Surviving a 2023 recession as a tech company: How to prepare the business for a downturn

Events of recent years have been challenging for all of us. Covid-19 had a great impact and the situation worsened because of the Russian invasion of Ukraine. Due to rising inflation in the EU and US, the risk of recession grows tremendously. A recession is a period of significant economic decline characterized by a decrease in the gross domestic product (GDP), employment, and trade, typically lasting at least six months. A decrease in consumer spending and investment often accompanies it.

According to Goldman Sachs, the likelihood of the United States entering a recession this year has increased from 15% to 30 %. Additionally, there is a 48% cent probability of a recession occurring within the next two years following the Federal Reserve's first 75 basis point increase since 1994.

This time is incredibly challenging for businesses. Due to the growing costs and concerns connected with the uncertain economic situation, everyone desperately seeks spaces to cut costs. There might be some casualties but also rising opportunities for some startups.

In this article, we gathered the most significant predictions and solutions for saving your business and surviving this time.

What does a recession mean for startups and tech companies?

All companies are impacted by the ongoing recession, including tech startups that have had to let go of numerous employees since April 2022. As funding becomes scarce, the situation is expected to deteriorate further. The post-pandemic economic decline has been compounded by geopolitical tensions, such as the ongoing Russia-Ukraine conflict, resulting in significant business challenges.

A Goldman Sachs survey says that 93% of US-based small firms are concerned about this, and 38% have already noticed a customer decline in:

• Rising inflation
• High-interest rates
• Rising oil and gas prices
• Layoffs and cost reduction pressures
• Limited access capital

Opportunities for startups during the recession.

Recessions can be challenging for businesses, but they also create opportunities for those that can adapt and take advantage of changing market conditions. According to a Harvard Business Review case study about the 2008 recession, economic downturns can "shuffle the deck" in terms of competition, with the bottom 20% of an industry potentially rising to the top, while the top 20% may suffer. This means innovation is crucial during a recession, as competitors may outperform those not keeping up.

• Less competition for talent and market share makes it easier to attract high-quality employees and gain a larger market share.
• Changes in consumer behaviour may also present opportunities for companies with better products or value propositions.
• Motivate companies to put in extra effort and become more efficient, potentially leading to a more sustainable business in the long term.
• Headcount optimization, including letting go of underperforming employees and outsourcing some parts of services or products, can help companies streamline their operations and redirect resources toward more productive uses.

How companies survived the recession in 2008

Entrepreneurship is about creating companies despite the challenges presented by the market, personal obstacles, or external factors. Some of the most successful companies were founded during economic downturns and grew in the face of adversity. Difficult circumstances do not deter true entrepreneurs, but instead view them as opportunities to innovate, persevere, and ultimately succeed. Here are some examples of the huge unicorns:

• Airbnb (private; $38B, 2019)
• Pinterest (public; $14B, Oct 2019)
• Cloudera (public; $2.5B, Oct 2019)
• Uber (public; $54.6B, Oct 2019)
• Square (public; $26.9B, Oct 2019)
• Slack (public; $12.5B, Oct 2019)

However, there is hope for more companies and not every business has to strive, some of them only have to survive with the period and bloom in a different, more convenient to them time. A great way to reduce costs is using outsourcing your development. To better illustrate how this could be helpful, here are some examples of big companies that also turned for help to their vendors:

• Google:

The company has utilized remote IT teams for outsourcing purposes, not just for labour cost savings but also to leverage global talent and cover in-house employees' vacations.

• IBM:

The company has prioritized outsourcing to build specialized teams for each department, leading to increased efficiency. Even during the 2008 recession, IBM signed multiple outsourcing contracts, highlighting the importance of the practice.

• Microsoft:

The company's vast contract workforce has been crucial to its survival through multiple downturns, providing expertise and services beyond its in-house capabilities.

• Apple:

Engineering is conducted globally, with one out of three engineers being outsourced. The company's resilience can be attributed to its investment strategy during economic downturns.

• Netflix:

The entertainment startup shifted to a partner's infrastructure in 2008 and unplugged the last data centre in 2016. This move increased agility, with the "operational load" of managing their technology being transferred to a third party.

Why is outsourcing trending during a recession?

When seeing all of the examples above, you may still wonder: Ok, but how is outsourcing that helpful?

Outsourcing software development as a business model remains relevant during economic downturns because of its proven effectiveness. Outsourcing non-core activities can reduce costs, save time for critical tasks, retain the best talent, and achieve or maintain a high-quality digital product. Let's explore the advantages of outsourcing in a recession in more detail:

• New labor markets:

Hiring from a lower-cost-of-living market can open up a more affordable workforce, which can be a budget-friendly alternative compared to high-cost cities.

• Budget-friendly alternative:

Outsourcing helps turn fixed costs into variable costs, allowing you to accelerate growth while lowering costs and enhancing investor confidence.

• Cost transparency:

Outsourcing clarifies upfront monthly costs, allowing you to budget accordingly and improve your ability to scale your business.

• Flexibility in resources:

Outsourcing allows companies to hire workers as needed and cut them off when they don't, allowing them to take on new projects without worrying about retaining a full-time team.

• Established processes:

Outsourcing companies are result-oriented, aware of the latest technologies and trends, and constantly improving their relevant experience.

• Expanded vision and expert insights:

An external team can solve problems from a fresh perspective and add beneficial functions to your product.

• Reducing stress for current employees:

Relying on an outsourced team can save your company from burnout and errors in the work caused by overloading your existing staff with additional duties during economic hardship.

Best way to outsource IT project with valuable tips

Once you decide that outsourcing could be a way to save money its good to plan your strategy to maximise your benefit. To Help you outsource effectively, here are several key steps that you need to follow:

• Identify a clear scope of work:

Determine which tasks or processes your company can benefit from outsourcing.

Decide whether you want to outsource entire departments or specific tasks, depending on what will bring the most value to your company and what you can afford.

This information will help in later stages of the outsourcing process, such as cost estimation.

• Compare the costs:

Once you have identified which tasks or processes to outsource, you must determine how much it will cost you financially. Compare the cost of doing these tasks or operations internally with an outside company to see which is more cost-effective. Get quotes from multiple vendors and compare the rates to choose the one that offers you the best value for money.

• Choose a credible supplier:

After you have clarity on the scope of work and the costs involved, you need to prepare a request for proposal (RFP) and find qualified contractors who can provide outsourcing services. When looking for outsourcing companies, consider clients' reviews, portfolios, quality of work, services they can provide, and prices for their services.

Conduct a thorough comparative analysis to select the best vendor, as this is a crucial step in determining your outsourcing experience's subsequent success.

• Decide on the engagement model:

Once you have chosen the right provider, learn about pricing models and bundling options to optimize your budget.

There are three standard outsourcing models:

• Time and Material
• Fixed Price
• Dedicated Development Teams

The decision on the engagement model can be based on various factors such as delivery time, budget, project size, and expected deliverables.

Consider each model's pros and cons and discuss the most suitable option with your software vendor.

• Sign the contract:

Once you have found a competent and reliable outsourcing partner you want to work with, it's time to draw up a contract. Your contract should include a detailed scope of work, specifying precisely what tasks will be completed and when. It must also include provisions on intellectual property ownership and confidentiality. This step is essential because it will help protect you and the outsourcing party if something goes wrong during the project.

Recession outsourcing tips

During a recession, businesses must take proactive and forward-thinking steps to succeed. Here are some tips for outsourcing during a recession:

• Invest in innovation and automation:

Despite the high upfront costs, investing in innovation and automation can drive operational efficiency and revenue growth in the long run.

• Opt for shorter contract terms:

Plan for a shorter contract term with the ability to renegotiate terms based on market dynamics, so you can stay nimble and adaptable to changes.

• Consider scalability:

When choosing an outsourcing partner, consider their ability to remain flexible and scalable vertically and horizontally.

• Manage change effectively:

Invest in change and ongoing management to ensure the success of your outsourcing initiatives. Be purposeful about what leverage you use when aligned with your stakeholders.

• Build a cultural fit:

To sustain successful collaborations, ensure a cultural fit between your company and the outsourcing provider. Align and improve culture to build, balance, and strengthen connections, ultimately supporting your agenda.

Business survival tip: time to streamline and optimize your processes

Apart from choosing the right way to outsource, you can also change your business approach. Minor alterations could be beneficial not only during this difficult time but also for the long run.

• Plan your budget:

A well-planned budget can act as your organization's financial and commercial roadmap. It can help you ensure sufficient funds for current and future plans, identify unnecessary costs, promote financial discipline, mitigate risk, clarify business goals, evaluate new opportunities, and ensure strategic alignment among decision-makers and stakeholders.

• Build an efficient remote work culture and processes

The future of work is remote, which presents challenges but also opportunities to reduce office space costs and access top talent globally. Building an efficient remote culture is crucial; tools like monday.com and Asana can help manage remote projects. However, hiring and payroll can become complex and volatile, and traditional payroll solutions may not be ready for this change. To overcome these challenges, consider Symmetrical, which automates payroll and offers easy management of employees, contractors, and payments, resulting in much lower startup costs.

• Automate your startup

In times of economic turbulence, companies are compelled to cut expenses. Rather than replacing employees, businesses should explore the potential of technology to automate routine and repetitive tasks, freeing up workers' time to focus on higher-value activities that require critical thinking and creativity. Investing in intelligent technologies such as artificial intelligence, machine learning, and process automation can enable businesses to improve performance, reduce errors, and enhance customer experiences. By automating mundane tasks, companies can reduce the risk of errors and free up valuable time for employees to work on more strategic projects.

• Be smart about pricing

It's natural for businesses to want to raise prices when demand increases, but caution is essential. Customers are often aware of market prices and are likely to notice if a business charges significantly more than competitors. Overcharging customers can lead to negative consequences, including losing customer trust and loyalty, negative reviews, and reduced sales. In some cases, the price increase can be justified. However, there are other strategies to increase revenues without raising prices. Businesses can offer discounts for bulk purchases, cross-selling related products or services, or implement loyalty programs. These strategies can help businesses retain customers and build long-term relationships while maintaining a steady revenue stream.

How to raise capital during a recession?

We understand your plans and visions about starting a business in those uncertain and troublesome times seem like irrational dreams. However, this does not have to be the case.

In the current startup environment, timing and momentum are crucial for seed-stage startups. The market is experiencing a significant bifurcation, with only the top 10 percent of startups able to attract significant follow-on capital at any valuation. This leaves a shrinking pool of startups that can still attract funding from VCs.

Investors were more willing to give the benefit of the doubt to new teams with new ideas in 2021, driven by FOMO. However, they return to backing founders with established credibility due to past success, network, or CV, leaving less room for those without these advantages to play the FOMO game and dictate terms and syndicates.

For startups not part of the '10 percent club' of super-successful serial founders, securing funding is becoming more challenging as most tourist investors have moved on. However, founders who started from scratch and still succeeded in raising nice rounds showed a clear pattern of exhibiting stellar growth through low-cost user acquisition.

The era of spending money to buy growth is over, which is not necessarily bad. Ultimately, good startups should focus on achieving growth through cost-effective user acquisition.

It’s also good to be interested in the market's topics that hold the most interest. Launching a startup today is possible, especially with a good business plan and inspiring product, for example, ESG software.

According to data provider Crunchbase, climate start-ups in the United States raised close to $20 billion last year, surpassing the 2021 record of $18 billion and nearly tripling the $7 billion raised in 2020. Additionally, research firm HolonIQ reports that at least 83 climate-focused companies worldwide have valuations exceeding $1 billion.

Therefore, the chance to build a prospering and successful start-up is still valid. With good preparation and the right product or service, the investors would likely put out money for your business.

Summary

2023 has not given us a perfect start. As business owners or entrepreneurs, you must be prepared for high inflation and the likelihood of a recession. As it all seems uncertain and highly challenging, there is still hope that your company can survive. By following some guidelines and preparing yourself for the economic situation.

To save your business, look for alternative ways to cut costs and save money. Remember that during such difficult times, there is less competition in the market, which could be a significant advantage for you. Study the strategies of companies that survived the last recession and try to draw conclusions.

Most importantly, to save most of your money, consider outsourcing your development rather than building an in-house team. Such a solution could be your life changer and benefit the business in general, not only during a recession. If you want to help, your business strives and still save up be sure to contact SolveQ and IT outsourcing company here! Our experienced company has provided for many other businesses of various sizes and at different stages, preparing us for all the difficulties the economy might face.