Recession-Proof IT: Do more with less

Due DiligenceThe US is officially has been in the longest economic expansion in US history. At my age, I’ve been through a few economic expansions and a few recessions. There are a couple of things I’ve noticed as expansions end and recessions begin,

  • Recessions are a shock to everyone who thought the expansion would never end.
  • Major companies begin laying off employees to maintain short term profits
  • The largest companies borrow heavily to get through to the next expansion
  • Bankruptcies jump because mid-size businesses have not planned for a recession

With so many lay-offs, the message, almost a mantra, from leadership to employees is,

We have to do more with less!!!” – CEO during a recession

Doing more with less is what technology does well. When times are good, most organizations tolerate inefficient business systems. During a recession, these inefficiencies kill company productivity. The Secret to thriving in an economic slowdown,need-modern-sales-team2trans-1

  • Build more efficient business processes
  • Automate those processes with technology

In other words, if the management team can double the efficiency of their business process, a strong technology strategy will multiply these efficiencies by at least ten times. Mathematically we can say it like this

Business Process X Technology multiplier = Total Company Employee Productivity

Developing Employee productivity is how Recession Proof Companies do more with less.

For example: As a micro-entrepreneur, the owner found a competitive advantage in taking an extra 15 minutes for each customer. Fifteen minutes that more substantial companies couldn’t afford to do. Raising the bar on customer service has always been one reason for hiring a smaller company. Over the years, our entrepreneur has grown from 1 customer to 1000 customers. Just measuring the cost of this one 15 minute task, the CEO made this chart.

Pre-Analysis results

*FTE – Full-Time Employee equivalent, which assumes about 40 hours/week

Once the company had grown to 100 customers, the owner decided to delegate the task to other employees. With continued growth the mid-size business to 1000 customers. At 15 minutes/customer/week, this simple task now requires six full-time employees.

A few years later, the new board is looking for ways to “do more with less.” Removing the costs associated with a service that requires six employees seems like an obvious win. Once a company is doing well, the easiest way to reduced expenses is to lay-off employees. The economic downturn becomes an excuse for eliminating the 15-minute customer service task. A task that, in its present form, block business scale-ability.

What would be the effect if the cost was eliminated without eliminating the customer service task? This is the value of automation in technology. Without automation, the business expense grows with the addition of each new customer. With automation, we maintain customer levels while eliminating the cost of paying people to perform these tasks.

In this table the same 15-minute task was automated after the 10th customer and before the 100th customer. Here are the new metrics associated with this process.

Post Analysis

Analysis,

  • End GameThe micro-business owner, with only ten customers, only needs 2.5 hours/week to accomplish the 15-minute task for every customer. Generally, the micro-business owner will take a “Do it yourself” attitude and provide the service for the customer. Adding 2.5 hours/per week to the owner's 40-hour workweek. (Total workweek 42.5 hours)
  • For the small business owner with 100 customers, task automation has saved 25 FTE hours/week. If the employee cost is $10/hour, that is a minimum cost of $250/week or $13,000/year. (Note: this example ignores the hidden costs of insurance, taxes and management costs associated with each employee.)
  • The Medium Business, manually performing the same task would require six full-time employees. The customer service hours work out to about 1,200 FTE hours/year. At $10/hour, the cost would be $120,000/year. With an automated solution, the 1,200 FTE hours are re-directed to other tasks that can’t be automated. The customer is happy because services remain the same. A win/win/win for the customer, employee, and the company.

Assessing the business value, we can also see an increase. A company is more valuable when the buyer knows that if the owner leaves, the company growth will continue. Now that the task is automated, the owner’s influence is still a part of the organization even after leaving. Customers stay because nothing has changed. In our example: Automation has reduced the cost of earnings by $120,000, which means that profits are also increased by $120,000/year. Just looking at this one improvement and assuming an EBITDA multiplier of 3, that is a $360,000.00 increase in the business valuation.

This example is very simplified and makes several assumptions. Each company’s situation is different. The example is based on the experience of one of our clients. A mid-size company that add $360,000/year in profits that were associated with one simple, 4 hour, technology fix. In that case we measured a 50:1 ROI six weeks after the fix.

Recession proofing your business

GraphingThis article is about Recession-proofing, your company. In the example, we showed that a single automation project could add $120,000 in cost reduction to a mid-market company. Your numbers will vary. After all, your employees probably cost more than $10/hour. (Use your own numbers to calculate the value of just 15 - 20 employees, to understand how this simple strategy would help you.)  If you do the calculation with your own numbers, that is the business value added to your company’s value, for every “15-minute task” automation project.

At Executive Outliers identifying the “15-minute task” that can be automated, is one ways we help our clients. Included in our IT Due Diligence reporting is an option to identify automation tasks like this.  For the business investor, our report is used to identify “Low-hanging-fruit” projects with high ROI value. High ROI projects are changes that would see measurable improvement in ROI.  Where the ROI is meseared before an after the change is made.

cyber-security-mythsIf you have questions about automating business processes, we can probably answer your questions. We can even do a workshop with your team that will project the Earnings improvements that would occur from business automation. Our process is very discreet and confidential and appears to be an IT audit. It may shake up the IT department, but the employees are usually thinking, “Well it’s about time.”

Recession-Proof your organization

Whether you are a business owner, board, investor or business buyer, to learn more about building a Recession-Proof organization contact us.

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