With a looming recession and slowed period of growth, the tech industry is experiencing unprecedented hiring freezes and layoffs. Companies that expanded rapidly during the pandemic are now looking to shrink their cost base, but CFOs are overlooking supplier spend optimization as a way to reduce costs without compromising long-term growth. It can also be more effective in boosting EBITDA with fewer operational impacts.
How did we get here?
For most tech companies that have seen massive amounts of unconstrained growth, revenue has been king. Younger companies like Robinhood and DoorDash that have yet to develop solid cost management practices are just two examples of tech companies that are sagging under economic pressure.
Traditionally, organizations in this position have not worried about managing external costs or developing strategies to manage them. As a result, they have immature spend management practices that did not scale with their growth. Just take Peloton for example. During the pandemic, there was an increased demand for their products due to the need to exercise from home. Now that things are going back to a new normal, the company is facing a crisis. They have backed themselves into a corner where they have not managed their external costs and are resorting to external measures like layoffs. Short-term cost measures such as these will hinder the ability to innovate and will hurt companies in the long run.
Implications of Immature Spend
Decreasing headcount is the quickest way to reduce large costs but this will have predictable negative impacts on reputation, the ability to retain talent, investments in innovation, and growth projects long-term.
When it comes to hiring future talent in the marketplace, prospects will be more reluctant to join organizations that implemented mass layoffs. Additionally, it will cost more to hire new talent due to the credibility gap. Immature spend management practices will also hinder the ability to continuously innovate, which will disproportionately affect companies in the long run. Unfortunately, we now see this is the expense of being in a fast-changing industry. At a time when credibility in the marketplace is imperative, tech companies also need to be aware of their reputational management. Eliminating top talent is detrimental to a company’s reputation, especially during this period of the war for talent. It is more beneficial to find external ways to reduce costs. Instead of implementing quick cost-cutting measures, tech companies need to keep their eye on their long-term strategies and focus on cost management practices that work.
Cost Management Strategies That Work
Although cost optimization can be more difficult due to inflation, there are many tactics available to tech companies that can reduce costs, including the implementation of a cost management strategy, supplier spend optimization and the alignment of the CIO and CFO. It is important to identify the areas where you may be overspending, especially when it comes to direct versus indirect spending.
Inflation is having a greater impact on direct spend (expenses of materials eventually sold to customers) than indirect spend (goods, materials, and services not directly related to making products or services). Supply chain companies are so overwhelmed just by the necessity to acquire products that they cannot take the time to be strategic on how to build out the supply chain management process. That means they become the victim of inflation versus managing through it. It is a matter of digging yourself out of the day-to-day operations, so you can take the time to develop the right strategy. When it comes to direct versus indirect spending, companies have not been as focused on good faith receiving (GFR) and must now due so because it is core to their business. Consumer packaged goods (CPG) and distribution industries that tend to have smaller indirect spending are also starting to realize that this is something they can no longer ignore.
Additionally, companies also need to be hyper-aware of their supplier spending. One example of supplier spend optimization that some companies may be looking past is software licenses. It can be a huge opportunity to unlock cost savings as there is often overspending in this area due to duplications of services. An organization may have thousands of users included in their licenses. As a result, they may be paying for more users than are active. Companies, instead of automatically renewing, can renegotiate to make sure that their licenses are compatible with their needs.
Other services and budgets like marketing that do not have logistics baked in can be another easy way to reduce costs. This is something that Uber is currently pursuing. These are quick changes that can have immediate results. But this issue gets to the heart of the problem which is leadership and management.
Perhaps the least talked about, but most important roles in a tech company are that of the CIO and CFO. The building of that relationship is critical for managing supplier costs and optimizing spending, without compromising long-term growth. Both officers need to be effectively communicating with one another on supplier spends, like software licenses, to ensure that resources and funds are being allocated appropriately. Historically, companies with unconstrained growth have not needed to be budget-conscious, and CIOs have not needed to be as close to the CFO. But now, success for a lot of these companies will depend on how much control a CIO has on the acquisition of software, the strength of their internal procurement policies, and how financially minded the office is.
In both the short and long term, these layoffs will hurt tech companies. Companies often overestimate how long it takes to optimize supplier costs, assuming that it takes years to build a strategic cost management program. In reality, companies can see returns after the first quarter if it is deployed correctly. When focused on the day-to-day, companies can easily get bogged down by inflation and volatility versus managing through it. Taking the time to get the strategy right means that the company succeeds, and it does not come at the cost of layoffs which will only further hurt the company’s reputation and ability to innovate.
Kent Mahoney is executive vice president for North America at Proxima.
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