Several factors point to a surprisingly strong demand for third-party technology services in 2023.
The technology and services market this year experienced strong growth. But we have a slight deceleration at the end of this year as the prospect of a potentially deep recession grows. There is now a slowdown in consulting, particularly strategic consulting, and a slowdown in discretionary spending. Will that continue? Here is an overview of what I predict for the coming year.
Discretionary Spend
Capital is becoming more expensive, and a recession in 2023 is likely. Hence, we will see strategic consulting continuing to slow, and the discretionary spend components of the systems integration market will slow.
However, behind this slowdown in discretionary spend, we will see an increase in demand for essential technology services. I believe we will experience a high floor as we enter the recession, as companies will continue to spend on digital transformation journeys. They will continue to spend on technology and on the services to both implement and manage technology.
Driving this high floor is the fact that most companies are now in a heightened state of intimacy between technology and operations because of investing continually in software-driven operating platforms. This deeply intimate state is far more dynamic than in the past. As I have explained in several blogs, for companies to make operational changes, they need to make changes to the tech stack. The continuing investment required to drive change forward will create a high demand floor in 2023.
Increase In Outsourcing
At the same time as spending on digital transformation and software-driven operating platforms increases, we will see the traditional cost-saving sectors in the IT return.
I expect services demand in the business process outsourcing (BPO) sector to accelerate. The reason for strong demand is that outsourcing is one of the ways companies can achieve cost savings, which will be a focus as we move into uncertain recessionary times.
The cost-saving outsourcing market has been slow for the last two years. It is now accelerating. We at Everest Group can see this acceleration in the pipelines with deals over 50 million ACV a year. Some deals coming through the system are worth hundreds of thousands a year. Thus, we see a return of the mega-deal market in outsourcing. Transaction size is growing around cost-saving deals.
One implication of the increase in outsourcing is that companies may need to revisit the traditional contract structures for services contracts. COLA cost of living adjustments for service agreements are based on inflation in the broad market of goods, not on tech spending.
Tech Wage Inflation
The constrained labor market we currently face will continue next year. There will be more jobs than people to fill them for experienced engineering, IT, and other skilled labor.
Therefore, we could well see wage inflation in the engineering, IT, and skilled labor sectors continuing to persist well past where other labor markets are cool. I acknowledge that there have been 100,000 layoffs in big tech in recent months, but that is only a drop in the bucket. Some, if not much of those layoffs have already been or are being absorbed by the rest of the tech industry.
2023 likely will cause a collision between the need for companies to save money and the need for service providers to pay more to keep their workers in a high wage inflation environment. Look for tension growing between the buy side and the supply side.
Increase In Use Of Contingent Labor
Given the economic uncertainty and continued wage inflation, companies that have a strong demand for IT and engineering are now cautious about hiring more workers. Instead, they are moving into the contingent labor market to at least create a cushion.
If a company needs to hire 500 engineers, it may seek to add only 50 but look to the contingent labor market or short-term contracts to fulfill the remainder of that demand. I believe this strategy will continue through the recession because of the ongoing need for engineering and IT talent due to the intimate, dynamic relationship formed between tech and operations through digital transformation.
There will also be strong demand for new technologies such as AI and ongoing automation as companies further move into the new software-driven operating platforms.
The coming year will be one of strong demand, with tensions on pricing, and difficulty meeting the demand.
Growth Of Product Management
Another factor in play in the tech and services world for 2023 is companies accelerating their investment in product management. This causes rethinking around technology, with CIOs managing tech stacks rather than large technology estates. They will reconceive their set tech stack into a series of products for both external and internal consumption.
This will drive the rise of product management in large enterprises. This is important in terms of how companies govern and plan their technology investments. Product management will be a powerful influence center emerging that needs to be supported and catered to.
Bottom Line
Discretionary spend will slow in 2023. But the story of technology and services for the coming year is a story of surprisingly high demand, due to continued investments in platforms and digital transformation and the strong return of outsourcing to achieve cost savings and to supply talent in a constrained labor market.
