Amidst all the changes we’ve seen in business over the past several years, particularly in high tech, 2016 will be a turning point.
The rapid pace of change over the last five years has opened the door to new, creative business plans, sky-high valuations and meteoric growth for the nimble. Indeed, a bellwether of growth, mergers and acquisitions are on a record pace in 2015. We’re set to break the record of $4.6 trillion set in 2007, according to Dealogic, which tracks the market.
Yet, for all of the change we’ve seen in the industry, the lofty valuations and the profound optimism about how software and technology can cut costs, improve efficiencies and make the world a better place, the time has come for these businesses to demonstrate an ability to monetize these innovative ideas, grow revenue and begin the path to profitability. We’re already seeing early indications of this pressure in recent valuation adjustments. I predict that sort of pressure for results will continue to mount in 2016.
Really, it’s to be expected. The early winners were those that disrupted their industry, established new business models and grabbed market share early. The next round of winners will be those that can fully monetize these new business models, and not just at the point of customer acquisition but throughout the customer life cycle. Growth is great; but unless you find a way to monetize, you run out of runway.
It has been a challenge just to keep up with the remarkable pace of change in recent years. The shrinking half-life of the Fortune 500 is a good indication. In 1965, that half-life was 28 years; today, it takes just 15 years for half of the companies listed on the Fortune 500 to turn over.
That change has spanned industries and business models. Companies that sell products have evolved into companies that sell services, with software companies a prime example, as subscription revenue growth rates surpassed the traditional licensing model. Likewise, services companies are now selling products. Take Jawbone, which began with selling noise-cancelling headphones, expanded into wireless speakers and now sells activity trackers with smartphone apps. Or Shazam, which began as an app that informed users of the name and artist of the song they held up to their phone and now lets users access all kinds of information about music, television and film, partnering with advertisers.
In fact, the very way that people are buying has changed dramatically. As much as Netflix transformed video rentals with sophisticated algorithms for movie recommendations, it was the shift from a flat rental fee to a monthly subscription that really disrupted that market. We’ve all seen the profound effect subscription pricing and freemium models have had on the software, communications and media industries.
We’ve also seen the impact of this digital transformation play out in retail. Ecommerce quickly became a new sales channel, but retailers that established an ecommerce channel years ago are realizing that customers now expect the same experience online as they get in the store. They want to be able to buy online and pick up or return in store. The companies winning in retail are the ones that have not only created efficiencies and superior experiences with regard to selling but have deep visibility into their customers, inventory and supply chain.
Clearly, we’ve seen some of the winners emerging from this rapid pace of change, and many of them have found ways to monetize their disruption. But for many more, these changes create an incredible strain on their internal systems and their traditional business processes, leaving them at a disadvantage and unable to adapt and ultimately survive.
To truly prepare for the change in business climate in 2016, businesses need to do three things.
1. Take a close look at your existing systems and processes. Do you have the infrastructure in place that enables you to monetize your business today, as well as where it’s heading? Can you – scale – that is, attract new customers, process orders, provision/fulfill, bill timely and accurately, recognize revenue, and then renew that customer relationship over and over again?
“At scale” is critical; if you’ve taken a piecemeal approach with your infrastructure, then a period of intense growth will put a tremendous strain on the organization that will be costly and time consuming to resolve.
2. Next, assess your organization’s ability to pivot. Are those systems and processes flexible enough to adapt to change and capture new opportunities? Can the back end, for example, support a move from a mobile app that recognizes music to a new advertising platform? If not, all the great innovation and market momentum won’t mean much when that market takes a turn or the industry is disrupted by someone, or something, else.
3. Finally, do you have the right people in place to make that move from billion-dollar valuation to a billion dollars in revenue? It might mean bringing in some new talent with the skills you haven’t needed in the past. It definitely means retaining your existing talent, which these days is more critical, and more difficult, than ever.
Jim McGeever is president and COO of NetSuite. He joined NetSuite in 2000 and was the company’s 15th employee. From 2000 to 2010, he served as NetSuite’s CFO and was a driving force behind NetSuite’s successful IPO in 2007. In 2010, he became the company’s COO, responsible for global sales, services and support operations. Previously, he was director of finance for Clontech Laboratories, the corporate controller at Photon Dynamics, and a chartered accountant at Ernst & Young.