Much of tech’s glow during the past few years was a reflection of low interest rates and high demand for connectivity to support remote work, schooling and play during the Covid-19 pandemic. In a low-yield world, investors hungry for a return on investment were eager to fund tech’s most speculative ideas, from crypto and nonfungible tokens to the metaverse.
As employees headed back to work, the reversal of some pandemic trends, combined with inflation and growing concern that the global economy could be headed toward a recession have weighed on quarterly earnings at a host of companies and led many to prepare for darker days. Facebook parent Meta Platforms Inc. is eliminating more than 11,000 jobs after it lost a quarter of its value in a single day in October after a weak earnings report. The consumer-driven ad engine at
Google is decelerating. Amazon.com Inc., meanwhile, is cutting up to 10,000 jobs. Ride-sharing company
and payments-processor Stripe Inc. are cutting jobs, too. Cryptocurrency exchange FTX collapsed into bankruptcy.
The market for cloud computing, business software, artificial intelligence and other so-called enterprise technologies has been a relative bright spot. The demand for cloud computing, for example, has moderated, but is still growing at a robust 30% rate.
The forecast for information-technology spending to grow 5% to $4.6 trillion in the coming year should hold up unless the wheels really come off the economy, according to research firm
“The [tech earnings] results we’ve seen have come in within expectations,” said Gartner analyst John-David Lovelock, who expects infrastructure-as-a-service, a cloud-related service, would grow about 32% this year. Gartner expects that growth to slow to about 30% next year, with a five-year compound annual growth rate of about 27%.
Still, demand for enterprise technology is sensitive to the economy and already is shifting. “During times of economic uncertainty, companies look for ways where technology can drive growth and create more economic value faster,” said Juan Perez, chief information officer at
While the business case for adopting cloud computing and automation is fundamentally sound, the case isn’t as solid for other areas in tech. The metaverse, nonfungible tokens, some aspects of cryptocurrency or technologies that don’t have immediate monetary value will fall out of favor, said
chief information officer and chief investment officer of UST, a Aliso Viejo, Calif.-based company that assists clients with digital transformation.
While companies still believe in the importance of investing in such technologies, a slowdown in the overall economy could have an effect on their budgets, according to Mr. Kanchi. He expects customers to continue to invest in areas such as automation and low-code or no-code software platforms that reduce the need for human programmers.
“The downturn has kind of started but it hasn’t hit bottom and will get bad, very quickly, likely sometime mid-next year,” said
co-founder of early stage investor FPV Ventures and former tech leader at Google. He expects a decline in demand for marginal or luxury areas such as crypto, grocery- and food-delivery services, “neobanks” and high-end travel and beauty.
The outlook for drug discovery and life sciences, cybersecurity, and companies that help customers address costly inefficiencies or unlock inventory in the manner of Uber Technologies Inc. or Airbnb Inc. also is promising, Mr. Chan said. He predicts that “the new Google or Uber of 2023 and 2024 will come out of this downturn.”
CIOs and other technology leaders will need to draw on different skills as they manage their way through a radically different business environment. Here are some suggestions.
Prioritize cybersecurity. CIOs say they are figuring out which projects would be most important to defend in the event of budget cuts, and monitoring the health of vendors that might be vulnerable in a protracted economic downturn. An economic downturn may put pressure on IT budgets at some point, but cybersecurity isn’t the place to look for cost savings. “I don’t ever go to that hunting ground to save money. If I get a budget challenge, it doesn’t come out of cyber,” said
Focus on efficiency. When budgets are under scrutiny, companies tend to focus on short-term solutions that can drive efficiency and productivity, Salesforce’s Mr. Perez said. Those solutions can run the gamut from simple planning to the use of automation and artificial intelligence to minimize supply-chain bottlenecks that can drag down profit.
Rethink hiring strategy. Companies should take this opportunity to reconsider the pace of hiring and employ freelance workers where it makes sense. Startup Piñata has increased its scrutiny of costs, co-founder and CEO Lily Liu said. The company, which operates a rewards and credit-building program for renters, has about 30 employees and planned to hire as many as 15 more this year. Due to the economic outlook, bringing on new workers might take longer than planned, Ms. Liu said. Additionally, CIOs say they are looking at the opportunity to hire valuable workers who lost their jobs at other companies or renew technology contracts on more favorable terms.
Look beyond IT. Work with business units and departments outside of IT to maximize operational efficiency and drive down costs. CIOs should think beyond their own departments and help the entire company use their resources and expertise to lower costs and increase efficiency, according to Gartner’s Mr. Lovelock.
Focus on long-term competitiveness. Should IT budgets come under pressure during a downturn, do your part to control costs and deploy capital realistically and responsibly as the situation demands. But, it still is possible to make a case to corporate leadership that recessions don’t last forever. The company still must invest in strategically important areas that drive growth and set up the company for success when the economy begins to recover.
Write to Steven Rosenbush at [email protected]
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