What Is Happening Now In Tech Services Spend?

The beginning of 2023 saw tech services budgets slightly up, with robust IT spend during the first quarter. In mid-April, companies began significantly reducing their discretionary spend and delaying or canceling initiatives that had been budgeted. Any new initiatives focused on cost saving and how to do more with less. Now, the sentiment is shifting again: there is a bit more money to drive business value, and I expect that to slowly build for the rest of the year. Where will IT spending occur for the rest of 2023, and what are the implications?

4 Major Spending Pillars

The sentiment for spending to drive business value spreads across four major areas.

Pillar #1: Existing Levers

Although companies still desire to move their legacy estates into the cloud, the funding is not there now. Therefore, in the legacy space, they look to costs and potentially move more work offshore, either through third-party services or into their captive or Global Business Services unit (GBS).

There is an uptick in new captives or offshore GBS units, both in the growth of existing units and in startups. Companies have initiatives to save money, but they must continue to invest in maintaining those initiatives to keep the company functioning and make sure that it is secure against cyber threats.

Today, much smaller firms are looking at building their own captive or GBS. Over the last few years, the barriers to entry into this have dropped dramatically. Mature leadership teams and legal help are now available to do the incorporation and provide effective recruiting vehicles to quickly start off these vehicles. I believe this trend of smaller companies looking to build their own offshore capability will accelerate.

Pillar #2: Modernization

The last three years have been a story of rapid modernization of legacy, but there are still large estates yet to move. However, the funding and the appetite to continue to move them without direct business resulting from it seems to be greatly diminished.

There are still modernization projects going on. They were typically planned and funded last year. But new ones starting up seem to be greatly curtailed.

There is a movement to focus on self-funded modernization. If the result of funding modernization saves money, then there is a lot of appetite to do that.

However, the broad case that cloud is more efficient and you save money in the cloud is a myth that most organizations no longer believe.

Pillar #3: Mature Digital

In this area (referred to as mature digital and sometimes as digital run), we see some green shoots with a little more discretionary funding being available for projects. At this point, it's unclear whether or not we will bump across the bottom of a recession. But there seems to be a little bit more money available for spend, particularly in the mature digital area.

In this space, there are companies that already largely transformed the application-based infrastructure to the cloud and have five to 10 years into that journey. In this situation, we see ongoing need because platform operations caused the relationship between business operations and the tech stack to become very intimate and dynamic. The business now runs through the tech stack in a much more intimate way, and the necessity to keep evolving and making investments in that tech stack can persist even in the face of less budget.

So, some of the savings generated in the legacy efforts or the curtailing of the spending in modernization are being absorbed into these mature digital spaces, which the business insists cannot operate without adapting to the new business conditions and the tech stack also changing and adapting. In this space, we continue to see significant ongoing activity.

At least for the rest of the year, this modest recovery in customer sentiment should lead to a little bit more free spending. I think this likely will go into the platform part of the business, with companies driving hard to try to improve their platforms and tech stacks to create better business value.

Pillar # 4: Generative AI

The possibilities that generative AI technology provides for all organizations across all of their tech stacks are immense. This is not lost on companies as well as service provider firms, and there is an appetite to explore that.

The biggest constraint right now is the willingness to fund use cases where companies can productively apply generative AI and ensure they can do it safely and work through risk of exposure of their intellectual property and data. Most companies now wrestle with these issues, which significantly constrains their ability to invest in the technology until they resolve how they can manage the risks.

Implications

Business Value. I believe we will see CTOs and CIOs developing a better set of language around digital to be able to articulate the business value of services and draw a clear alignment between the business value that is expected to be released in the business and the technology investment.

They will use the techniques and language pioneered by the tech community in their product management. So, there will be increased interest in introducing more product management people and skills mindsets into enterprise technology organizations.

Service Providers Shakeout. The focus now is meeting company objectives and key results (OKRs), and it affects every initiative in this space. Although there is money to change the tech stack and the operations, it must align very closely with accelerating the progress to a company’s OKRs.

Consequently, there is also a shakeout in the tech services providers. Companies are reducing the number of providers that have been participating in building out their tech stacks. Thus, we have the emergence of a bifurcation of the industry, where one or two strategic service providers will garner more work.

On the other side of the shakeout are the best-of-breed providers. The best-of-breed component is a third party or a team that a company brings in to add a specific piece of technology, develop a specific piece of code or integrate a component into the stack or the platform. They have been proliferating the space, but now their work is being curtailed.

Cost Implications. The more-for-less mindset is firmly entrenched in the business psyche, with companies potentially looking for cheaper ways to do things and potentially back off some of the costs.

Price rises that have been going on will get a lot more scrutiny on the value for money. Third-party service providers will continue pushing back on discounting prices on talent.

Talent Availability. We are still in a tight talent market, so companies may regret laying off tech staff at this point. In fact, as I have explained in several prior blogs (Understanding Digital Platform Costs and How Persistent Teams Improve Productivity in IT, for instance), the platform operations model needs persistent teams for digital run areas. Third-party providers that churn their talent are significantly problematic.

Companies may not be able to find enough talent in North America, but they can find it in India and other locations. So, as I explained above, companies are increasingly putting their own capability in place in offshore captive or GBS units. I believe this trend will accelerate.