Is The Tech Recovery Upon Us?

Let's face it, things still aren't great economically: unemployment is over 10% nationally in the US, credit is tight for small businesses as well as reduced access to investment capital, and consumer's moods, while improving are still not positive.

However, while I don't want to overstate the case, but I do believe we are on the way to recovery. This has strategic implications for software and tech companies.


A look at the positives:

Stock markets on the rise--The Dow Jones Industrial average is up nearly 65% in the last nine months. Tech stocks in particular have been strong: the benchmark NYSE Arca Computer Technology Index is up nearly 95% in the same period. This is from a very deep bottom, of course. But it adds considerable wealth increases optimism, which usually leads to positive momentum.

Search firms are adding their own staff-- ExecuNet's benchmark Search Firm Hiring Index has increased the last two quarters, after many quarters of decrease. This is a nice indicator of expected increased hiring by businesses overall.

Worldwide employment on the rise -- Manpower, Inc.'s Global Employment Outlook Survey for Q1 2010 states that the employment outlook is mostly positive in the Americas and Asia-Pacific, while still somewhat mixed in EMEA. Labor market strength in Asia-Pacific, which is becoming increasingly important as a consumer market, is expected to return to levels similar to before the global downturn.

VCs still have lots of money to invest -- After sitting on the sidelines in fear (like everyone else with money in their pockets) during this great recession, Venture Capitalists are starting to poke their heads out among the economic green shoots. They were sitting on huge amounts of capital that was raised in the pre-recession bubble environment, much of which is still not invested-but still accruing management fees. I have heard that there are now many limited partners filing lawsuits as a result of their funds lying fallow, which may stimulate an acceleration of VC investments in the coming year.

IT spending is forecast to rise -- After several down years and a very bad 2009, Garner is projecting an increase in excess of a 3% in IT spending worldwide in 2010. This is very important, and a bullish signal for the tech sector heading into the New Year.

The IPO market window appears to be opening -- Security software company Fortinet had a very successful offering in November. Meru Networks, a supplier of wireless LAN solutions, announced today it planned to raise $86M in an initial public offering. IPOs tend to drive increased capital access up and down the food chain, and that window has been closed for some time. If it opens significantly, that bodes well for growth in the software and tech sector.


No more bubbles - at least anytime soon

We're not heading toward another bubble anytime soon. It appears we're headed for moderate, but hopefully sustainable growth as a result of our two catastrophic burst bubble in the last decade. Government debt, commercial real estate and inflation potential are concerns in the long run, but appear to be manageable in the near term.


What should tech companies do?

First of all, don't be stupid and increase spending if your situation doesn't support it -- credit is still very tight, and access to investment capital still remains below typical levels of the last decade. So make sure your plans are supported by cash flow, or in the case of early stage companies, at least access to reasonable levels of debt financing or investment capital.

If you are able to spend, it's a great time to grow fast or take share from competitors -- when the economy is just starting to take off and buying is accelerating, act before your cautious competitors have come out of their shells.

In general, companies tend to be too conservative in their investment and hiring plans -- Take note that hiring tends to peak at the apex of an economic cycle, just before growth slows or turns negative. In fact, many experts consider strong hiring a leading indicator of an economy that's lost its momentum. I've never been a fan of hiring just because you have the money and growth rate to support it. This is a leading cause of bloated cost structures and bureaucratic, slow moving organizations. But most companies are pretty lean in staff after several years of recession. So if you really do need people, it's more productive to hire them now as we begin an up cycle, instead of waiting until the very end of it as so often happens.

That's my forecast and advice for the software and technology business sector as we enter 2010. What's your forecast? I'd love to hear it. Post a comment or shoot me an email to add your own spin to this discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil via email at info@pjmconsult.com.

Strategies for a Technology Market Slowdown

Is the world economy slowing down? What are the implications for technology companies?

Recently, technology stocks (along with the stock market in general) have tanked. There is a credit crunch that shows no signs of abating, and inflation is rearing its ugly head, with the continual climb in the prices of oil and other natural resources--commodities which touch every aspect of the world economy. Is the economy headed for a severe downturn--taking technology businesses down the drain with it?

I hardly think so, but we have had a very long running economic expansion, that eventually will reverse by the universal law of "what goes up, must come down". Economies are cyclical by nature, so a downturn has to happen eventually. And tech stocks are usually affected more severely than average in an economic downturn, which affects technology industry investment and ultimately tech growth rates.

So what should you do if you're the CEO of a software or hardware tech business?

Be Prudent, But Don't Panic
Now's certainly not the time to stick you head in the sand, and hope the economy doesn't get any worse. It almost certainly will; but more importantly, how will it affect your company? That's what you need to ponder. Is your product a "must have" or a "very nice to have"? Obviously the "nice-to-haves" will have a tougher time in a declining economy, and should plan accordingly. So take the time to analyze you situation, and make a forecast for your own business, based up the unique circumstances of your market and company. Remember, hope is not a strategy.

Look For Opportunities to Outflank Weaker Competitors
For strong players, declining economies can be a great time to pick up market share from weaker competitors. If you have the resources and can do it safely, now might be the time to run a promotion, or selectively increase your marketing. It's counter-intuitive to most managers' instincts. But weakening the competition during a downturn can lead to stronger growth when things turn back upward.

Slow Near-Term Expense Growth, But Don't Compromise Long-Term Initiatives
In most cases, companies will want to carefully monitor, and possibly cut back on their spending. You want to make sure that you don't put your company in jeopardy, by have expenses out of sync with flat or declining revenues. But try your best to keep intact the initiatives that are critical to long-term growth. You must continue to think long-term as well as short term, assuming you don't get in a situation where your survival is at stake. Cut back on advertising and office space if you're seeing a slowdown--but make sure you don't cut the product development project which will lead to growth 18 months hence. These can be tough decisions, but they really separate the long-term successful CEOs from the flash-in-the-pans. Almost anyone can manage when times are good.

Limit The Growth Of Your Staff
While prudent spending can be wise during a downturn, aggressively increasing the size of you staff usually isn't. There are always exceptions, of course, but adding too much staff can really bloat your fixed cost structure, in a manner that limits your management flexibility. Unfortunately, many companies are often most aggressively adding staff at the end of a growth cycle--just in time for the downturn. If this leads to layoffs, it can have a devastating effect on your company's morale.

Although layoffs are sometimes necessary, they are always painful and hurtful to the company culture--unless the company culture is already of the "Attila the Hun", cutthroat variety. The founders of one of my former employers, Bill Hewlett and David Packard, ran HP for many years with a rule of thumb that limited staff increases to 25% of revenue growth. This helped them avoid the natural inclination to hire someone new every time a new task was identified. I believe was an important factor in many years of smooth growth--without layoffs. This particular metric might not be right for your company, but something similar could prove to be a useful damper on excessive hiring.

Make Sure That You Have Money For A Rainy Day
While it's no time to panic, it IS time to make sure that you have the financial resources necessary to comfortably cruise through a downturn. VCs and Private Equity firms have been flush with cash; if you are close to a deal to bring in outside investment capital--don't wait--so it now. Availability of funds and terms will only get worse, as the stock market heads down and the credit crunch continues. Also, make sure that you have available the largest line of credit possible with your bank. It may cost you an extra few thousand dollars a year, but its excellent insurance, if you are surprised on the downside. If you're in startup mode and financing yourself on credit cards and home equity lines--maximize your future access to these as well! Whatever your sources of funds, make sure now that you're financially well prepared for whatever the future holds.

Be Poised For The Next Upturn, Whenever It Happens
I mentioned earlier that you should try your best to keep long-term initiatives alive. In that same vein, your thought processes should CONSTANTLY be focused on the next upturn, in all of your decision-making. Again, this assumes that your survival isn't in question. For example, while massive hiring isn't usually wise during a downturn, you want to always be open to unique opportunities that may not come along often. Say there is a talented executive available, only because of the downturn. If you can safely afford him or her, snap them up now, before a competitor grabs them. Downturns often present opportunities to improve your business when the next growth cycle occurs. But you need to be "looking ahead" and making good decisions now, to take full advantage of the upturn when it finally does.

Summary
Once again, now is not the time to panic. But it is an important time to plan. Anyone that can predict what will happen with an economy should go to the nearest casino--no need to waste your time with a software or technology company! So I suggest that it might be wise to do a "best-most likely--worst" 2 year forecast now, and try to plan as best you can for the two extreme cases. Post a comment and let me know your thoughts on how the economy and the tech industry will fare in the coming months.

Phil Morettini
PJM Consulting
www.pjmconsult.com

The Haphazard Development of People in Early Stage High Tech Organizations

Many entrepreneurs start out giving little thought to how they will grow their embryonic technology business in the long run. They are totally focused on designing and releasing the first product, or making that first sale. This focus is usually a very positive thing in a new company, since grandiose plans of startups have a way of getting derailed by the harsh realities of trying to survive.

Other more organized and contemplative entrepreneurial types have a master plan all laid out, including the steps on how they are going to grow their company all the way to the happy exit they have planned. This approach can be of great benefit as well; even though things won't go exactly as planned, it's great to have a road map that you can adjust as conditions change.

One thing that many younger organizations don't do so well, is in planning the development of their staff. Don't misunderstand; there are a lot of development opportunities for employees of newer and smaller companies. But this development often just "happens"; there is little thought that goes into it. A job needs to be done--and a particular body is more available than any other. The fit may not be ideal--and the amount of training given minimal. But the person is thrown in to sink or swim, because like the old saying "necessity is the mother of invention". It needs to happen, and it often works out well a surprisingly large amount of the time, given the haphazard way in which this "personnel development" often occurs.

But is this optimal, even within the constraints of a hard-charging software or hardware company? Most of the time, with a bit of foresight and a strategic pause, you can increase the odds of successfully stretching your current staff, into areas where expertise or experience are lacking. Below are five simple steps that may greatly increase your success rate in growing

Consider Psychographic Profiles Of Candidates In Your Hiring Choices
Like most things that are done in company development, if you hire the right people, things are likely to turn out better--no matter WHAT curves the marketplace throws your way. So try to think ahead when hiring that next entry-level employee, to fill the open clerical or support role. What other activities may need to be done in the near future? In what areas could this new employee be grown? Are you hiring the most flexible candidate, the type that will be most comfortable when you try to "stretch" them into an unfamiliar role? Will they freak out at being asked to perform a new and challenging activity, or will they embrace it as an attractive career growth opportunity? Try to think ahead, and the answer to your next personnel crises might be right down the hall.

Plan Ahead As Much As Possible
As mentioned above, it's really useful to try to think ahead to what functions will need staffing in the next 3, 6 or 9 months. This type of strategic thinking is difficult for many early stage managers, who are focused on getting through the end of the month. Unfortunately, this mentality often leads to hiring the person that will save a few nickels in initial salary, or has the most experience for the immediate position--therefore "hitting the ground running" with the least amount of training. But if you factor the medium and long term needs of your business into your hiring decisions, you may hire different candidate--who may add much more to the growth of the business over time.

Train At Least A Little--Don't Just Throw Them To The Wolves
Startups have a tendency to "throw people in the pool and see if they'll float". Many times managers will ask an employee to get started, and just do the best they can in the short term. It's often a crisis situation, and the manager intends to come back and train them when things settle down a bit. Unfortunately, in early stage companies, the situation NEVER settles down. As a result, you end up with an employee that fails, feels abandoned and neglected, or develops bad habits that become hard to undo. While it's hard to find the time or resources to provide training, for most people, it's an important factor in ultimately achieving success. So make it a priority to give the person in a new role some basic training, no matter what it takes.

Supplement And Train Using Consultants As Mentors
One great way to provide training and support to employees in new roles is to get some outside help. Many smaller companies don't believe that they can afford consultants, because their price tags for providing expertise and short term work are much higher than permanent employees. But that is usually "penny wise, but pound foolish". Most jobs that need doing, also need to be done right. If there isn't the expertise or senior management bandwidth available to train and support the employee in the new role, the job may not be done the way the manager intended--costing the company far more than the amount that outside help would. In these instances, an outside consultant is actually a very cost-effective way to prevent costly early mistakes, as well as putting the employee solidly on a track to long-term success in their new role.

Allow Room For Errors
Margin for error is usually less in early stage companies, with a resulting amount of high pressure to "get things right the first time". But it's unrealistic to think that someone new to a job, with minimal experience and support, will do everything perfectly the first time. Startup managers need to factor this into to their expectations, and plan for results to be a bit uneven at first. It's especially important that the demeanor of the manager makes the employee feel comfortable to take educated risks in the company's best interests, without feeling like any missteps could cost them their career.

SUMMARY
It's true that early stage tech companies can't afford to engage in the same type of organizational planning and personnel development that occurs in most giant corporations. However, that is somewhat offset by the vast opportunities for development that are found in these fast-changing, non-bureaucratic environments. Early stage tech companies are well served if they force themselves to engage in just a fraction of the planning done in larger corporations. Post a comment and let us know what you think about organizational development in startup companies.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/