“I’ve always thought the toughest place to be CIO is at a tech company — because everybody in the organization thinks they know more than you do."
Is digital transformation easier for tech companies? Other industries might think so. “However, there's a bit of ‘physician heal thyself,’” said Grant Thornton Technology and Telecommunications Industries National Leader Steven Perkins.
The truth is more complex. “I’ve always thought the toughest place to be CIO is at a tech company — because everybody in the organization thinks they know more than you do,” Perkins said.
In practice, digital transformation at tech companies can be complicated by many factors. As a result, might be ahead of some industries in transformation, but companies often have a long way to go.
“They're focused on getting great products out the door, with advanced capabilities for their customers, but then their back office might not have any of that,” said Grant Thornton Digital Transformation and Management Principal and Leader Roy Nicholson.
As the tech industry pulls back from pandemic-fueled growth, companies are reviewing and adapting their transformation plans. Some large companies have cut workforces back to mid-pandemic levels, and smaller companies are making fundamental adjustments. “These are fast-growing companies,” Perkins said. “As they grow, they're laying track, sometimes just in front of the train. They need to put in digital infrastructure to transform from startup to mid-market, domestic to international, or other transitions they need to make.”
Perkins added, “As they do that, they don't develop a very efficient infrastructure. They just get things done to support growth, and then they need to rationalize it. They scale infrastructure, applications and processes up to meet new opportunities and new markets. Rarely do those three segments stay in sync or optimized as they're scaling up. So, you end up with an infrastructure that is potentially effective, but often inefficient.”
“When there's an opportunity for a pause, you need to rationalize that infrastructure. There's an opportunity for a pause now,” Perkins said.
As you weigh digital transformation priorities across your business, consider the impact that you can have on three elements of your business: customers, operations and products.
Cross the customer chasm
In today’s slow-growth environment, tech companies need to prioritize the most important investments. The shift to SaaS solutions changed how companies — including tech companies — invest in transformation.
“With on-prem technology, you had to pay for all of the infrastructure up front,” Perkins said. “You had to hire your own technology staff and make a lot of investment before you could get any benefit. Now, you can outsource to service companies, reduce capital investments and put more of your money to work on business processes and analytics,” Perkins said.
But, for tech companies, there’s a flipside. As tech shifts its own customers to SaaS delivery models, it must cross a gap in traditional revenue.
“Tech companies that are making the shift to selling SaaS are going through what they call ‘the chasm of death,’ because they're going to have a significant revenue drop-off from that perpetual to the SaaS revenue model.”
“Tech companies that are making the shift to selling SaaS are going through what they call ‘the chasm of death,’ because they're going to have a significant revenue drop-off from that perpetual to the SaaS revenue model,” Nicholson said. “They don't get paid all of that revenue up front anymore.”
That means tech companies also need to change how they invest in customers. “They used to invest in the new licenses sales force, but now they have to invest in customer engagement and retention,” Perkins said. “There’s a lot of pressure to build and keep customers, which is even further magnified when growth is slowing — when you know that every one of your cloud customers is thinking, ‘How can I spend less?’"
If you sell SaaS, you don’t have a guarantee of perpetual licensees. You essentially need to resell licenses on a regular basis, investing more in customer engagement, support and retention.
"In the perpetual model, software companies were just focused on building the product, selling it, moving on to sell another one and then renewing licenses at some point in the future,” Nicholson said. “With a subscription model, there are two additional elements or capabilities that tech companies need to build out: They need to be more focused on helping their customers adopt the technology — otherwise, they're just going to switch if off — and they need to expand their footprint, turning on new features to drive more revenue.” Both of these center on optimizing customer engagement.
Nicholson referenced the LAER model (land, adopt, expand and renew) saying, “Traditional companies were focused on ‘land’ and ‘renew’. Subscription companies need to look at adoption and expansion for their customers, and that's a whole new set of capabilities to build out.”
Focus on efficiency in the middle
Traditionally, tech companies have prioritized transformation for their customers and their products over their own operations.
“If you have value buckets, you have customer engagement at the front end, product development at the back end, and then operations in the middle,” Perkins said. “In tech companies, the investment usually goes to the front and back. The middle is where tech transformation gets starved.”
“Efficient operations are essential for tech companies to successfully move to that SaaS revenue model,” Nicholson said. To focus on transformation that drives more efficient and effective operations, consider four fundamental needs:
Scale your back office
“Companies that grow rapidly need to scale their back office,” Nicholson said. Often, this transformation begins with considering large-scale initiatives like a new or upgraded ERP system. However, ERPs are not the only path to transformation, especially if you need to save cost in a slow-growth environment. “Most tech companies are not going to launch a traditional four-year implementation right now,” Perkins said, but even ERPs have faster implementation models today. “The state of the ERP world has changed dramatically in the last 10 years. You can get capability fielded, get up and running, in relatively short order.” Beyond ERPs, other solutions offer powerful alternatives to make targeted gains. First, you must identify your current back-office needs and priorities, along with the role that technology, business processes and other change-driving actions must play.
“You have pressure for the infrastructure to reduce cost and be more efficient, so harvest the investments you’ve made in data and technology.”
Automate your inefficiencies
It’s important to recognize where and how you can further capitalize on your prior transformation investments. “You have pressure for the infrastructure to reduce cost and be more efficient, so harvest the investments you’ve made in data and technology,” Perkins said. Intelligent automation has often been one of the quicker paths to transformational returns, and one that can be adapted to meet more needs. You might have already undergone one round of analyzing and automating processes to gain greater efficiency, but there can be another layer of opportunities at a level above, where you think in cross-functional terms. There, you can apply custom solutions or even a limited application of an existing ERP solution. “We used to think of intelligent automation, but think of it as hyper-automation,” Nicholson said. “It's about operating more efficiently at doing what you're currently doing, in the back office or front office.”
Clarify your forecasts
Your back office needs to keep up with today’s demands, but it also needs to help you plan for tomorrow. “There’s a legacy challenge of being able to accurately forecast revenue in software companies,” Nicholson said. Data-driven forecasts can become more complicated after large changes like the ones we’ve seen in markets and workforces. “Look to apply AI machine-learning algorithms, to more accurately forecast what your quarterly revenue is going to be,” Nicholson said. “Analytics and data can help weave together your staffing, planning, and forecasting, especially when you look at sales organizations. Where do you most effectively deploy your resources going forward?”
Engage your customers
Lastly, consider how your back office can help to proactively drive business factors like customer engagement. Some of the data and processes that drive better forecasts can also help to drive better decisions about how you engage customers and adapt your strategies. Do you have a 360-degree view of all of your interactions with customers and what they are doing with your products? That transformation can even feed into the products your customers see. “What are the implications, as you think about driving tech transformation within a tech company? You can be building it into your product. Use it in analytics, use it in customer engagement,” Perkins said.
“You have the customer deployment and support side of it, and then you have the internal operations side,” Perkins said. “Tech transformation applies to both of those. You need tech transformation today, and you need it in every step of the value chain.”
Grow your business to grow your product
Tech companies usually focus on advancing their product capabilities and product strategies, but sometimes their business strategies don't keep up. Your product development plan needs a business strategy to support it. Every business has a different path to growth, but there are some common considerations at every stage of maturity — from startup to stabilized, there are analytic and tech components that fuel growth at each stage.
"The question is: If you’re now looking at three years instead of 18 months, do you have the strategy in place for internal systems to support that business plan?”
The growth of a tech company often follows a pattern. “I've always drawn an S-curve,” Perkins said. “They start small, they scale quickly and then they plateau in terms of growth. There's a different set of challenges for them at each one of those stages.”
Traditional strategies included going public with an IPO or being bought by a larger competitor. “Now, maybe the upslope is much longer than it was in the past,” Perkins said. “If you were thinking you’d have an exit in 18 months, now it might be 36.”
“The question is: If you’re now looking at three years instead of 18 months, do you have the strategy in place to support that business plan?” Nicholson asked. To build a flexible plan that guides your business growth, you need to understand your business through data.
“Tech companies are awash in data,” Perkins said. “It’s critically important to invest in initiatives that mine that data, and get it to the right people.” Companies need to make sure that leaders have updated data to answer strategic questions like:
- How are we maintaining and building revenue?
- Where do I get the highest and quickest return on my development investment?
- How can we efficiently and proactively cybersecurity and regulatory compliance into our products?
- How are we anticipating and preparing for software or hardware supply chain issues?
- How are we driving more efficient and profitable product development?
- How are we using technology to improve risk management?
“Tech companies are going to continue to grow. Tech will grow more slowly than it has, but it will continue to grow and probably outpace the economy.”
Companies need to keep funding data analysis to answer strategic questions. The question is how to save cost by building on existing infrastructure, because funding can be hard to find in today’s market. “One pressure that all tech companies have right now is trying to finance initiatives,” Perkins said. “Money is much more expensive than it used to be, and valuations are going down. For emerging and mid-market companies, the middle of that development S-curve is going to elongate. They are going to stay private longer.”
“But tech companies are going to continue to grow. Tech will grow more slowly than it has, but it will continue to grow and probably outpace the economy,” Perkins said.
Lean into your opportunity
Many tech companies have undergone a correction from their pandemic boom — but are still ahead of where they were before the pandemic, and still on a path to growth. So, this is an excellent opportunity to rationalize recent changes and prudently invest in ways that will pay off when the market returns.
“There's an opportunity to lean into tech transformation,” Perkins said. “Don’t abandon projects that are going to pay off when the industry comes back in 12 months or so. Focus on things like analytics — things that you can do now, to sit on top of infrastructure you have and drive greater value with short-term return.”
“If you need top-line growth, focus on customer engagement — not just throwing your product over the wall and then going on to the next one,” Nicholson said. “It means having an ongoing relationship with your customer and understanding who they are, so that's about CRM, data and having a holistic view of all the touchpoints that you have with a customer.”
“If you're looking at reducing headcount, then you have to do the same or more with less people,” Nicholson said. “That means looking at any opportunities to automate business processes in the back office.”
“Now, it all has to tie back to the impact on your profitability,” Perkins said. “It needs to be measurable and near-term, because capital's harder to get and more expensive to hold.”
Public and private investors will place transformation initiatives under closer scrutiny in today’s market, but transformation that leads to near-term payoffs and profit growth can demonstrate wins, build confidence and position your company to move ahead as the market returns.
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