Microsoft-ing your way through a recession

Last week the tech world imploded. Layoffs, slowed hiring, tightening budgets, etc. Though the overall economy is soft, tech seems to be taking a particularly hard hit, perhaps in part due to overbuilding during the good years. Whatever the cause, times are suddenly tight in the tech world.

For those of us who have been through this before, it’s worth remembering that even if the macro economy officially enters recession territory (two consecutive quarters of declining GDP), tech won’t. At least, it hasn’t historically. Tech companies have continued to grow, if more slowly, even in the midst of recessions. Just look at the recent earnings from the cloud providers: robust, if slower, growth. The reason? Companies continue to spend because the cost of not investing at all is to fall behind, perhaps irreparably.

To survive and even thrive through this downturn, Microsoft offers some lessons. Yes, I’m talking about “embrace and extend,” among other things. But it needn’t be a bad thing.

Embrace, extend, empathize

That famous phrase—“embrace, extend, extinguish”—comes from internal Microsoft documents the U.S. Department of Justice uncovered during its antitrust review of 1990s Microsoft. The company’s strategy involved embracing widely used industry standards, extending them with proprietary extensions, and then using those not-so-standard “standards” to extinguish competitors. Bad, right?

A much nicer form of the first two Es is happening today. One of the things Microsoft has done particularly well is to empathize with enterprise IT professionals who need to move to the cloud but are stymied as to how to get there. Though each of the clouds has modernization programs that help enterprises migrate workloads, Microsoft seems to emphasize this even more. This could be defensive (there’s a lot of Windows shops that Microsoft would prefer to see use Azure than rival cloud services), but it’s also smart business. Microsoft is trying to meet enterprises where they are (still mostly on premises) and help them move to the cloud on their terms. It’s why Microsoft habitually highlights hybrid cloud. Each of the major cloud providers has a strong hybrid cloud story, but this has been central to Microsoft’s strategy from the start.

How do you apply this principle? Well, it might have been fine to pitch CIOs or developers on making tectonic changes to their applications during boom times, but in a soft economy, “incremental” may be the wiser course. Remember: Enterprises will continue to spend because they must spend. As my InfoWorld colleague David Linthicum argues, “Cloud computing is now ‘table stakes’ for enterprises to take their business to the next level.” Extending with cloud, however, may be easier to justify in terms of smaller yet significant steps toward digital transformation.

How should you get there? First, keep in mind that you have roughly zero chance of successfully “embracing and extending” your business without good people. Layoffs may get you closer to profitability, but there’s a serious downside that Linthcum calls out:

Both the enterprises that fail and the enterprises that succeed with cloud computing are spending about the same amount of money. What most determines success or failure is the skill of those who are carrying out cloud computing deployments and not the technology itself. People still make the largest difference.

Scrap people at your peril.

Second, look for ways to blend new with old. As RedMonk analyst James Governor told me recently, “Integration is a cardinal enterprise virtue.” Enterprises generally don’t have the luxury of rip-and-replace transformation. Generally, they’re looking for ways to “embrace and extend” existing infrastructure and applications with new alternatives. Walking into an enterprise and telling them to change everything without respecting how and why they have the architecture they do is both callous and ineffective. Meet them where they are and help them figure out how to modernize both despite and because of the downturn.

Get your house in order

Despite counsel to protect your people, it’s likely that companies overhired during the boom times, as former GitHub CEO Nat Friedman suggests. Even so, there are good ways (and very bad ways, as Elon Musk has demonstrated) to rightsize companies, as I’ve argued. Some cuts may help, as I’ve experienced.

I’ve lived through two significant tech downturns, and my experiences couldn’t have been more different. For the first, I was working for an embedded Linux startup in the heyday of the dot-com boom. If you didn’t experience it, you simply can’t appreciate just how bonkers it was. We had virtually no revenue and were nowhere near profitability, but our bankers wanted to take us public, and the only way to get a big valuation, they reasoned, was to value us based on engineering talent.

The problem? We didn’t have much. If I recall correctly, the company employed just 40 people at the time, and we were seeking a valuation north of $200 million. (Unicorns mostly didn’t exist back then.) So we did what any self-respecting dot-commer would do: We acquired six companies and increased our headcount ten times (and our engineering base and our costs) in the space of a month.

That worked fine until the dot-com boom turned to bust, and capital and customers vanished. Layoffs and an ignominious end followed soon after.

Now contrast this with a later open source startup, Alfresco. I worked there during the 2007–2008 recession, but the difference this time was that our CEO John Powell was exceedingly prudent. As the former COO of Business Objects, he knew how to run a tight ship and kept us profitable. We grew headcount as revenue grew, and we cut expenses as needed to maintain profitability. The economy was in shambles, but I felt secure, and I and my colleagues worked hard to deliver customer success in straitened circumstances. I’m not sure I’ve ever experienced such camaraderie, which absolutely helped the company thrive during the downturn.

So, by all means, pare back your headcount if you must, but do so very carefully. People are a net positive. People innovate. People figure out how to do more with less. I can hear you say, “but I’m just going to lay off the weak performers.” The way layoffs work, it often doesn’t happen that way. I know folks laid off recently by Stripe, for example, who were top performers at some of the most demanding employers like AWS. Even if you manage to let only the weak employees go, the environment created by mass layoffs is poisonous. You’re likely to lose top performers the second they find a new job.

I’m not suggesting that these are easy decisions. Rather, I offer a reminder that the best strategy during a recession is to help people do incrementally more (as a vendor) and protect the innovative instincts and abilities of people (as an employer). I credit Microsoft with that first idea, and I will take some credit for the second.

Copyright © 2022 IDG Communications, Inc.


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