The rising crisis in IT

Well now, there are several things to consider regarding the rising crisis in the IT industry. First, there is the primary market for services provided by businesses. Then, there is the financial market in terms of interest rates and available funding (which is in decline at the moment), and last, but not least, the workforce market. Keeping in mind all said, any business will be forced to adjust its plans and budgets – there will be budget cuts, which means that any further employment will be put on hold, and planned salary increases and bonuses will suffer. So we can expect an even higher employee turnover rate in the first quarter of 2023 (on top of the announcement made by the IT giants).

The lack of funding sources caused by the higher price of the capital on the open market will further push for reconsideration when it comes to planned growth and project planning during the first two quarters of 2023.

That’s all fine, and we know all of these things, but how will it affect the business and the IT industry? We have witnessed depressions before, but these didn’t affect the IT industry in a more significant way. This is more or less because IT saw enormous growth during the pandemic, during which many companies started embracing doing their business online, and employees started remote work in significant numbers. Moreover, the increase in digital currencies also skyrocketed during this period. All of this resulted in high investment growth in different IT industry areas. But now, the climate is changing. As we have mentioned earlier, investments are scarce, and companies have started budget cuts and are more cost-oriented. Since the IT industry has seen this enormous growth, it is to be expected that this industry should be the first to suffer the consequences.

Surviving the crisis

As we are all aware, we are amid a new (or just prolonged) economic crisis, with slowed economic activity, due to increased interest rates resulting in increased costs in all business segments. This slow-down is evidently sharper than it was expected, resulting in high inflation that influences global economic growth.

So how does the current climate affect the IT industry, and is there one answer to this question? Today’s IT industry is a complex ecosystem with different players and market models. So let’s start with this question: what types of companies does the IT industry include?

The Players

IT (or better even, ICT) is an integral part of our lives and, consequently, any business out there. But various businesses depend on their infrastructure and software systems in several ways.

Several major groups of companies dominate the IT scene today – Big IT companies like Google and Meta that have their own products and/or platforms and unique business models. These companies are usually industry leaders and, in many ways, set the trends and standards. 

Other Software vendors that have big enterprise solutions as their products, like SAP and Microsoft are similar. Still, their business model is bound to Software development and consulting offers to other companies that utilize their product for a specific purpose. 

The third group is made up of smaller companies that do not have their own products. These are usually called Digital-transformation or Service companies which, in most cases, develop products and services or support other companies in the development, project management, etc. 

The last group in the IT industry would be consumer companies which just utilize platforms and products as tools in conducting their primary business. These companies are non-tech but still have internal IT departments and may have internally developed software and hardware systems. 

By now, you probably wonder what happened to startups. Startup companies fall into the third or even fourth category, depending on what their core business is or what it will be. Even though they are labeled as a special group for the uniqueness of doing business and obtaining funding sources, they are still affected by the price of capital in the same way as the companies from the same category. Well, not entirely, since they are much more sensitive to the changes in the financial market, being mostly funded by investments, and they are increasingly scarce as the price of the capital rises. 

Now that we have a somewhat clearer picture of who the participants in an IT ecosystem are, we may find the answer to our question a bit easier.

All of these groups will suffer the consequences of the upcoming tides of the economic crisis, but usually in different ways, which is to be expected since each IT company has a different business model and is part of a different market.

IT giants, like Google, that offer their own platforms or products, usually are the leaders in tech trends. Strangely enough, they will sense the hit of depression first. They are the ones that have the largest investments in cutting-edge projects and technologies, which naturally carry the most risk, and are, by nature, the most expensive. So, what happens? Well, the riskiest expensive projects (and jobs) are cut first. We can already read the headlines and announcements that speculate the huge numbers, but in reality, we will see how many people will actually be out of work. This hype may be just there to prepare the people that layoffs are coming, but the numbers may be significantly lower when they actually come. In that way, the reputation of the companies is saved, and employees are calmed down (at least the ones not losing their jobs).

The second group, the big IT vendors, will not have the massive layoffs, thanks to the investment and project portfolio that is significantly less risky. On the other hand, demand for their products and services will decline. 

These two groups of companies will be forced to adjust their plans and budgets – there will be budget cuts, which means that any further employment will be put on hold, and planned salary increases and bonuses will suffer. We can expect an even higher employee turnover rate in the first quarter of 2023 (on top of the announcement by the IT giants).

Let’s consider the third group – service-oriented companies. They are stretched between two markets – the labor market and the service market. The labor market will become more turbulent, but all indicators are there that salaries will suffer a decline, and the rates under their services offered will also suffer significant hits. It looks like business as usual for these companies, does it? Let’s come back to this question a bit later after we see how things are for the companies that just utilize IT  products and services, from other vendors. As we said, big vendor companies will also have to raise their prices, and the usage of services and platforms provided by the companies in the first group will also rise. Hence, the natural instinct for the companies in the fourth group is to take development and maintenance in-house. These companies will also be under pressure to take their cost down, and how can they do it if prices are going up and they can’t hire new people?

The Game

After all of this is said, it seems clear that the cost of IT services and projects will be under the microscope and closely monitored. In this situation, the big players will cut down the costs related to their IT services, but this will not affect infra costs, as they are usually constant. Instead, they will reduce the number of IT managers, IT supporting staff (Product Managers, Business analysts, etc.), and even the number of engineers. We already see this with massive layoffs in Amazon, Google, and Twitter. That’s all to be expected, but if one does a closer analysis, the question arises– how will those companies reach their targets and achieve growth? Again, history has taught us that plan reduction, and ambitions usually do not follow cost reductions, and in these times, targets are often not met. This puts a lot of strain on planning, which in turn reduces the performance of the businesses.

Good planning, efficient monitoring, and the ability to adjust quickly are what is needed in times of economic depression. Big businesses, not unlike small businesses, have to be able to promptly identify growing, unhealthy costs and eliminate them quickly and painlessly. Small businesses, like startups, find this way of running their operations natural since they have always done their business in this manner. Big players will now have to find a way to adjust their way of running operations differently. This is not possible if one company has mammoth IT departments. Now it is time for a change! After massive layoffs, their projects will be outsourced in one way or another. Some companies will keep project management in-house, while others will outsource whole projects to external service-oriented companies. We already have this, and this is how the business has been conducted for a long time now. So what’s changed?

The Winner!

It’s all great, planning and all, but how is it going to be achieved in real life? Well, it seems that we have a winner! Service-oriented companies have unique positions since they have various talents and skill sets to offer as well as huge experience in project execution in various domains. This lets them jump in and help usually much bigger companies (from either of the aforementioned groups) either as a supplementary provider or full product development partners.

This enables them to provide the right kind of service at the right time, but with rigorous planning and constant monitoring. This leads me to believe that old models of engagement are becoming obsolete. We will see less and less selling of the time of engineers, less and less fixed bid projects, and more and more joint ventures in the means of joint tracking and planning of skills and resource needs. The service companies will provide resources with needed skills and expertise when it’s needed and in the quantity that it is needed. New models of engagement with service-oriented companies will emerge, mostly focused on planning in terms of skill sets and scalable teams with the right skills and seniority at the right time. The focus now shifts from FTE to FTEE and close collaboration with service providers. Product management may stay on the customer side, but project management and resource planning will be a joint effort or be transferred entirely to the service provider.

What does this mean for the IT service market? Well, the way customers are approached will change. Collaboration models will certainly evolve into something similar to just-in-time skill supply, in which the service provider and customer plan in much shorter terms – even on a monthly basis (today, it is usually done on a 6-month or yearly basis). Service providers will be much more involved in customers’ projects or systems, resulting in, all-in-all, much closer relations with the customer and becoming part of their organizations operationally (not legally!).

Again this is not something radically new, we have those models of collaboration today, but instead of this being more of an exception to the rule, it will become a rule at least in the next couple of years.