Managing Major Shocks to the Economy

In the past 20 years, we have gone through 3 major shocks to the economy. There was 9/11, the financial collapse in 2008 and now the economy is freezing up due to the coronavirus. At Salentica (my former company) we worked through the first two events and learned some important lessons.

For B2B software companies with a product revenue base of annual recurring revenue, it is likely clients will continue with their subscriptions as the costs are already paid or in the budget, so don’t require approval. In the short term, discretionary consulting projects are the first ones that are cancelled or postponed by clients. Business owners need to anticipate that their services/consulting business will slow down and manage accordingly.

In the 2008/2009 slowdown, we found that our software product sales impact lagged the worst of the financial crisis. One theory I have is that large software acquisitions that can take 6-12 months were underway and continued even when the economy did a rapid slowdown in late 2008. Buyers had the approvals and budgets in place and senior management is likely looking past the downturn, unless the company needed to preserve cash.

It was well into 2009 when the markets had started to recover that we saw a slowdown in our product sales. It was likely because new software acquisition projects that were in the planning stages in the fall of 2008 were not approved for 2009. So while the worst of the recession was over, there was no budget or approval in place for new software capital projects. Small and mid sized consulting projects were brought back sooner as they could be funded with from the operational budget.

The lesson learned for a B2B software company was that while there may be short term cut backs when there is a shock to the economy, the full impact may not be felt until after the economy has started to recover. When the initial shock hits, it is still possible to close new business for software acquisitions that are well underway. It also means that even when the economy is well into recovery, software product acquisitions may be postponed if they were cut from budgets while management was still dealing with the economic slowdown.