The firm’s survey of more than 140 C-level executives finds that more layoffs lie ahead, but the firm asserts that job cuts alone are not enough to ensure a successful future; ‘transformational operational change’ can drive a 20-30% improvement in costs
Slowing customer markets and tighter financial conditions are pressuring technology-industry executives who rode a considerable growth wave during the pandemic but now need to adopt a more structured, long-term approach to ensuring profitability. That’s according to a report released by AlixPartners, the global consulting firm.
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“Clearly, the time has come for tech companies, even world-class ones, to strengthen their profitability muscle, and while many have begun that journey, few are taking a truly structured, methodical approach” #techindustry #profitability #AlixPartners
The report, entitled The great rebalancing act: Why tech is focused on profitability rather than growth, and why this is good for the industry, includes a survey of 146 C-level tech-industry executives, finding 74% plan to prioritize profitability over or equal to growth over the next 24 months, up from 56% who said that was their priority over the last two years. However, the survey of senior industry leaders also finds that many current profitability efforts—including layoffs—are proving unsuccessful, an indication of how complex and difficult the current environment has been for the industry to navigate, an environment in which growth for many has declined and access to capital has become stiffer and more expensive.
An analysis contained in the AlixPartners report also finds that the year-over-year growth consensus of public tech companies with annual revenues of $500 million or greater has fallen by more than two times since 2021, while EBITDA expectations have increased more than 12% for each of the next two years. After a long period of over-hiring (including during the pandemic), and now after the industry having shed more than 350,000 jobs over the past 18 months, the AlixPartners survey finds that nearly half (46%) of those whose companies have already reduced their workforce by more than 5% are planning future job cuts over the next 12 months.
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But, says the report, merely employing the blunt tool of layoffs isn’t enough for tech companies to ensure their futures. What’s needed instead: a truly transformational operational change—which, says the firm, can drive a 20% to 30% improvement in costs.
“Clearly, the time has come for tech companies, even world-class ones, to strengthen their profitability muscle, and while many have begun that journey, few are taking a truly structured, methodical approach,” said Giuseppe Gasparro, Co-leader of the North America Technology Practice at AlixPartners and a Partner and Managing Director at the firm. “The good news is, such a structured approach to truly transformational operational change exists, it can drive a 20% to 30% improvement in costs, and it can prepare any type of tech company—large or small, growing or not growing—for whatever the future may hold.”
The prescriptions in the AlixPartners report for structured, sustainable tech-company profitability include:
- An emphasis on the “back-to-basics” metric of return on invested capital (ROIC), one of the truest measures of efficiency in allocating capital to profitable investments
- Rigorous measurement of hiring initiatives, including of back-fill positions
- An enhanced go-to-market effectiveness, including allocating resources by customer tier and creating “revenue war rooms”
- Revamped research-and-development strategies, including product road-mapping and product rationalization
- The leveraging of artificial intelligence (AI) across business processes
“Unfortunately, we expect more pain to come for the tech industry,” said Gasparro. “Interest rates continue to pressure valuations and limit access to capital, particularly in light of recent bank failures like SVB and First Republic. And as capital is more expensive to access, tech companies of all types need to fund most of their operations using their own reserves, which in turn requires an ability to generate positive cash flows and run positive EBIT margins. Put another way, going forward being a high-value tech company will mean being a profitable tech company.”
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