Product strategies for the new recession

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Unless you’ve been living under a rock for the past month, you’re likely aware that global asset prices — equities, bonds, commodities, foreign currencies, just about everything — are in turmoil. What’s going on? How will it affect your business? What can you do to survive, and even profit from what will happen over the next twelve to eighteen months?

To be brief, the global economy never recovered from the 2008-2009 financial crisis. During the ensuing recession central banks and governments around the world coordinated massive fiscal and monetary stimulus in a textbook Keynesian attempt to suppress the business cycle. These interventions succeeded in levitating asset prices, but through inflation rather than real economic growth.

Most economic indicators have been flashing red for more than a year. On Friday, as the stock market took another beating, the Atlanta Federal Reserve Bank revised its GDP growth estimate down to 0.6% after the closing bell and going into the holiday weekend. J.P. Morgan then lowered their GDP growth estimate to 0.1%. The US economy is teetering on the edge of contraction, and since the NBER generally runs a couple of quarters behind in officially calling it, we have probably already slipped into recession.

China is even worse off, eroding demand for manufactured goods has hit their economy especially hard. China’s lack of demand for raw materials has crushed commodity prices, devastating the economies of commodity producers like Canada, Australia, Brazil, the OPEC countries (now embroiled in a regional war in the Middle East), and many others. The commodity contagion has hit the US shale oil producers, who borrowed heavily to finance their development projects. About half a trillion dollars of high-yield debt backed by shale projects is at risk of default, with many shale producers living off their hedges that will soon expire. In addition to the shale debt bubble, we are dealing with student loan and auto loan bubbles that are eerily reminiscent of the subprime loans that precipitated the last credit crunch.

There’s not much that can be done to stave off the next recession. Central banks have pushed interest rates to zero to encourage borrowing, they have bought up junk assets to restore investor confidence, they have monetized their own debt through multiple rounds of “quantitative easing”, and some central banks in Europe have even experimented with negative interest rates. We’re in uncharted waters. About the only monetary policy tool the central banks have left are Bernanke’s infamous “helicopter money” drops.

Most healthcare technology business have little to no direct exposure to these current economic problems. But 2008-2009 taught us that problems of this magnitude are rarely contained, and the indirect effects can be painful even for “recession-proof” healthcare businesses.

For example, the subprime crisis started when housing prices stopped going up. Upside-down borrowers stopped making mortgage payments. Bonds backed by these mortgages began to go bad, and these defaults spread to all the channels that investors had used to finance the purchase of mortgage-backed securities. Suddenly companies with good credit ratings found themselves locked out of the capital markets because nobody wanted to buy debt for fear that the assets behind it might be toxic.

And this is how the crisis spread to hospitals, health systems, and healthcare technology companies. Healthcare is a very capital-intensive business, so hospitals borrow a lot of money to finance construction products and buy expensive capital equipment, including EHRs. Some health systems found themselves locked out of the credit markets and were in danger of running out of cash. So they froze capital purchases, stopped hiring, and even laid off staff to reduce operating expenses. With no capital to invest and nobody to work on supporting technology projects, health systems stopped buying most technology products.

Here are some of the important lessons we learned leading product strategy through the 2008-2009 financial crisis:

  • Cash is king. If you don’t have dry powder, you will certainly not thrive — and you may not survive the next crisis. Cash is much easier to get when you don’t need it badly, so don’t delay. The best source of cash is from operations, and the best way to free it up is to prioritize rigorously, focus on what is essential, and stop doing everything else. Now is the time to prune your product portfolio.
  • Cash is king for your customers, too. They will be cutting everything that is not absolutely essential, meaning everything that doesn’t create cash. So when you are pruning your portfolio, get rid of anything with a weak value proposition. If it doesn’t print money, your customers won’t buy it.
  • Refine your monetization strategy. Even if your offering literally prints money for your customers, they won’t be able to afford it if costs a few million dollars up-front and they have no access to the capital markets. But if you can repackage those same assets as an operating expense, you just might have a deal. If it requires a capital expense and your customers have no capital, they can’t buy it.
  • Be willing to sacrifice profit to grow share. Now is not the time to try for a record year on the bottom line, it’s time to secure your market share and drive the competition out of business. Remember, you will be able to monetize an expanded market share when the business cycle turns favorable again. If it costs more than the competition, your customers won’t buy it.
  • Turn R&D inward. Now is not the time to add a pile of new features to your product. It’s time to cut costs. So figure out what drives your cost structure and turn your engineers loose on driving that number lower. If you’re competing on price to gain share, you need to lower your cost structure, and extra features won’t help.

Questions? Contact us.

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