As the economy slows and higher interest rates increase costs and reduce demand, companies are considering how they can continue to grow profitably.
When times are tough, companies often consider cost cutting to bolster their profitability, but fail to consider ways they can increase their revenue, says Blackbird Ventures partner Tom Humphrey, former COO of video streaming platform Kanopy and e-commerce platform OurDeal. He adds that his experience in bootstrapping a startup taught him that cash is king and he is working closely with Blackbird’s portfolio companies to increase their revenue. A construction tech company in the portfolio is analysing the leads that come in via the internet and prioritising the strongest, which has seen its growth rise from four per cent a month to seven per cent.
Another Software as a Service (SaaS) company was spending a lot of time implementing its software for clients and realised it could start charging for this valuable service, which has brought in an additional $1m in revenue this year. Finally, yet another company has narrowed its marketing efforts to potential customers in industries that are faring well during the slowdown rather than trying to sell more widely.
Humphrey has also been working with the portfolio companies on growing via organic marketing through more effective search engine optimisation (SEO). “If we can get customers coming to us for free, that’s 1000 times better than having to go to Facebook and pay 10 bucks per customer to sign up,” he says.
As far as cost cutting goes, growth companies need to trade off between innovation and research, and development or marketing efforts.
Customers come first
Ben Heap, a founding partner of H2 Ventures — and also independent chair of CBA New Digital Businesses and a non-executive director of The Star Entertainment Group and Colonial First State Investments — says that businesses should be “obsessed with the customer” in economically difficult times, and not risk being distracted by other stakeholders.
“In good times, with tailwinds behind you, those risks are less apparent because the business grows as a result of the tailwinds and you’re able to accommodate these different stakeholders,” he says. “But when times get tougher, which we now face, if you don’t spend sufficient time obsessing about the customer, you run the risk of trying to solve [problems] for too many stakeholders.”
That said, doing a good job for customers can also result in meeting shareholder or regulatory commitments.
The obsession with customers can also inform cost-cutting initiatives. Heap notes that a lot of Silicon Valley growth companies are shrinking their teams and spending their limited resources on the one or two things that are imperative for delivering to customers, rather than the nice-to- haves. “That takes a bit of cost out, which in itself is additional to profitability, but it also allows that shrunken team to be much more focused around the initiatives and the growth drivers.”
In this situation the board and directors have an important role to play because of their five year- plus time horizon and the organisation’s long-term future, compared with the CEO, who might be mostly focused on the next 12 months. They can pare the “wish list projects” and be more focused on what really matters to the business in the future.
“You can’t cut your way to greatness, but in more challenging times, you can find a per cent or two through cost savings,” says Heap.
Ben Thompson, a partner at Partners in Performance, says that companies can create a growth culture by getting staff at all levels involved in innovation. In fact, staff at the coal face — such as call centre operators or sales assistants — often come up with good ideas. “Anyone who’s got a customer interaction has the opportunity to spot a growth opportunity — or a problem,” says Thompson.
While innovation is important, doing something new “is horrendously difficult” and as a result, companies should consider making an acquisition as a short cut. “There’s somebody else who’s been plugging away on this idea for a decade because they saw it a decade ago, and it’s now closed to market, but these are technical people, not businesspeople,” says Thompson. “So this is actually the opportunity for a larger business to take the position and use their knowledge of how to drive a sustainable business — one that’s more customer and delivery-oriented — and get a result.”
Keep the team together
In tough times, it’s also important to keep the team together, because those teams that have worked together for a long time and know each other will perform better, says Thompson. “How do you retain your preferred staff in this inflationary environment? Paradoxically, you need to pay up even more to retain the core of the team. It takes a strong and visionary board to recognise the necessity for that.”
Tibor Schwartz GAICD, an infrastructure asset manager at QIC (Queensland Investment Corporation) agrees, noting that it’s important not to lose core capabilities through a down period because the economy will eventually improve. Like Heap, he regards customers as key and says business leaders should identify and focus on their customers’ long-term strategic drivers. For instance, QIC portfolio company Pacific Energy supplies power to the mining sector, whose key to future competitiveness is all about decarbonisation. So it can prosper if it helps miners to decarbonise.
He notes technology investments can offer an opportunity to reduce costs in a business and at the same time deliver better service to customers.
As a long-term investor, QIC doesn’t cut corners on addressing megatrends that underpin its individual investments. For example, the investor has another portfolio company, Lochard Energy, which is working on a feasibility study to repurpose its Iona gas processing and underground gas storage facility in Victoria to store hydrogen.
“In the infrastructure world, whatever the short-term challenging economic circumstances, our focus is on not compromising the core capabilities in the company and the people who work there,” says Schwartz. “And absolutely not compromising our long-term strategic goals.”
Increase revenue — charge for new services, target customer segments and leads
Focus on the customer — this will also take care of other stakeholders
Spend on delivering to the customer, not on “nice-to-haves”
Keep the core team together, even if it means pay rises
Maintain core capabilities — they will be needed again when the economy improves
Focus on long-term strategy
This article first appeared under the headline 'Rising Costs…and Profit?’ in the November 2023 issue of Company Director magazine.
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