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December 07, 2023

For tech firms, three steps toward a sustainable operating model

The sky is not falling in the technology sector—but leaders must chart a new path now that the era of overemployment and easy money is over.

In just a few months, we’ve transitioned from anticipating a stark recession to a brighter yet unpredictable economic horizon. Amidst this shift, it’s hard to ignore the flurry of foreboding announcements from the tech world—each signalling cracks in what was once the unblemished gem of the digital economy.

But is all this doomsaying mere hyperbole? Harvey Stotland, Associate Vice-President of Communications, Media & Technology Consulting at Cognizant, believes it is. According to Stotland, the challenge is that getting lost in the headlines is too easy. "The tech sector continues to post strong growth,” he says, “and will remain resilient through even the toughest economic conditions."

Supporting Stotland's point of view is an arsenal of compelling economic data. Even when the recession loomed largest, forecasts for the sector remained optimistic. Gartner reckons that even with stock prices slammed by market pressure and a slew of layoff announcements, spending on tech will continue to post healthy growth. Even with a recession factored into calculations, the research firm predicts tech spending will exceed 5% through 2023. Forrester is equally bullish, expecting 6% growth in the global tech industry this year.

Despite solid projected numbers, the industry is still wrestling with a critical challenge: building sustainable business models following a period of exponential growth. According to Stotland, balancing new economic pressures and growing business opportunities is why leaders in the sector must focus on the three pillars we’ll discuss here: an intelligently rightsized workforce, a streamlined target operating model, and diverse revenue streams.

1.    Use data to make intelligent rightsizing decisions

A cursory glance through recent news articles tells us which pillars draw the most focus from leading tech companies today. In February, the CEO of Zoom, Eric Yuan, captured the mood in the room when he announced a 98% cut to his salary and the layoff of around 1,300 workers worldwide. "Within 24 months, Zoom grew 3x in size,” he said. "We didn't take as much time as we should have to thoroughly analyze our teams or assess if we were growing sustainably."

Zoom—the poster child for pandemic professional (and often leisure) connectivity—isn't the only firm struggling to embed operational discipline following significant growth. In 2022, Microsoft swelled its ranks by 40,000. Amazon added 310,000 roles in 2021, following a flurry of hiring in 2020, when the firm packed on half a million employees (a 38% increase in headcount). Meanwhile, Alphabet has boosted its headcount by at least 10% every year since 2013, growing its numbers by over 20% in some years.

Even with all three firms now announcing layoffs, few will see a net decline following the hiring boom through the pandemic.

Stotland points out that while the layoffs are far from cheery news, they are drawing attention away from the real work the tech sector must concentrate on. "Leaders in the sector are looking to cement past growth into a sustainable operating model,” he says. “But this calls for a more nuanced approach than the media stories show. Rather than approaching the business with a scattergun, taking big chunks out with little thought as they look to bring runaway costs under control, they need to use a scalpel to intelligently adjust operations to boost performance and optimize their cost model."

To do this, they need data, some of which can be gleaned through questions like those in the following figure.

Figure 1

Armed with this data and insight, then, and only then, should they start making the necessary cuts.

2.    Develop a target operating model through right-shoring and process optimization

While layoffs and workforce restructuring capture the headlines, more critical work must occur below the surface. Stotland points to four activity streams to help a sector more accustomed to largesse than fiscal conservatism. The first centers on yielding the best value for the business by right-shoring talent and processes. A shift in thinking that calls for evaluating and reconfiguring global supply, manufacturing, inventory and distribution to optimize where work is done—particularly as work patterns, cost models, and skills availability shift. Apple, to take just one example, is planning a new facility in Vietnam to add resiliency to its supply chain.

Talent and processes outside the physical manufacture of goods also benefit from right-shoring activities. Major software companies reliant on cloud infrastructure stand to trim costs significantly by optimizing infrastructure. For example, X/Twitter aims to cut between $1.5 million and $3 million daily in cloud and server fees.

In concert with this right-shoring activity, executives have another lever to pull: process reengineering and automation. "Developing reference models for the business domain, optimizing technical and infrastructure resources with intelligent process automation, and driving greater business efficiency through intelligent processes," Stotland argues, "enables executives to embed a more sustainable operating model in which work flows from the right locations in the right way to deliver the best business results."

It’s also important to note that a streamlined operating model combined with post-pandemic working practices releases pressure on business assets. As hybrid working becomes standard practice, sparsely populated office buildings present opportunities for more pointed cost-reduction activities. Stotland believes that with the right tech and working practices, businesses can consolidate office and other facilities spending while driving down additional costs, such as travel expenses.

According to research firm Global Workplace Analytics, companies can save up to $11,000 for every employee working two or three days remotely. But this is predicated on delivering truly immersive digital working experiences in which employees have access to the data, collaboration tools and connectivity they need. According to Stotland, this is an area in which many continue to fall short. ”"It's not uncommon for workers to spend an hour a day just looking for the data they need,” he says. “As we talk about streamlining processes and optimizing assets, we also need to ensure workers have the resources they need to be as effective as possible."

3.    Identify and exploit new revenue streams

The final pillar of a more sustainable tech sector is diversifying and expanding revenue streams.

Stotland argues that many tech giants are over-reliant on a particular category or customer group. For example, social media revenue primarily comes from ad spending, and advertising budgets tend to be more conservative through periods of economic uncertainty—bad news for any company without other revenue sources. In other cases, tech giants fight for market share in increasingly commoditized offerings.

But Stotland believes greater verticalization—the development of industry-specific capabilities to solve sector challenges that existing solutions aren't specialized enough to tackle—could help tech firms unlock new levels of value from their technology. One example is the industry cloud that brings more robust governance controls to regulated sectors. Another is solutions dedicated to the unique peak demand requirements of the online gaming sector.

"Specialization is an important path to new revenue opportunities," Stotland says. "In some cases, that's greater verticalization to tackle an industry pain point. Or it may be cross-industry, such as a capability to support a unique business environment in a particular geography or jurisdiction. Or an innovative solution for a horizontal challenge, such as supply chain or HR. The question that must carry through, however, is ‘How will this new solution deliver revenue to the business that offers a degree of resiliency?’”

Countless examples of companies in the sector pushing for greater revenue diversity exist. AWS, for example, now makes up close to 15% of Amazon's overall revenues. Should consumer spending truly dent Amazon's ecommerce business, AWS offers a degree of insulation.

Taking first steps

In short order, the tech sector moved from darling of investors and VCs in an easy-money economy, to the poster child for looming economic uncertainty. Stotland believes now is the time for the industry to start embedding true resilience into the heart of the business.

Other industry executives and luminaries agree. In a recent interview for Fortune magazine, Sanjay Brahmawar, CEO of enterprise software firm Software AG, argued that the new economic environment—primarily the shift away from easy-credit—would see the tech sector shift from a "growth at all costs" mindset toward "growth with profits." Meta founder and CEO Mark Zuckerberg strikes a similar tone, calling 2023 the "year of efficiency" with strategic imperatives centering on becoming "a stronger and more nimble organization." If the days of easy money are over, now's the time to strike to build an operating model that helps a business thrive when cash is harder to come by.

In response to the shifting economic landscape, technology companies should proactively focus on building resilience and adapting their operational models by both building a more resilient operating model, and positioning themselves for stronger growth, specially they must:

Enhance operating model resilience

  1. Conduct cost diagnostics: Evaluate cost additions from the previous business cycle, assessing their relevance in the current economic reality. Rebaseline the business by optimizing processes, considering right-shoring benefits, and accounting for ESG and regulatory factors.

  2. Invest in employee experience: Prioritize an exceptional employee experience beyond talent acquisition and retention. Implement HR and IT automation, and provide technology platforms that facilitate hybrid work arrangements.

  3. Streamline business processes: Initiate rationalization, harmonization, and simplification of business processes. Ensure that cost reduction efforts are complemented by the removal of corresponding personnel, locations, and systems.

  4. Establish governance metrics: Set up governance metrics to support future growth phases. Utilize contingent workforces strategically to enhance operational agility.

Optimize revenue streams

  1. Strengthen product engineering: Mitigate uncertainties in the product engineering process by adopting a consistent model that emphasizes products and platforms over minor projects. Prioritize outcomes, planning, and measurement to withstand economic shocks.

  2. Leverage niche markets: Tailor products to address specific use cases or verticals, optimizing marketing strategies and user experiences. Deepen integration within industry landscapes and ecosystems for increased market penetration.

  3. Harness customer lifecycle data: Recognize the value within customer data for potential product expansion. Develop new offerings based on democratized data from core products, exploring data-centric products and Everything-as-a-Service models.

By implementing these recommendations, technology companies can navigate economic uncertainties, foster resilience, and position themselves for sustainable growth in the evolving market landscape.

For more information, visit the Communications, Media & Technology section of our website or contact us.

Cognizant Insights Team

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