Companies have less appetite to invest in innovation and are forced to slash discretionary spending and freeze headcount additions. However, times like these also give IT companies access to lower rates, a position to renegotiate long-term deals, and an increased supply of a talented workforce. If channeled properly, this could be the time to catalyze growth, gain market share and add value to our existing businesses.
During a Downturn, Spending on Tech is Inevitable
Markets are cyclical, and a downturn is the best time to look beyond cost-cutting and move toward strategically investing in technology. Tech is invaluable since it is ingrained into every type of business today for service enablement – a key reason why investments in tech will continue to pour in during the coming years. It ultimately helps organizations stay resilient during turbulent times; its immense contribution to the day-to-day business is undeniable.
According to a recent study by Spiceworks Ziff Davis (SZD,) companies in North America and Europe plan to increase their IT Spending in the coming year, with 51 percent of the 1400 IT companies surveyed attesting to the increase while only 6 percent intended to contract tech spending. This demonstrates that while recession talks have led companies to freeze hiring, cut costs, and re-evaluate their existing contracts, spending in tech will continue to increase.
The Emergence of Digital
With all the advancements in IT – from stand-alone or desktop applications to enterprise systems via ERPs, CRMs, and web and mobile extensions – systems were already advanced, and enterprise IT investments formed a significant part of the budgets of forward-looking companies. But with the rise of digital technologies, connected or pervasive and the Cloud becoming the norm, value-for-many systems having changed cost structures, etc. – every business has become more of a technology business driven by digital.
Businesses that embraced digital had the advantage of being pervasive enough to get insights on consumer behavior to steer faster growth. Native digital companies such as Netflix or Airbnb have grown faster than the big brick-and-mortar companies, making a compelling business case for more traditional companies sitting on stockpiles of cash reserves built over decades. If they don’t shift to digital, digitally aligned organizations will give them a run for their money.
There will be a propensity for these large enterprises to quickly move to digital over the next five years. But the skills required to make this change do not exist in the market at the desired capacities, and therefore, even in times of a market downturn, investments in tech are likely to continue. This is the perfect opportunity for organizations & industries looking to become more agile and iterate faster; leveraging the right digital technology will unlock new business models and channels of business growth.
For example, a modern bank can process an agriculture loan in a few minutes as land records are GIS enabled and digitized. So, can a traditional bank ignore tech and yet remain in business?
Why are Companies Now Continuing to Invest in Tech
As outlined above, investment in tech is not a cost to a company but rather a pivotal facilitator to stay relevant in a modern business environment. Tech helps companies scale growth, amplify product delivery, and pioneer operations at a time when budget cuts are inevitable. In the SZD study, one-third of the companies planned to allocate their IT budget to enable remote work by increasing security, data governance, and implementing online collaboration tools.
While overall tech investments will increase, there will be a shift in the existing dynamics within tech, giving prominence to certain areas while showcasing a decline in others. Many businesses will continue to prioritize new IT projects, bolster security software, and provide less importance to in-house hardware as they move their IT resources from in-house to online. According to a recent Gartner study, spending on new hardware has fallen by 3 percent since 2020, while there has been an increase in planned spending on cloud computing and managed services by the same extent.
Additionally, there are markets where digitization is low, like Japan, with the potential to grow in the upcoming years. Employers will increasingly focus on digital, product engineering, and hybrid tech to enable new business forms in emerging markets.
Where in Tech are Companies Spending
If we make it viable for companies to fund projects and satisfy the requirements needed to make digital products successful, there is no doubt that investments in technology and products will continue to pour in. According to a recent report, the top strategic tech trends for 2023 will include enterprises using Industry Cloud Platforms, Platform Engineering, and Wireless Value Realization.
According to Gartner research, there is a 5.1 percent increase in IT spending projected for 2023, with the majority geared toward software and service spending. Additionally, software spending will increase from $790 billion in 2022 to $890 billion in 2023, with 11.3 percent growth, and spending on IT services will increase by 7.9 percent.
Closer to home, as NASSCOM Chairman Murugesh pointed out in his keynote address, the Indian IT industry is set to grow to $350 billion by 2025 from the present $191 billion, riding on increased growth in digital initiatives and higher spending by global Fortune 500 clients. I believe India might have a capacity of nearly 10 million engineers by then, which will still be inadequate to meet the demand.
Where does Labour Shortage Stand Amid Spending in Tech?
In terms of labour, when costs are high in the EU and the US, there is more possibility of offshoring. More recently, tier I and tier II companies in Australia and New Zealand are offshoring for the first time as they need to adequately address the labour shortage to meet an ever-increasing demand to shift to digital products. A recent visit in December 2022 by a Finnish ministerial delegation to India said they would make visa norms easier for Indian tech talent and healthcare professionals- yet another indication of the truth that India will have 20% of the world’s working population by 2047! (as stated by Bob Sternfels, CEO Mckinsey & Co.)
But this doesn’t signify a lack of avenues for creative folks who find opportunities to grow. Employees equipped with the pulse of tech and solid domain understanding will continue to see market demand. Staying on top of emerging tech trends will help employees adapt quickly, and employers retrain people and find new areas within tech to focus on. Ultimately, those who find new opportunities and leverage their experience and expertise to match it will continue to grow even during an economic downturn.
For the short term, employers will need to balance increased IT demands. And as we build digital products, we must adapt. We should remain steadfast on the personalization of application as it plays a dominant factor in setting us apart from the rest by increasing our key capabilities. Learning to adapt individually will also enable employees to find opportunities during challenging times.
To summarize, companies view spending in IT to streamline their businesses and operate more efficiently. It helps aid internal operations, and increased spending on IT has helped businesses scale without increasing their headcount. This doesn’t mean this expansion is without its fair set of challenges. Our task as employers is to articulate the benefits of shifting to digital in a manner that allows people to invest even when the money and markets are tight.