly due to its compounding nature.
Once you define your target balance, as tech leaders, you’ll need to pay attention to two basic vectors: increasing revenue and optimizing costs.
- On the revenue side, focus on the core products, improve productivity, and leverage your existing customer base to up- and cross-sell.
- On the cost optimization side, increase efficiency and profitability, reduce operational costs (cloud, managed services, etc.), as well as the cost of third-party tools (license fees, etc.).
Of course, these vectors should be boosted with creativity and innovation from your team. There is nothing like a shrinking cash balance to inspire focus, creativity, and innovation.
I’ve lived through four major economic crises: 2001, 2008, COVID, and now.
In 2001 and 2008, as a developer and team manager, I observed and learned from great leaders.
As a CTO, I’ve applied these lessons (as well as new ones) to helping technology organizations adapt during COVID and the current crisis. In order to succeed on the road ahead, it’s time to embrace the fundamentals and adopt healthy operational approaches. In the coming weeks, I will share my experience and knowledge on a number of topics:
- Change management
- OKRs
- Improving productivity and efficiency
- Tech department reorganizations
- Cost optimization (headcount and production), and more.
Bottom line: this crisis is a turning point for your company. As a technology leader, don’t miss this opportunity to help your company navigate and come out even stronger on the other side.
Need help or coaching?
Sphere’s Tech Executive Advisory helps tech executives and their teams solve big challenges. In addition, we work with business leaders (CEOs, COOs, and GMs) that manage tech executives to bridge communication gaps, improve departmental collaboration & productivity, and align execution with business goals.
