How technology companies build economic resilience

by | 6 Sep 2022

Brexit. COVID. Ukraine. Sanctions. Inflation. Energy.

The storm clouds keep on coming.

Any one of these would have caused widespread economic damage. Together they are creating one of the deepest recessions the world has seen, and many UK businesses are not prepared. They have no resilience and no plan.

They don’t even have the foundations in place.

But what are the foundations? How do we improve our basic business resilience?

Let’s start with the obvious. Cloud and SaaS businesses reported strong financial results during the lockdown, many buoyed by the scramble to remote working. The majority of these were in communication, collaboration, security and healthcare. Some also had structural advantages that made their business model more resilient.

These advantages included:

  • Attractively flexible business terms — that allowed customers to buy on a monthly basis and thus scale (or cancel) in line with their need.
  • Easy onboarding — that minimised friction for the customer and decreased time to revenue.
  • Minimal infrastructure and inventory — cloud-based businesses can flexibly scale their operation to meet demand.
  • Agility of offering — cloud services can quickly adapt to changing customer needs or regulations.

If your business model can leverage any of these strategies you should consider them…but what if your business is built more on atoms than bits?

Many hardware companies are rooted in the ‘real’ world. They feel the impact of inflation, supply chain shortages, sanctions, import delays and new tax tariffs.

One business I worked with provided infrastructure to private and public sector customers. Their model relied on sourcing hardware from China and Taiwan, but their suppliers could not meet demand during COVID. Many ceased to exist.

Unable to fulfil customer orders on time impacted revenue recognition, accounts receivable and ultimately working capital. The business was forced to engage more expensive suppliers in Europe while honouring prices and schedules that heavily favoured their customers.

A few months later the war in Ukraine (and swift sanctions) resulted in more disruption to the supply chain. Overnight there were even fewer suppliers, even longer lead times and even higher prices.

The business quickly became unprofitable.

I was pulled into this engagement to focus on commercial agreements. We needed to work with customers, suppliers and partners to better protect the business from this and future crises.

Every situation is different, but there are some common sense takeaways that every business can apply to increase their ability to withstand economic storms:

  • Force majeure — including a force majeure clause helps to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and prevent contracted parties from fulfilling obligations.
  • Adjust prices to the consumer price index (CPI) — in the event of inflation or deflation, you should adjust your pricing in line with the CPI. This protects you in the event of rising costs from suppliers, who may increase their prices on a monthly basis. Although your prices may change, there is a strategy and approach that minimises customer churn.
  • Prepare for fluctuations in foreign exchange — markets are volatile. If you operate in a foreign currency, consider fixing the exchange rate with your suppliers or including provisions that allow your prices to be adjusted with your customer’s. Or both.
  • Negotiate extended payment terms — smart businesses aim to build a buffer between their income and outgoings to manage cash flow. For example, if you offer customers 30-day payment terms, you would aim for a minimum of 45-60 day payment terms with your suppliers.
  • Require valid quotations before accepting an order — whilst verbal or indicative commercials are perfectly normal, I advise clients to accept an order only if it is accompanied by a valid and approved quotation from the vendor. This reduces the risk of changes in price, availability or timeframe.
  • Work with multiple suppliers — this falls into the realm of the ‘bleeding obvious’ of course, but it’s remarkable how many businesses don’t see supplier management as a strategic issue…until things fall apart. Being dependent on a sole supplier limits your ability to negotiate and introduces a single point of failure. Avoid it where possible.

Finally, I advise clients to treat customers and suppliers like partners. Business is a team sport and works best when it’s based on trust. When we can openly collaborate on challenges and solutions, everyone benefits.

What next?

These are common sense ideas that most technology businesses can and should be using. To discuss the specific challenges you face, contact us.

Mitul Ruparelia

About Mitul Ruparelia

Mitul Ruparelia is a Managing Partner of Fortius Partners, a growth transformation partner for private equity and venture capital backed businesses. He has over 20 years of growing profitable, sustainable business units, defining strategy and leading sales, marketing, product, innovation, finance, raising investment and people management for established, underperforming, and scale-up businesses. He has helped companies scale to valuations of over $1 billion.

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