Tech-Company Growth and Commercial Diligence During and Post-Covid

With several months of market insights and observations from the field, we know what to ask differently, and that is a great starting point. Human bandwidth is the constraint for B2B tech companies to solve for, and investors to invest behind.

Through the end of 2020, Covid will remain a challenge for all commerce, whether dealing with the downside or trying to figure out your best upside. Even those with a SaaS model, which has an awning of protection thanks to long-term contracts, will be selling for ¾ of their fiscal year through a purchase cycle undergoing rapid changes in buyer budgeting, purchasing processes, and customer needs. Tech companies need to re-assess their client segmentation including end-market dynamics (stimulus included), updated view of their customers’ tech strategy, and back-to-work plans, and geography of the customer’s workforce. Knowing the answers will provide the required insights for updating customer prioritization, product development, sales and marketing, and implementation (with or without partners), and M&A strategies.

Stax’s industry analyses and state-specific data on economic rebound shows a substantive difference in economic activity and short-term growth curves by industry and region. Our field research on customer intent to purchase, return to offices, transportation/school availability, and potential to travel has been predicting the current level of return by customer and segment for the last few months. It is easy to see how an organization could be trying to sell into a dead zone while missing a fast opening nearby. The number of new customers used to forecast, and where you think they will come from, all need to be updated.

We highlight the potential tailwinds and headwinds, and what questions to ask to prioritize the levers of product, sales and marketing, and allocation of investment, including M&A. What is a headwind and tailwind will vary by player, but a framework helps layout the facts for consideration and each reader may move some of these items from one section to the other.

Tailwinds:

Every company has been going through a similar tearing-down of operations and costs, adapting to remote working, expanding needs for improved workflow processes, determining what can be moved to tech-enabled, automated, collaborative, e-commerce, and reduce costs while increasing customer ease-of-use and security. Even healthcare, typically slow to adopt, is being forced to rapidly introduce more technology and that change will be long-lasting (Telemedicine).

Some companies still see tech as operationally required, while others will see it as more strategic than ever and try to use the situation to move forward faster. The SBU can make more of their own decision. Expect greater tailwinds for those with better-distributed offerings, easier UI, and interoperability, enabling a more flexible workforce to use the technology so that implementation is easier and total output is better in parallel with reduced costs. These offerings will have the potential to win share from those that are less cloud-based, do not integrate well with other platforms, or need more hands-on training. If you have a sticky product and you have built adjacent products around it, this creates a protective moat.

Industry specialization and maturity of competition in your market matters too. Harder for players to break into new markets without significant investment or M&A. Given reduced access to customer environments (due to lack of available customers to talk with, industry conferences, etc.), it will take newcomers longer to learn enough, to be a threat.

Headwinds:

We are seeing wide differences in expected business closings/openings, and operating levels by end-market, balance sheet strengths/weaknesses, and the ability for an organization to do anything about their situation. In March, companies started cutting costs and hoarding cash, with CFOs tightening expenditures and CEOs creating mandates, reversing trends Stax identified years ago in technology sales when purchase decisions were shifting from the CIO to more distributed decisions. There are some battlefield decisions enabling more distributed work, e-commerce, and other critical needs, but changes in the ability to purchase larger permanent solutions, speed to purchase, price negotiations, and integration will all be prevalent for the remainder of the year and have long-lasting implications. Rather than budgets expanding across the board, many are making faster, forced decisions to reduce one cost before taking on another.

Status Quo – core systems will not be ripped out, but growth is constrained to new features/pricing and customers are reviewing existing features for real usage and negotiating to reduce the cost of add-ons and negotiating for longer duration discounts. Workforce reductions will also reduce needs for seats. And likely many will reduce what they can now, while they consider what could be a longer-term, more efficient solution. If your technology is not core, a complete system, or easily connected, then there is greater risk of being replaced. What does this mean for technology companies and diligence on technology companies?

Things to consider for the product requirements:
  1. Point solutions, depending on their level of integration, may be challenged by suite solutions that are easier to deploy. If your company doesn’t have a full suite, is it good timing to expand integration partnerships and/or potential acquisitions? If your company is full suite, then pick the places where you can win share from point solutions and invest heavily. (Does it need to be fully integrated or just talk to other offerings? E.g., my payments software talks to my ARAP software is more important than it being one system.)
  2. Ability to unbundle offerings can increase a potential user base and speed time to purchase for new customers but has the risk of allowing current customers to slim down their usage and prices paid.
  3. Relative differentiators to competition, how wide is the gap, and what add-ons/features and functions create a lock-in that makes it harder to dislodge?
  4. Ease of UI, collaboration, and training on every level. Employee training will be much more difficult online vs. in-person, and our data highlights a low likelihood of training/conferences will return in the near term.
  5. ROI and ability for user/customer self-serve, and eventual automation to simplify at the interface. Teaching your customers how to help their external or internal customers use the technology.

Reporting at all levels. With distancing, there is less visibility into usage. Providers will have to maintain their status as valuable or be high on the list for potential cost reductions.

Things to consider for targeting, sales and marketing:
  1. End-market needs, penetration, and required pace of adoption. The stock and flow model needs a reset to focus the salesforce on the best set of opportunities. What are the changes up and down, bubble/floor, or new steady-state, by vertical and region? How are they going to shift over the next six months? Pick any two companies that would have been in the same segment last year, might have totally different behaviors this year. Our research consistently shows a wide range in segmentation for return to spend, by sub-sector, by region in the U.S. and tech strategies (using tech for defense vs. offense), which are all changing rapidly. We are not saying abandon a particular customer segment, we suggest a schedule of which segments to prioritize, based on updated needs, ability to maintain and grow, likelihood to switch or purchase new, e.g., now vs. 3 months vs. 6 months.
  2. Current customers risk: churn and potential to withstand – on the downside, what will happen to their business, will they last at all, be smaller coming out of the crisis, do they have other options or require a steep discount to survive, and are they expected to withstand? We are seeing a wide range of requests by end-market.
  3. Current customer strength: it will be easier to grow existing customers than acquire new customers. What is the potential growth from current customers in users/usage, modules/features/functions, and how much will they pay for this?
  4. The current sales process, re-evaluating from potential to closed won/lost: how does your cost of customer acquisition change? How do you adjust and go-to-market as offices and travel open? In the short term, most have accepted that onsite demos are gone, and video works well enough, but the longer-term blend is unanswered. Have sales migrated to video with a lower cost but lower yield? How do you go-to-market? How do you re-think the process and who gets into each part of the sales funnel, where and when. What is the contact-to-cash by segment, and how do you align resources for the best outcomes based on your economics?
  5. What is your Total Participation Rate? The TAM is always a high number. The PAM – Practical Addressable Market only includes the deals and revenue in which you can participate, and that is what drives cash flow. In almost every client engagement on the subject, Stax finds that clients are not bidding on a significant number of total sales opportunities, and by updating the ways for sales/internal to identify prospects, one can quickly improve the top of funnel and deliver fast and lasting value.
  6. Are the offerings incremental additions vs. system replacement and what is the ability to implement seamlessly and remotely. Expectations vary widely, and this may include a review of channel partners.
  7. What is the timing and cost to implement services compared to the competition, how have the needs changed, and where can you develop an advantage to reduce the friction in new interest and pull sales forward?
  8. What is the client-visible ROI and increasing service level for a reduced cost, and where is it easiest to back up that claim to accelerate top-line and bottom-line growth?

What we do know, and how management teams can inform action on product, sales, and M&A strategies.
  1. We will live with this new operating reality until treatments are widespread through mid-2021.
  2. Product and sales teams need a refreshed view of customer segmentation that will have updated drivers as the most important, differing from historical segmentation models, even if only for how you prioritize the next six months.
  3. There is still great value in data from past systems, and what is most important is to develop more voice of customer analyses, because customers are willing to discuss what they are thinking today and planning for tomorrow while explaining with their current behaviors and reasoning.
  4. It is possible to get the data and information in the near term which sets up tech company management teams and investors for a better near-term, mid-term, and long-term chance of success.

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