Like a ship on calm seas must keep a weather eye scanning for potential storms, small- and medium-sized businesses (SMBs) must be alert to unforeseen economic disruptions that can rock the boat, or even sink it. SMBs typically don’t have the same resources as larger corporations to weather uncertainty. Preparing for the unknown is challenging, and recent economic news doesn’t exactly provide a definitive forecast.
The JP Morgan Midyear 2023 Outlook states, “Given stronger than expected economic momentum so far in 2023, a recession appears off the table this year.” While this is good news for SMBs, there could be trouble on the horizon. The outlook added, “Slower loan growth from regional banks could be a headwind to economic activity.” In similarly mixed news, NFIB Chief Economist Bill Dunkelberg recently said, “Inflation has eased slightly on Main Street, but difficulty hiring remains a top business concern.”
So how do SMBs stay afloat in an uncertain economic climate?
An effective tactic is to create tech equity. Creating tech equity helps SMBs lean into economic headwinds because SMBs that create tech equity become better prepared to respond in times of uncertainty, take advantage of opportunities, and outperform competitors.
What is tech equity?
I coined “tech equity” to describe the value technology adds to a business. Tech equity is an asset, comprising key components of a company’s technology portfolio that drive differentiation and value creation.
The components of tech equity are divided into two categories: Alpha and Beta. The Alpha components comprise the types of technology investment that create value and result in the greatest return on investment. Strong Alphas, including using data and analytics to glean powerful insights and improve customer focus, will increase company valuation, and enable SMBs to outperform their competition.
While the Alpha components provide the greatest investment return, the Beta tech equity components are essential for mitigating risk and volatility in an SMB. A company that hasn’t addressed Beta components, such as IT infrastructure optimization, is at risk for costly upgrades and is more prone to the volatility of outages than competitors that have maintained and modernized their Beta tech equity components.
With the threat of headwinds, an SMB might look to cost-cutting initiatives to steady the ship. Some cuts may be necessary but be careful; too many will result in the drastic depletion of your tech equity. Cost-cutting often involves stopping IT projects that create significant enterprise value. When this occurs, tech equity accrual comes to a halt. And getting that momentum takes time.
Rather than cutting projects and reducing tech equity, SMBs can better prepare for economic disruption by investing in creating tech equity. SMBs that take this approach are building long-term for the next cycle and preparing for the tough times to come.
Tech equity examples
Take for example the data and analytics tech equity component. SMBs with strong data and analytics capabilities can analyze key aspects of the business and make informed decisions on adjustments that will result in efficiency. This may involve areas such as supply chain management, inventory levels, or flexing the workforce. These insights significantly enhance an organization’s ability to identify cost savings, so investing in data and analytics now pays off greatly in the next cycle.
Data and analytics are just one example. Here’s another: Rather than reducing head-counts or taking other steps that might not be sustainable, a business could choose to bolster the process excellence tech equity component. Implementing process automation makes a business more agile and efficient.
For example, major efficiencies are created by implementing an Enterprise Resource Planning (ERP) application that facilitates order-to-cash posting or a manufacturing system that automates inventory processes. In some cases, perhaps significant gains are realized by focusing on those customers that are more profitable. In this case, the SMB would greatly benefit from implementing a Customer Relationship Management (CRM) application.
Practice makes perfect
Tech equity is not created by doing just a one-time IT project and calling it a day. A one-time project may improve certain aspects of the business, but that approach does not create long-term sustainable value.
Whether it’s about implementing automation to increase productivity or using analytics to drive efficiency, creating sustainable tech equity requires many hours of practice and dedication. To make it happen, the business leadership needs to establish a culture whereby repeating the exercise of creating and sustaining tech equity becomes the norm rather than a one-off.
Weather the storm
Though the future is uncertain, cycles repeat themselves and you can be sure that sooner or later economic headwinds will arrive. When they do, the long-term investment and repeated hard work of creating tech equity will pay off, enabling your SMB to weather the storm and emerge into quieter seas even stronger.
Michael C. Fillios is the founder and CEO of IT Ally, a business and technology advisory firm for family-owned and private equity-backed small- and medium-sized businesses (SMBs). He is a former Fortune 500 global CIO, small business CFO, technology entrepreneur, and management consultant with more than 25 years of experience. His first book, Tech Debt 2.0®: How to Future Proof Your Small Business and Improve Your Tech Bottom Line, was published by the IT Ally Institute in April 2020. His new book is, Tech Equity, How to Future Ready Your Small Business and Outperform Your Competition (IT Ally Institute, May 4, 2023). Learn more at itallyllc.com.
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