Resilience in the technology industry
Businesses around the world are trimming investment in tech, but there’s still room for optimism in the tech industry.
Every six months, the Grant Thornton International Business Report (IBR) surveys mid-market businesses around the world, and the latest survey showed that investment in technology is slowing from the pace it had over the past two years.
However, the percentage of companies planning to increase their investment in tech is still higher than it was before 2021, as is the global tech industry’s optimism.
“We’re now seeing tech companies rationalize their operations and their workforces to meet a more measured pace of growth,” said Grant Thornton US Technology and Telecommunications Industries National Leader Steven Perkins. “In periods of hyper growth, tech companies struggle to ‘lay track in front of the train’ by scaling operations, sales forces, supplies and alliances, while folding in acquisitions just to pace market expansion. Now, they have the opportunity — and the necessity — to rationalize and right-size their operations.”
23:23 | Transcript
Leaders see strength ahead
“The most surprising thing is that the statistics do not show more of a downturn in optimism between the first and second half of 2022,” said Grant Thornton UK Tech Sector Leader for Audit, Nick Watson.
“Last summer, tech companies began to conserve capital and slow internal spending in response to the onset of slowdowns in enterprise tech spending,” Perkins said. Tech industry leaders have already seen investment tapering, but their relatively resilient optimism could indicate that they expect investments to return.
“Tech companies should be optimistic about a return to growth in the medium term,” Perkins said. “We are experiencing a cycle decline in tech growth, not dissimilar to what see every decade or so. This global slowdown in enterprise and consumer spending on tech follows 15 years of rapid expansion, and the pandemic pulled through forward revenue for companies in several subsectors.”
“Digital transformation and tech adoption continue to be prerequisites for businesses, and that is supporting market demand,” Watson said. “The hotspots of cybersecurity, artificial intelligence, automation, resilience and moves to the cloud still apply. Plus, there’s a growing focus on data and analytics.”
Technology upgrades and cybersecurity initiatives could be the biggest drivers of continued tech investment, as they both topped the list of business challenges over the next six months.
While businesses will need tech to help solve the biggest challenges, tech firms will also face challenges of their own.
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The top 3 constraints
To keep building and maintaining resilience for the challenges ahead, tech firms need to address three top constraints right now:
“Firms need to lock in talent,” Watson said. “Big tech layoffs and slowing venture capital growth means that there is some easing on the pressure for talent, but there are still major skill shortages in key areas of development and software. To help retain talent, companies are being creative about how they tie people in.”
“You need to strengthen balance sheets and ensure the cash runway is solid. Every tech firm should be addressing any cost structures that became too bloated in the long run of success the industry has had,” Watson said. “There’s a big focus on recurring revenue models. The companies with strong balance sheets are looking at the opportunities that could create for M&A.”
“You need to prioritize customer retention and having a breadth of business coverage — customers, geographies and sectors,” Watson said. “Recession might be coming, but it will not be equal across all markets. So, how dependent are you on a particular market or customer?” Some tech companies are thinking about this diversification in new ways. “Some companies are focusing on expansion within the existing customers, rather than trying ‘land grabs,’” Watson said.
Tech firms have faced a range of new challenges in the past few years, and many have already adjusted their strategies or business models to adapt. “To address supply chain exposures, companies are expanding semiconductor manufacturing in the U.S. and increasing their reserve stocks,” Watson said.
“Tech companies need a laser focus on customer retention and expansion as they navigate slower growth,” Perkins said. “One significant difference from the last tech retrenchment is today’s as-a-service model. Prior retrenchments were underpinned by a perpetual license model, where clients were locked to maintenance and support contracts, and barriers to switching were high. Today’s model places a premium on reselling existing positions and expanding existing client use of products and services. Those tech companies who focus and excel on client engagement and experience can retain, and even take share, in the slowing market.”
Strong business needs will keep driving demand for tech. However, the competitive nature of the industry means that resilient companies will need to keep adapting ahead of market changes.
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