Return to Profitability
- Current Situation
- Back to Basics
Times are hard, and it's difficult not to react emotionally when profits disappear and you're in danger of becoming one of the failure statistics. Don't panic. Easy for me to say, but I've seen it time and time again. Perfectly healthy companies running themselves into the ground because they don't use common sense when challenges occur. This article presents some common-sense reminders that make sense in any industry, but are specifically for Internet service providers, called ISPs for convenience. These are companies offering services or products over a backbone network for remuneration. They go by monikers such as ISP, ASP, MSP, CSP, and so on. In-depth information can be found in my book, Service Provider Strategy (Prentice Hall PTR, 2001).
Events are conspiring to bring hard times to most businesses, and Internet service providers are no exception. A global recession, made worse by the aftermath of the terrorist bombings on September 11th, has slowed trade on a worldwide basis. As business slows, operating expenses creep up as a percentage of sales. To make matters worse, there is a global overbuild of Internet data centers, built to handle a predicted business volume that never occurred. One would expect many mergers and acquisitions on the horizon because would-be investors face such high risks that funding for survival is simply not available.
Global trade was in slow decline for several quarters, even before the terrorist bombings, which inevitably sped up the decline. One could say there was a double hit, first to the dot-com/communications/high-tech industries, and next to the airline industry. Coordinated actions between central banks are ameliorating the situation, but papers are filled with stories of cutbacks and layoffs as companies seek ways to reduce their expenses.
SGA Needs Reduction
As margins continue to shrink, corporations look for ways to reduce expenses. It is perhaps unfortunate that the other alternative (that of growing revenues) seems so unrealistic that companies blinker themselves into cost reductions rather than looking for ways to emerge as a stronger force. There are many types of expense reductions: reducing personnel, enforcing travel reductions, and so on. Expense discipline is a necessary part of doing business, and should be enforced as an ongoing part of operationsnot only in bad times. I also argue that instead of focusing on expense reductions in bad times, business should review and look for ways of increasing the value of their products to their target markets. This not only will increase revenues, but will also increase the perceived value with the customer.
Market Is Overbuilt
The overbuilding of Internet data centers is a complement to the people who advertise and sell industry analyst reports. Most analysts have been proclaiming the huge potential market size for Internet-based services and providers have seemingly built Internet data centers to handle expected capacity without validating or verifying analyst reports. In essence, they've outsourced their marketing without researching actual target market needs and without analyzing the actions of competitors. Surely one must be suspicious when reviewing the most recent reports, some updating the market by only six months, where market sizes have shrunk by over 50%. Large in-country markets for a particular product have mysteriously vanished. The message is clear: Do your own homework, and don't just rely on the sheepish crowd.
Consolidation In Market
A byproduct of downward business cycles is the market consolidation of businesses. Today's market is no exception from this trend; for example, the acquisition of GTS by KPNQwest in the Netherlands. Companies surviving this cycle, in whatever form, should be stronger and better able to face their next challengeshow to execute a merger or acquisition, ensure that business processes work, and merge corporate cultures can be the subject of another article(s). It must be noted that mergers and acquisitions are a notorious minefield that have never ever produced an industry-leading company as a singular ongoing entity.