Thesis work paper Software Cutbacks

Software Cutbacks Will Normally Be Harsh Because the Expense Saving to Operating Income Ratio will be 3:1.
Due the large revenue changes that can effect software firms (Blumling et al., 2002), operational cutbacks for software companies will normally be exceedingly harsh on the companies employees because the turnaround must start earlier. Where as other firms may begin cutting back when sustained losses occur, software companies should begin prior to this, because the chances of company renewal are so much harder. Davidson explains
”Suppose…you have 3-6 months of cash flow available. The first thing that you have to do is cut back. This will be painful. It will go against all the things I have written earlier about the value of retention, the value of being an employer of choice, but if the company is going to survive, cut early rather than late” (Davidson, 2001).
For software turnaround’s, there are several ways to improve profitability quickly. Tarter (Tarter, 2001) gives the industry benchmark for the number of sales and marketing employees to the total number of the companies workers to be approximately 23%. But for computer programmers and IT employees gives the caveat that the value of the software and the type of industry the firm is catering to will determine the number of employees. He cites the examples of Rockwell Software against ID Software as examples. These firms have differing numbers if software developers, from 5000+ at Rockwell Software to only 15-20 at ID Software. Hence generic benchmarks can not be used.
Blumling (Blumling et al., 2002) recommends cutbacks should include changing the scope of its operations by eliminating products, customer segments, distribution channels, and geographies that are not linked to the companies core franchise or growth options, a tactic similar to that voiced by Sutton (Sutton, 2002). Likewise controlling outlays on IT equipment, office supplies, travel, and outside services areas that might account for 30% to 40% of overall spending are often over looked. This tactic of cost cutting is supported by both Sutton (Sutton, 2002) and Teng (Teng, 2002) above.
Blumling (Blumling et al., 2002) states that for software companies turnaround savings of 10% to 20 %, can enhance operating income by 3% to 8%. That is, on average a 15% saving will approximate to a 5.5% increase in operating income, a 3 to 1 expense savings to operating income ratio.
From these figures it can be seen that operational turnarounds for software will normally not be enough, as the cost savings needed (although deep), will probably not have a significant effect on revenue. Such a ratio supports Davidson (Davidson, 2001) and Hofer’s (Hofer, 1980) argument that some turnarounds require a strategic realignment rather than simply operational cost cutting. Furthermore, industry benchmark firm Software Success (Tarter, 2001) found that general and administrative expenses averaged to around 13.8% of total revenues over a three year period of 2000 to 2003 for the United States software industry. With the average range being between 10.1% to 14.4%. The statistics also indicate that larger firms are at an operational advantage due to economies of scale.