The year 2020 will be included in textbooks on macroeconomics as a vivid example of social engineering in creating a global economic crisis. Sars-cov-2 pandemic, deliberate shutdown of major economies, disruption of trade, interruption of international traffic, humanitarian crisis in developing countries. All this has led to serious economic shocks. In this article, we will look at the difficulties faced by most software houses and suggest measures to overcome the consequences of this economic crisis.  

Software Houses As The Research Subject  

We will leave out of the scope of our research the largest companies, such as Microsoft, Apple, Intel, SAP, ORACLE. These conglomerates have accumulated unthinkable cash reserves on their accounts that will allow them to wait out more than one such crisis. By the way, the amount of this “sleeping” money is so large that it has a significant stagnating economic effect because it is inaccessible to investors, new projects and does not take any part in the world economy.  

Large companies with 1,000 to 5,000 employees are of interest to our research. As well as small companies with 100 to 1000 developers. These are the companies that are most at risk.  

The activity profile of our software houses is:  

  • software products development  
  • custom software services  
  • IT startups  
  • digital transformation services  

The profile of such companies is similar in many ways. These are modern IT businesses with offices in different countries that provide onshore and offshore IT services, or distribute their IT products, cloud solutions, and other services.  

What Were The Risks It Companies Faced With At The Beginning Of 2020?  

Here we have collected typical problems. We will try to average and summarize the available information. 

Overestimated Investment Growth  

The Wirecard investment scandal is an excellent illustration of this thesis. This company resorted to falsifying reports, which would have allowed them to “stay afloat” for some time, if not for the financial crisis that broke out, which became the trigger to expose this story. Wirecard itself is not related to our research, in contrast to the IT company that Wirecard outsourced all software development. (The author of the article is personally familiar with the management of this IT company and some employees who deal with Wirecard. We will not mention the name of this IT company, so as not to aggravate the financial and reputational losses).  

For our story, it is important to understand that the ever-memorable Wirecard was one of the most rapidly developing and promising FinTech companies in recent years. Investors were happy with the growth charts and did not skimp on investment. Subcontractors were also encouraged by the growth of this booming project. In the modern world, growth is synonymous with stability. Therefore, subcontractors also actively invested in their growth, hiring staff for the future.   

The termination of such a large and important project led to serious financial losses and left dependent IT companies in a vulnerable position, with a large pool of developers who would not be in demand.  

Reducing Demand In It Services  

The crisis of 2020 is not the first shock in the IT industry. Crises cover this industry with a repeated frequency of once in 10 years. The first Dotcom bubble burst in the early 2000s. Then there was a noticeable decline in 2008. And now there is 2020. These crises have a lot in common. In the period of collapse, investors try to sell their shares and options to lock in a profit or loss in the cash. Many businesses and solutions appear for sale on the market. As a result, there is a decrease in the demand for IT services. This year we see a similar picture. IT companies have almost completely stopped hiring. Interns and junior developers are losing their jobs. Many developers are talking about changes in the terms of payment and forced leaves.   

IT companies compete fiercely with each other and cannot allow a large cash gap. Therefore, they have to respond quickly to a decrease in demand:  

  • fire anyone who does not bring the company revenue  
  • reduce salaries to increase profitability   
  • stop funding the development of their products.  

Reducing IT Costs  

This information cannot claim to be full-fledged research, but according to the information we have, every second customer company significantly reduces the funding of the IT department or seeks to reduce the cost of IT projects. The situation with software houses clients is not so simple. Customers cannot immediately abandon their projects by simply withdrawing funding. It means the loss of a competent team which possesses unique expertise. If the project is closed, software houses will reallocate specialists for other projects, possibly lay off some of them. It will not be possible to re-assemble a team that can continue the project after the crisis ends. A lot of things will have to start from the beginning. Therefore, customers do not stop funding completely, but cut their budgets as much as possible and negotiate discounts. IT business is a highly competitive field, where the margin is at the level of 8-15%. And service providers find themselves in a difficult position where their costs may be higher than their income.  

Increased Competition  

A logical manifestation of any crisis is an unprecedented round of the competition. IT service providers strive to maintain their position in the market, offer discounts, and unique conditions for cooperation. Against the background of the above-mentioned problems, pressure from competitors further complicates the business environment.   

Also, during the crisis, competition from companies from India, Vietnam, and Argentina has increased. These countries have been severely affected by the pandemic and are in dire need of new financial flows.  

Impact Of The 2020 Crisis On Product It Companies  

In the short term, product companies are doing much better than service companies. Some entertainment and educational products were in high demand throughout the lockdown. But the decline in solvent demand has also reached this segment of the IT market. Managers of product companies note a decrease in growth rates or a decrease in sales volumes. The marginal propensity to spend consistently falls, both for individuals and corporate customers.  

However, the presence of its own IT products in the asset portfolio is a serious factor in financial stability for software houses.   

An Important Difference Between The Crisis Of 2020 And All Previous Ones  

The first dot-com crisis of 2000 revealed many problems in the IT industry. Investors have not yet been able to correctly assess the prospects of a startup. Consultants did a poor job in predicting market prospects for IT products. The burst investment bubble led to a severe collapse in the stock market, investment outflows, and the closure of thousands of IT businesses. But today we do not observe such strong market fluctuations. It is important to understand that now we live in a new world, where information technology has penetrated so strongly into all spheres of public and economic life that it is simply impossible to repeat the situation of 2000. A stock market review from Bloomberg shows that IT companies cannot complain about a strong downturn. The main indicator of the power of the market, which is the demand from investors, has remained stable, which inspires even more optimism. In other words, few people believe that the current crisis will lead to ruin or a strong redistribution of supply and demand in the IT market. Most market participants expect the crisis to end soon.  

Survival Strategies And Crisis Management  

In this section, we will suggest some strategies that can help overcome the consequences of the crisis and prepare software houses for future challenges.   

Concentration Of It Expertise  

Traditionally, it is considered that diversification is a more sustainable business strategy. For software house, diversification means providing a wide range of services and supporting as many technologies, system platforms, and solutions as possible. For many software development companies, such a profile is natural, because it has developed historically, thanks to accumulated expertise while serving many customers. Today, when companies are forced to think about reducing the number of employees, they must decide which technical expertise to leave, and which can be disposed of as ballast.   

In this context, companies that have started to specialize in large web content management platforms are in a winning position. For example, Adobe Experience Platform or Sitecore. These are universal web systems that allow you to develop any business application regardless of the system platform. Those consultants and integrators who have started to specialize in such solutions do not have problems with scaling their business.  

This strategy is not practical in the short term, because your business will not be able to develop the necessary expertise and immediately find customers. But following this trend will help you overcome future crises and optimize your technology portfolio.  

HR Cherry-Picking   

The crisis forces many specialists to look for a new job. And this is an important trigger for HR departments of any company. It is during a crisis that you need to closely study the labor market and look for potential talents that can become valuable resources for your company. During this period, most companies stop hiring and lay off more employees than usual. The labor market becomes unbalanced for a while. Candidates request lower salaries to increase their chances of finding a job. This is the right time to look for new resources or find a replacement for specialists who cost the company too much.  

Cheaper Development Process Thanks To Ui Libraries   

As corny as it sounds in an era of React and Angular dominance, but UI libraries are still in demand and relevant. On average, using the third-parties JavaScript library can save up to 30% of working time on developing a UI layer. Developers of some libraries go much further and offer ready-made solutions for popular application tasks. For example, the Webix JavaScript UI, in addition to 100+ web widgets, contains ready-made applications for the following purposes:   

  • file management  
  • document management  
  • task management  
  • user management  
  • chat and messaging  
  • pivot charts and tables  
  • SQL query   

Using such ready-made blocks not only speeds up the development process but also allows you to save on developing the UX design and backend layer. Projects that are based on unified library solutions have fewer requirements for the skill level and competence of developers. In other words, a company can attract less qualified employees to build a solution from well-tested blocks.  

Implementation Of The Remote Work Practices  

The widespread introduction of remote work has shown that personal communication and the need to be present in the office are greatly overestimated. Most IT companies continue to operate effectively during the pandemic. Naturally, it is not without the facts of falling productivity due to communication lags and weak self-control on the part of ordinary employees. Various systems for time tracking and distributed project management help solve this problem. For example, Timesummary is one of the products that proved to be effective at the height of the pandemic. (At the same time, it caused a wave of discontent on the part of ordinary employees, who were required to maintain strict reporting). Strict reporting requirements cannot but cause dissatisfaction on the part of employees. But it is much more important for companies to maintain manageability and efficiency in times of crisis.  

Investing In Your Own Products  

Amid a crisis, some employees will probably remain unused on commercial projects. The management of software house will have to make a difficult decision whether to lay off some of the staff to reduce costs, but at the same time lose competence. One of the alternatives may be to develop their software product with resources that were not in demand during the crisis. The author of this article personally took part in several internal projects and learned such useful practices:  

  • Offer employees a share of ownership in the project. If they agree, to develop this area for less pay or overtime.  
  • Prepare the MVP version of the product and organize a crowdfunding campaign to raise funds for the project development.  
  • To involve specialists in the monetization of digital projects.  

Getting A Share Of Ownership In Customer Projects  

Clients of software houses stop funding projects due to objective problems faced by their business. They are in a rather vulnerable situation, and the offer to continue development in exchange for a share of ownership in their business may be a mutually beneficial solution. For several years of cooperation, the customer and the performer of the IT project form unique expertise, which becomes the key to technical and commercial success. Joint development launch and support of a commercial product can become its unique competitive advantage.  

Conclusion  

Every crisis opens new opportunities. The question is whether your organization has the resources and expertise to try to take advantage of the market prospects that have appeared. At the same time, we must not forget that the crisis also brings new risks, which must be accurately assessed. There are no new opportunities without additional risks.  

The strategy of survival (reducing costs, increasing profitability, firing employees) and growth (competitors takeover, marketing expenses, dumping) have approximately equal chances of success. The task of management is to analyze the market and competitive situation in detail to make the right strategic decision.  

Crises in the IT industry are becoming “softer”. The IT sector is becoming one with vital goods and services, like the agricultural sector, where economic crises do not lead to strong changes in the market environment, because they cannot affect the basic demand for essential products. Therefore, we should expect a quick recovery of business activity.