Growing in Downturns

“If the GDP declines but there are no economists reporting it, do we still have a recession?”
—-

It is no secret that the tech sector is still in a funk in many dimensions. Book-to-order numbers in the semiconductor industry arestill depressed, the telecom sector continues to report poor earnings, and software firms are itching to turn prospects into closed-deals and work. Yet, within all this discomfort, we still hold onto a sliver of hope. Is it warranted? Yes, it is warranted, if you have a good strategy.

The Wall Street Journal reported a case study on Tuesday, June 18th, concerning Taratec. As a consultancy, Taratec provided general IT services to pharmaceutical companies in 1999. When they noticed that the demand for their services declined significantly in early ’00, they took a risky strategy to re-orientate their firm towards providing solutions to a little known regulation referred to as “Part 11” from the Food and Drug Administration. This regulation affects drug-lab researchers. The refocusing of Taratec required developing software expertise, committing new resources to the sales team, and taking the risk of selling software products along with consulting services. The result was positive. After a decline in revenue in ’00, Taratec reports 65% revenue growth in 2001 to $24 million.

There are several elements to this story that warrant attention. One, it highlights the need for management to take an honest examination of their business and focus their attention on solving specific problems. Two, it provides a clear example of how small and mid sized technology companies have been able to use the downturn to develop new strengths. Three, it demonstrates the pay-off for taking financial risks in developing a differentiated core competency and new revenue generating capabilities. And four, it characterizes similar stories concerning difficulties faced by small businesses in the tech sector, and provides hope for their future.

There is no secret to creating a successful strategy in the tech sector. The difficulty of success is more often the difficulty of commitment. Many struggling professional services firms are struggling precisely because they desire to remain generalist. What small business wants to turn down a potential stream of revenue? Clearly, none. Yet turning down an opportunity with cash associated isn’t what the WSJ case study or I are suggesting. A point of this story is for small businesses to develop specific opportunities to create a reliable revenue stream.

Perhaps the key to Taratec’s success is the development each of the three parts of a compelling value offering required of small businesses providing professional services. These are (1) create an industry specific knowledge expertise, (2) create a differentiated subject mater expertise in a time-dependent problem, and (3) create firm level credibility in regards to delivery of the value. We see this in the Taratec story in their (1) knowing the pharma industry, (2) creating a superior value offering to address a specific FDA issue, and (3) having a history of successfully providing value in engagements.

For an alternative example, consider Open-C and their (1) deep industry knowledge of energy, (2) their excellent value offering in managing customer billing and changes to the billing requirements during a period of deregulation, and (3) a history of solving specific problems for clients such as National Water & Power.

True, differentiation investment is risky. It requires the dedication of financial, personnel, and management resources over a period of time in the educated belief of creating positive future returns. Yet I don’t believe that the largest impediment to change within a small business is the financial risk. The largest hurdle that I have noticed among many small businesses is their willingness to commit. At times, they see the opportunity and truly believe its exploitation will be profitable, but the management lacks the fortitude to make the tough decisions and commit to explore a new strategy. Perhaps it is the risk involved with doing something different and the accompanying changes to the organization, message, and skill set that are more significant.

As the Taratec case study shows, there is hope for those small businesses surviving the tech downturn. Yet the hope doesn’t come from simply survival, but rather using this time to make tough decisions, refocus the firm, invest in its capability and market, and execute a winning strategy.

The May Report, TECH BUSINESS BRIEFS, June 26, 2002