What do COVID-19 and Y2K have in Common?
I am stepping out on a limb and predicting the future, but I think COVID-19 may cause some behaviours at tech companies like those just before and into the aftermath of Y2K.
For those not into their business careers 25 years ago, the need to remediate or replace old software systems that were based on a 2 digit year code led to a tech bubble in the 1990’s. Enterprise software companies and systems integrators grew very rapidly as companies scrambled to remediate old systems. When the party began to end in early 1999, these tech companies had to deal with the change from hyper-growth to slower, flat or even negative growth.
Most major corporations around the world declared a moratorium on implementing any new systems from July 1, 1999 to March 31, 2000 so their resources were available to deal with any unexpected fallout from the tick over to the year 2000. As a result, most customers stopped buying. Those who had replaced systems were assimilating new platforms and processes into their company. Those who had remediated their old systems were in a “wait and see” mode before they would consider replacing post-Y2K.
It was the perfect storm at PeopleSoft. In Q4 1998, our sales pipeline began to collapse at the same time as many employees were being attracted away by the lure of the “Dot.Com”. We were facing the challenge of crossing a “sales desert” for the next 12 to 24 months before post-Y2K buying would pick up. We also faced the realization that our old client-server based products needed to be rebuilt from the ground up using new internet based tools and technologies. Investors realized the same thing as our share price began to drop from highs in the mid $50’s to lows in the $12 range.
Does any of this feel familiar to the past few weeks with COVID-19 and the market reaction to the uncertainty it brings? Already many software companies are feeling the impact on their sales pipeline with customer distraction towards securing their own business and safety of their employees, and it will likely get worse.
So, what do you do?
Here is what PeopleSoft did. We accepted that we were facing a “sales desert” and no matter how hard we tried to roll that rock up the mountain, we couldn’t sell to customers who were too distracted to buy. Therefore, we accepted the realization that we needed a smaller sales force. We also recognized that we needed to invest to rebuild our software to be ready for when customers were ready to start buying again in 12 to 24 months. This required freeing up and reallocating resources from across the company. This resulted in a 6% RIF (reduction-in-force) which laid off hundreds of employees. Our spend on R&D which had historically been 17% of revenue jumped into the 25-29% range and we embarked on an all-hands-on-deck effort to build PeopleSoft 8 which was a complete re-write of our 1990’s technology.
At the same time, other parts of the business took time to pause, rip off and fix band-aids that we had taped over leaks as we rapidly grew during the 1990’s (PeopleSoft had IPO’d in 1992 at $30M of revenue and grew to exceed $1B in revenue in 1998). In Services, we reorganized our services delivery model, upgraded and built new processes and methodologies and added new leaders with experience leading more sophisticated services organizations. Other parts of the company embarked on similar programs to fix their “hangovers from rapid growth”.
PeopleSoft 8 debuted in August of 2000. By early 2001, sales were flying, and the company was better positioned to handle the growth. Our share price recovered.
So back to COVID-19. Signs indicate a significant global economic contraction. Some industries will be hit harder than others so as a result, some tech companies will also take bigger hits depending on the industry sectors they sell into.
Every company is unique and every situation is different. It may be time for your company to hunker down like PeopleSoft did in 1999. If so, here is what I would consider doing:
- Get your spending and cash flows aligned to your revenues for the time period you expect this to last and don’t be overly optimistic in guessing when the recovery will start. This may means reducing your sales force and other parts of your company. Some of your competitors may fail or be significantly weakened during this period. Keep some “dry powder” to take advantage of opportunities presented.
- If you decide you must downsize, do it fast, especially in sales. Top performers can always find jobs, even in a bad market. Take out your bottom performers to expand territory or opportunity for your top performers to retain them. Don’t let your employees decide who is leaving and who is staying.
- Get ready for growth when the recovery starts by using the pause to fix the short-cuts of the past. This may mean fixing the technical debt your software has been building up. Fixing inefficient processes. Building missing components of your company. Upgrading your talent. Keep spending but spend where you will get your greatest return when the recovery starts.
- Lead! Many of your employees and leaders have never been through a recession. They have never seen job cuts or friends and family unemployed. It will be a very unsettling and scary time for them. Over-communicate what is happening and why actions are being taken. From “Good to Great”, invoke the Stockdale Paradox: “You must never confuse faith that you will prevail in the end — which you can never afford to lose — with the discipline to confront the most brutal facts of your current reality, whatever they might be.”
As I said at the beginning, I am stepping out on a limb in predicting the future but planning for this dark cloud now, may provide for a silver lining later.