By Vlad Gozman, a serial entrepreneur and founder & CEO of involve.me. Follow @vladgozman on Twitter.
As the effects of Federal Reserve policy continue to unfold, it’s becoming apparent that the tech industry is not immune to a major economic downturn. We’ve already seen job layoff announcements in the tens of thousands from companies like Google and Facebook, and I believe the likelihood of further gloom in the sector remains high.
This has echoes of past recessions, when so-called “core” industries bore the brunt of the pain. Many are likening today’s climate to that of 2000, when the dot-com bubble burst and tech companies were the first to lay off workers.
However, many major analysts see greater economic pain ahead. In fact, analysts at Bloomberg see a 100% likelihood of a recession in the U.S. within a year.
Companies that skirt layoffs are more likely to succeed.
Fortunately, tech leaders have options to help them weather the storm without significant job cuts. We can look back to the 2000 dot-com bust to find lessons on how to best prepare for a potential downturn.
The companies that stood out during the dot-com crash were those that kept their core employees. A Harvard Business Review article highlights that publicly listed companies with little-to-no layoffs “posted 9% share price increases, on average,” while “share prices remained flat in companies that let go 3% to 10% of their employees.” Firms that let go of 10% or more of their employees suffered a shocking 38% drop in share price.
Those findings apply to tech companies today. What leaders should take away from the dot-com bust is that reducing costs with layoffs might make sense from an immediate cash flow perspective, but it’s only a short-term solution and carries long-term risks. Companies that skirt layoffs are more likely to succeed over the long run.
Consider Elon Musk’s recent layoffs at Twitter. These actions, while instituted as a cost-saving measure, have led to lawsuits, a greater risk of fines and ethics concerns that could have long-term repercussions.
That’s because human capital is one of the most critical assets a company has. A key element of any strategy to prepare for a downturn should be to protect and invest in human capital as much as possible. This introduces an apparent paradox: Human capital is, after all, one of the largest cost centers a company has. The solution is in exploring ways to maximize the value of that human capital.
Leaders should strive to identify how they can best maximize the return on each individual’s efforts. For example, they should explore opportunities for upskilling, lateral rotations and other means of increasing employee value and offer them as solutions to reducing costs, rather than solely looking at terminating employees. This approach has been proven to be effective in keeping morale high and preventing disputes arising from a reduction in costs.
Finally, leaders should encourage innovation within their organizations. During a downturn, it’s especially important that employees continue to think critically about new technologies, products and services that can help the company weather the storm. This requires creativity; something companies often lack during times of crisis.
Leaders should look for ways to provide incentives for employees to come up with ideas that could make a difference in the long run—whether it’s through bonuses, job security or other tangible rewards.
Doubling down on innovation can yield dividends.
Another key lesson from the 2000 dot-com bust is that companies that doubled down on innovation were some of the few winners. For example, Netflix, which was founded in 1997, kept innovating during the early 2000s and hasn’t looked back since. While Blockbuster declared bankruptcy in 2010, Netflix has become one of the most successful and beloved companies on the planet.
Amazon, too, persevered through the 2000s by doubling down on its commitment to innovation. Throughout the early 2000s, Amazon continued to invest heavily in technology and expanded its service offerings in order to become a powerhouse. The lesson here is that investments in technology give companies an advantage as they prepare for a potential downturn.
Innovation is such a broad category, however, that it can be difficult for leaders to know where to focus their efforts. One tenet of innovation that is often overlooked, but carries tremendous potential, is marketing optimization. A company’s marketing efforts don’t always need to be completely reinvented in order to be effective. In fact, a laser focus on optimizing existing lists of customers and marketing campaigns can yield huge dividends.
For instance, interactive content can all be used to optimize companies’ existing campaigns, with things like quizzes, polls and surveys that collect valuable data on customer preferences, buying behavior and more (full disclosure: my company offers these services). The takeaway is that companies shouldn’t be afraid to invest in innovation and marketing optimization during a downturn; it could mean the difference between success and failure. Instead of completely overhauling your strategy with layoffs and shuttered departments, you should strive to make strategic investments that can have positive impacts in the long run.
It’s impossible to predict when and how hard a recession will hit. What’s certain, however, is that tech leaders should take proactive steps now to prepare for a potential downturn.
That means protecting human capital; exploring options for upskilling, lateral rotations and other ways of getting better returns on individual employees’ efforts; and doubling down on innovation and marketing optimization. Doing so can help tech companies weather the storm with minimum job losses as well as long-term economic gains.