The economic climate of the past 18-24 months could best be characterized as a storm: demand dramatically outpacing supply resulting in double digit inflation, a stubborn labor market that’s coined its own name (“The Great Resignation”) and markets awash in low-cost capital. It goes without saying that most company leaders faced a steep learning curve as they operated their businesses in this challenging, but oftentimes rewarding, environment.

The next 18-24 months may very well prove to deliver a storm of a different kind, characterized by slowing growth, a more limited supply of capital and continued dislocation in the labor market.

Our experience – working with growth stage companies over nearly four decades – has shown us that market turbulence can provide opportunity for some companies while creating headwinds for others. Regardless, leaders need to work to avoid the confusion, disorder or anxiety borne from turbulence and operate from a position of strength. But how do you do this? We encourage leaders across our portfolio companies to focus on six key areas:

1. Know Your Leading Indicators

Reviewing the overall performance of your business on a quarterly or even monthly basis can be a sound approach in a bull market. In a more turbulent environment, however, we believe companies benefit from monitoring leading indicators on a more frequent basis – weekly or even daily.  Changes in days sales outstanding (DSOs), sales cycle time, customer churn and other metrics can signal a change in the health of your existing and/or prospective customer base, helping you to determine when proactive adjustments may be necessary. Regardless of which metrics are right for your business, develop a sound data strategy that allows you to collect and monitor them regularly.  Implied in this is a retroactive view, or baseline, of performance. Understanding week-on-week or month-on-month trends is essential to knowing when conditions have changed.

2. Embrace Existing Customers

In the face of economic headwinds, we recommend leaning into the age-old adage of the “bird in hand.”  It is far easier (and more cost effective) to retain or expand share-of-wallet with an existing customer than it is to acquire a new customer. Encourage your team to think critically about sales and marketing resources and apply a “sales mindset” across key post-sales processes. Do you need more customer success reps than sales reps in the current climate? How are you measuring customer health? Are you creating and supporting customer loyalists and advocates? Help ensure your team is laser focused on delighting customers and emphasizing the value proposition of your product with them. Why? It’s important to recognize that some of your customers may need to optimize costs in their own business.  When that happens, the time you invest in solidifying the value of your product will help enable you to keep the customers – and revenue – you have.

3. Conserve Cash

For any business facing headwinds, cash is paramount. Many companies were influenced by a growth-at-all-costs mindset that permeated the environment in the past 18-24 months. Whether your company’s cash position is strong, or you need to access a line of credit to make monthly payroll, we recommend thinking critically about uses of cash for both people and non-people costs. Consider opportunities to manage people-related costs by right-sizing your organization (more on that below). For other, non-workforce-related costs, we recommend a simple exercise: download your accounts payable spending for the last twelve months, sort from highest spend to lowest spend, and review it line by line, annotating “wants” versus “needs.” Think critically about the “wants”; eliminating some of them will provide you with incremental cash to invest elsewhere in the business. Conducting this exercise together with functional managers who own (and likely initiated) the spend can be helpful in identifying opportunities to conserve cash and eliminate waste in your business. As a point of reference, we often see companies that have anywhere from 10-15% of “waste” in their cost structure.

 

 

 

4. Do More with Less

After you’ve worked to identify and eliminate potential sources of wasteful spending, we recommend creating organization-wide alignment around your primary company goal – for example, “we want to be 2x the size we are today in three years” or “we want to complete an IPO in Q1 of 2024.” Sit down with your functional leaders and ask each to evaluate their organization today – size, projects underway, tactics, etc. – in the context of the collective company goal. In our experience, this approach helps to create true transparency by uncovering additional opportunities to reduce or reallocate spend that does not directly support your company’s primary goal. Cost transparency can also create conversation and healthy tension between functional leaders, ultimately driving improved company performance.

For additional perspective on functional optimization, read our frameworks for driving marketing efficiency and prioritizing sales focus.

 

5. Be a Talent Magnet

Over the past several months, we’ve shared several different perspectives on how to acquire and retain talent in the face of a challenging labor market. While we believe those strategies – implementing a robust listening strategy, developing a holistic approach to compensation, and fostering a culture of inclusion – still apply, the current climate may afford you with an opportunity to do two things at once: strengthen the talent in your organization AND optimize overall headcount. Note the use of the word “optimize” and not “reduce”; this is an important distinction. Part of being a talent magnet is fostering a meritocratic culture that rewards high performers and holds underperformers accountable for improving performance.

 

6. Examine Your Acquisition Strategy

Lastly, we believe company leaders should also consider the implications of a slowing economy on acquisition pricing. By effectively executing the strategies above, we believe your organization will be more likely to weather the storm and operate from a position of strength, allowing you to pursue opportunistic acquisitions of competitive or complementary businesses.

 

 

 

Focusing on each of these areas – knowing your leading indicators, embracing your existing customers, conserving cash, doing more with less, becoming a talent magnet and examining your acquisition strategy –  will help your team identify opportunities, eliminate waste and position your business for great things when the economy begins to recover.

About the Author

Dave Averett is a Managing Director at Summit Partners, and the head of Summit’s Peak Performance Group (PPG). Dave works with management teams to identify and execute growth strategies that build long-term value. Dave is also an Army Veteran, and a graduate of the United States Military Academy at West Point.        

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