In today's dynamic business landscape where supply chains are a competitive weapon, transportation management and real-time visibility are keys to success. As a supply chain professional, you understand the importance of partnering with a technology vendor that can deliver robust and reliable solutions. However, when considering potential partnerships, it's also crucial to understand and evaluate the financial structure, health, and stability of the vendor as that can affect the solution’s capabilities and vendor’s service over time.
For some context on the importance of financial health, let’s review the technology investment landscape and some key messages explaining why you should be cautious when considering investing in supply chain technology that you’ll rely on for years to come.
State of the Supply Chain and Logistics Technology Market
Many supply chain technology companies were started in the mid- to late-2010s powered by low interest rates and the ability of venture capital (VC) firms to easily raise money. With a growing economy, that accelerated after the initial impact of the pandemic. VC firms were happy to have their portfolio technology companies prioritize market-share growth over profitability. Capital for investing was cheap and the ability to borrow money was easily available. This aggressive ‘growth without regard to cost’ business model does have some upside. It allows more capacity for innovation and risk-taking; however, growth without profitability is not sustainable in the long-run and few companies grow their way out of unprofitable operating models.
VC firms have financial models that expect to see a return on their investment in five to ten years. This typically means selling the company or taking the company public through an initial public offering (IPO). However, today’s turbulent stock market has basically taken the IPO option off the table. The access to low-cost capital is also shrinking in a higher-interest rate environment and VC-backed technology companies are shifting focus to profitability. This shift in strategy puts extreme pressure on their growth-first operating models, delivering on promises made to customers, and possibly even the outcome of the company.
Given this current state, there are three fundamental areas where supply chain professionals need to understand how the financial health of a potential technology vendor should impact their evaluation process.
Financial Stability Breeds Reliability
When it comes to a relationship with a supply chain technology vendor, financial performance matters and profitability is paramount. Choosing a vendor with a proven track record of strong profitable growth helps ensure that their business decisions won’t be driven by shorter-term market issues and the technology will continue to evolve alongside your business needs. Partnering with innovative technology companies with robust financial foundations will provide greater peace of mind knowing that your solutions will continue to more predictably evolve and be well-supported.
Sustained Innovation for Long-Term Success
Innovation is the lifeblood of any supply chain technology company. However, sustaining innovation requires a solid financial footing. While earlier-stage companies may bring exciting new ideas to the table, their ability to continue developing and enhancing their solutions can be as uncertain as the exit strategy of the VC firm. What happens to supply chain company development plans when the investment horizon is ending for a VC firm? Do they cut development back to show profitability and affect the product roadmap and customer service? This is why it is so important to favor companies with longer track records of financial success because they can provide their customers with extensive industry experience and the financial strength to continue investments in research and development.
Customer-Centric Focus and Commitment
In cases where companies restructure, or look to layoffs, to alleviate financial burden, there is a risk of impact on their customer support and implementation services. This situation can be exacerbated when venture-backed companies are sold so the VC firm can capture its profits from the investment. Once the company is sold, how it’s integrated, and whether the key resources stay after the acquisition, can dramatically affect service and support. Technology companies with a proven ability to weather industry challenges and maintain control of their destiny will provide more continuity in customer support and with partners in their supply chain ecosystem.
In conclusion, when evaluating potential technology vendors for your transportation management and real-time visibility needs, it’s essential to consider the vendor’s financial health and long-term strategy. While high-growth technology companies may present exciting prospects, the risks associated with their uncertain financial situations can outweigh the benefits. Put more importance on financial structure and performance – which is more than growth. Understand how the company will operate in the long-term and the investor exit strategy. These two are as important as the functional evaluation and need to be part of your selection process to provide greater reliability, sustained innovation, and customer-centric focus that will help unlock the full power of your supply chain over the long-haul.
Interested in learning more? Contact Descartes today to schedule a consultation and ensure your supply chain is a competitive weapon for years to come.