Don’t Panic: Making Sense of the Tech Slowdown Headlines

The technology industry has gotten used to riding high with a decade-long boom that was barely shaken even by the pandemic crisis. Economic reality is now striking. But opportunities remain for those with smart cost and resourcing management.

We’ve seen the headlines. Tech business employers, from startups to large enterprises, are seeking to rein in costs in an unstable business climate.

The economic downturn is putting US technology companies to the test. Rising interest rates, inflation, supply chain disruptions and the war in Ukraine are a challenging set of macroeconomic factors driving companies to turn to belt-tightening.

The unrest is still in its early stages but has received plenty of air time with announcements of layoffs and spending cutbacks by big names like Twitter, Tesla, Uber and Microsoft all saying they’ll slow or freeze new hires. Amazon, which added 270,000 staff in the second half of last year alone, admitted last month that it was overstaffed and would look to make cuts.

Bright Spots Amid the Gloom

Those are high-profile headlines for sure. But that doesn’t mean that the diverse tech industry is doom and gloom across the board. Not all sectors are facing a business downturn. In fact, some are being called out as potentially recession-proof or even bullish prospects:

• Well-funded cloud-software firms with the cash to invest in new markets. Among the best bets mentioned are Zoom, Veeva, ZoomInfo and HubSpot, according to RBC analysts.

• Well-positioned Web3 companies that are still attractive to venture investors.

• Businesses that offer technologies and platforms vital to firms across all industries - including those holding strong such as healthcare, financial services, education, manufacturing and energy.

We’re in stealth mode here at Accelerance. We’ve been following this development, mining insights from our global software developer network as well as from our deep tech industry connections. Based on lessons learned from the pandemic business shockwave, we’re not panicking. We see the challenges clearly but we also see a line of sight to opportunities. That includes using tech outsourcing as a critical tool for managing through this latest business disruption that is focused on cost-cutting and efficiency - one of outsourcing’s sweet spots.

As this latest shakeout progresses, savvy companies will pivot to meet the market reality, as many did during the disruption of 2020. Take a lesson from recent history: Those companies that best weathered the last two years had built adaptable and resilient business models and partnerships. One of the bright spots of the pandemic recovery was companies who were able to lean on their partners to help them to keep their costs and staffing levels under control.

Tech Spending Expected to Hold Up

With the latest buzz, what is the impact on the outlook for technology investment?

As recently as last month, technology analyst groups were still projecting modest growth overall for the year. Gartner expects global IT spending to rise 4% this year to $4.4 trillion. Software is the fastest-growing category with 9.8% growth expected this year, rising to 11.8% in 2023. IT services are set to grow 6.8% this year and 8.5% in 2023.

Some of that is due to price inflation, which hit the hardware market first. It’s now making its mark on software projects and IT services, with the increased cost of securing tech talent a key factor in higher spending.

Larger organizations have already indicated they’ll focus less on new technology projects this year. Instead, they’ll look to get their current initiatives and assets in order after having to adapt to pandemic conditions over the last two years. In its 2022 State of the CIO survey, tech publisher CIO found that 85% of IT leaders considered modernizing infrastructure and applications to be their key priority this year, followed by aligning IT initiatives with business goals and cultivating IT/business partnerships.

Increasing operating efficiency, through automation and integration projects, is now on the minds of C-suite executives and IT managers alike, as they tackle the mountain of technical debt the pandemic created.

So the next two years will likely still see plenty of action in the tech sector. But the type of projects given the green light will focus on the business fundamentals - integrating core systems, modernizing applications and improving operating costs as the chilly economic climate looks to extend into 2023.

Ongoing Tight Tech Labor Market

In contrast to the stark headlines, the tech labor market is still struggling with the gap between available skills and positions, especially for software development. With just under a million unfilled engineering positions last year, any gap will take time to close.

Therefore, we’re predicting that high demand for tech positions within strong industries and sectors will continue. The latest US Bureau of Labor Statistics bears that out, with employment in technology positions still at one of its highest levels since July 2020.

CompTIA’s analysis of those statistics, released on June 3, found that 22,800 tech workers were added overall in May, with a total of 106,700 positions for the first five months of 2022.

“Employer hiring activity as measured by job postings for tech positions totaled 623,627 for the month and nearly 2.2 million year-to-date. This represents a 52% increase versus the same period of the previous year,” CompTIA noted.

In May, the tech sector unemployment rate rose slightly to 2.1%, but that is still significantly lower than the overall national unemployment rate of 3.6%.

The downturn may make a dent in record demand and salary levels. Even so, that impact will vary more or less depending on the technical position or the industry.

Software Developers Still in Hot Demand

Nearly one-third of all IT positions advertised across the US last month were for software developers and engineers, with increases in hiring activity for IT project managers, IT support specialists, systems engineers, network engineers and architects also reported.

But CompTIA also reported that one-third of tech job listings last month were for “positions in emerging technologies or jobs requiring emerging tech skills,” suggesting that organizations aren’t throttling back their plans to innovate. They need artificial intelligence experts and data scientists, cloud architects and cybersecurity analysts, with an eye to taking advantage of these technologies to modernize their systems and gain a competitive advantage.

Speaking of competition, securing the best tech talent remains as difficult as ever. That’s why Microsoft, despite slowing its hiring efforts, is also planning to “nearly double” its budget for salary increases in a bid to retain its best talent.

In that light, the recent wave of tech layoffs looks like prudent rebalancing away from riskier ventures toward more sustainable projects and business models more likely to weather the economic storm.

There’s still some uncertainty ahead, but strong wage growth and low unemployment reported by the Department of Labor earlier this month suggest the economy still has considerable momentum. Ironically, the strong US labor report data drove markets down, as it is more likely to give the Federal Reserve confidence that it can continue with interest rate hikes to curb inflation, without stalling the economy.

Rate rises will in turn apply more pressure to tech companies, particularly those with considerable debt levels or which are exposed to the consumer market, where households are trimming discretionary spending as the cost of living escalates. Netflix proved to be a bellwether of that trend when it reported its first-ever drop in subscriber numbers in April, sending Wall Street into a tailspin. Netflix, which responded by cutting its slate of movies and TV shows and trimming its headcount has seen its share price dive 67% this year.

Outsourcing to the Rescue

Outsourcing proved to be a lifesaver for many organizations struggling to find talent or develop new platforms and services during the upheaval of the pandemic. So too will outsourcing prove its worth as corporate executives demand a fresh focus on cost containment and conservative financial management in 2022 - 2023.

We are already hearing from our network of software outsourcing partners that their customers are scaling back some projects while accelerating others. There is a rebalancing of corporate initiatives and investments in line with economic conditions. That entirely makes sense and the Accelerance global certified partner network has the capacity to accommodate this sort of reprioritization.

We've found that the downturn is swaying more US companies to consider software development outsourcing. That's because staff augmentation and managed project outsourcing can provide give companies with the skills and capabilities they need for technology projects with the flexibility to adjust headcount as the budget allows.

Some clients are going to require emerging technology skill sets under any market conditions. But they’re understandably reluctant to commit to in-house hires at the moment, so outsourcing is a viable interim solution.

Back to Business Fundamentals

Outsourcing can be a way to take on a more manageable variable cost rather than a fixed overhead commitment in volatile times. We’ve seen this cycle before - after the dot-com bubble burst and again after the global financial crisis over a decade ago.

Most recently, our partner network thrived through the pandemic by offering our clients the ability to undertake business transformation projects at a rapid pace while taking advantage of the cost savings of working with outsourcing partners in locations with more affordable labor rates.

As the global economic situation remains unstable, those fundamental benefits of pursuing outsourcing as part of a smart procurement strategy remain undiminished.

No one knows for sure how the economic climate will change in the near future. But you can count on Accelerance to help you find the best tech talent in the world to help you pursue your business goals and navigate the uncertainty ahead.

Accelerance is here to help you navigate through uncertain times. As the premier global software outsourcing authority®, we provide top-tier software development resources and professional consulting services. We have curated the world’s largest network of proven software development partners by personally vetting and certifying the top 1% of firms across more than 30 countries.

Our trusted advisors help clients develop and implement optimal software outsourcing solutions through better planning, better partner selection and better engagement management. Trust our proven approach to reduce outsourcing risk and costs, ultimately delivering desired business outcomes in a fraction of the time.

Contact an Accelerance advisor to learn more about how we can help you through the ups and downs of business cycles.