“Meeting today’s financial challenges in the technology industry” by Aileen L. Saringan (December 14, 2009)

SUITS THE C-SUITE By Aileen L. Saringan
Business World (12/14/2009)

In a world that has become increasingly dependent on technology, one might wonder how technology companies can meet with confidence today’s financial challenges like forecasted declines in IT spending and increases in pricing pressure.

In response to these challenges, the industry is also enhancing its corporate governance, strengthening controls over its financial reporting processes, and controlling costs, to name a few strategies.

But unlike other businesses, this industry has undergone what may be considered a precursor to the global financial crisis — the dot-com crash that occurred in the early 2000s. A conservative observation is that the more successful of these technology companies may already have a game plan of sorts for times like this.

Areas that need substantial financing form part of the game plan these technology companies follow.

Research and development (R&D)

In a highly competitive industry, constant product innovation is what marks the difference between success and failure. Current R&D focuses on next-generation products that consumers will buy, like smart phones, other mobile devices, Internet-based applications as well as other tech products and services.

Having a well-adapted R&D is not a small feat for technology companies. There are several basics that have to be covered if an R&D program is to succeed. First, a technology company has to maintain its top talent. A company that develops mobile devices has to employ people who can see what can be the next “in” thing for communications. Second, a technology firm should maintain a fine balance between cost and innovation. As recession consumers have limited funds, R&D can no longer be just about anything fancy or futuristic. The resulting product or service should not be costly to produce and, therefore, can be sold at a price that a regular consumer will find reasonable. It should also be able to fill a need of consumers to sustain demand for it.

These basics should not restrict R&D so much that it has to be linear. R&D should still allow a technology company to find a new product/service using some of the processes that a company already has. Tech companies in Asia have expanded products to increase market presence. Technology companies that produce chips have ventured into solar power and light-emitting diodes — overlapping technology put to good use.

In the end, well-established R&D will help ensure that a technology company can compete and overcome whatever financial challenges may lie ahead.

Mergers and acquisitions (M&A) and diversifications

Technology companies with enough cash can increase revenue, as well as expand product portfolio and market reach through M&A. Key technologies developed by start-ups usually appeal to major players in the industry.

In anticipation of governments’ action towards a cleaner environment, an established company may want to develop a recycling business. Investing in a company that recycles computer motherboards is a logical choice.

Some players in the industry converge to diversify their revenue streams. For instance, hardware companies buy software companies (Oracle/Sun or Dell/Perot). Technology companies may also invest in other industries, like in a medical equipment company in the health care industry.

Software companies who are able to provide software-as-a-service (SaaS) can be targets for larger software companies. These larger software companies see the future in SaaS, where hosted software is being paid for on a per-use basis or on subscription. This allows companies to avoid upfront software expenditures.

Distressed asset sale is also another M&A direction. Potential buyers normally see the opportunity to acquire distressed assets at a fraction of the usual price. This can result in increasing capabilities at a cost that is lower than market.

Despite the high cost of M&A, the resulting converged operations generally help a technology company achieve economies of scale that can somehow ease pricing pressures. However, technology companies must take note that M&A should be done with the end in mind: it should result in giving consumers products or services that can best meet their needs and provide a good return on investment.

Cost reduction and restructuring

Technology companies historically focus on cost controls as their products get obsolete after new products or innovations are introduced. As these product changes (e.g., mobile phones replaced with new models) are notably fast, tech firms limit their exposure to inventory obsolescence by being cost-efficient in producing them.

Aside from controlling operating costs, technology companies have also developed better cost structures through restructuring. These restructuring programs affected most subsidiaries of global technology companies. The management of global technology companies evaluates business units in different countries based on cost efficiency and quality of output, among other metrics. By having low labor costs and a high quality work force, subsidiaries of global technology companies here in the Philippines still continue to operate.

While we can cite other strategies employed by the technology industry, suffice it to say that adaptability is the key to survival. Management has to identify the opportunities that somehow emerge and then plan the best possible way for a technology company to adapt to a rapidly changing business environment with the resources that it has. However a technology company decides to address today’s financial challenges, the execution of the game plan remains management’s responsibility.

(Aileen L. Saringan is an Assurance Partner of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.