Why Companies are Increasing IT Spending During an Economic Downturn
It is better to anticipate than to react – Bob Knight.
According to the World Bank, rising interest rates in response to soaring inflation, supply chain issues and a myriad of financial crises in emerging markets are all increasing the risks of a global recession in 2023. Despite these fears, research indicates that IT budgets are expected to grow on average by 21% in 2023. Why, given cutbacks, layoffs and project postponements, is this happening? What should companies invest in and how can they maximize their investments? Read on to find out.
Companies that survived COVID-19 know the importance of implementing digital transformations
Deloitte’s 2020 Global Technology Leadership Study reveals that between 2016 and 2020, more than half of survey respondents reported year-over-year budget increases – a trend which came to an abrupt halt with the advent of the COVID-19 pandemic. The Congressional Research Service reports that, according to the International Monetary Fund (IMF), global economic growth fell to an annualized rate of around –3.2% in 2020.
Along with disrupting the global economy, the pandemic forced companies to evaluate, adjust and anticipate new ways of doing business. Take for example remote work. In December 2020, roughly one year into the pandemic, the Pew Research Center found that 71% of employed adults were working from home, compared to 20% who worked from home before the outbreak of COVID-19. Central to this effort was technology, as companies augmented, updated or created technological infrastructures that supported virtual collaboration. Implementing new tools that were convenient, efficient and secure necessitated taking digital transformation steps that had not been needed previously.
Remote work might be seen as an aspect of the broader digital economy, which was also forced to adapt to changing consumer habits as a result of lockdowns. The demand for e–commerce, telehealth and online education solutions triggered innovations to enable contactless interactions.
Similarly, though not caused by the pandemic, automation was certainly accelerated by it. For one thing, companies saw automation as a way to deal with staff shortages and an opportunity to reduce human involvement – so as not to violate health guidelines. Additionally, the pre-pandemic advantages of automation, like increased efficiency, faster processes and reduced errors, continued to encourage investment. Statista research indicates that the global robotic process automation (RPA) market, estimated to be $2.65 billion USD in 2021, will grow at a compound annual growth rate (CAGR) of 27.7% for the next nine years – meaning the market size is expected to be valued at $23.9 billion USD by 2030.
One lesson executives learned from the pandemic was that if investing in IT meant short-term pain, it led to long-term value. Companies that invested in their digital transformations, whether in terms of tools, infrastructures or processes, found themselves in a stronger position than their counterparts who waited.
What should executives invest in?
There is not one universal way to invest in digital transformations, as any such endeavor will vary industry to industry and company to company, depending on needs and goals. The most important thing is to invest in a strategy that is tailor-made to your business and your customers; one that not only addresses current pain points, but that anticipates future opportunities.
While automation, artificial intelligence (AI) and data science will (and should) continue to be top priorities for Chief Technology Officers (CTOs), the most important area to focus on is cloud. Gartner explains that for those IT areas which can transition to cloud (application software, infrastructure software, business process services and system infrastructure), the shift will be significant. Per Gartner, by 2025, 51% of IT spending in the aforementioned areas will have moved from traditional solutions to the public cloud, compared to 41% in 2022. Specifically, 65.9% of spending on application software will be directed toward cloud technologies in 2025, up from 57.7% in 2022. Total cloud revenue is expected to reach $917 billion USD by 2025.
Cloud computing delivers many advantages to organizations, from increasing business efficiency and cutting costs to increasing competitiveness and access – while at the same time enhancing security. This explains why the cloud infrastructure market rose to $178 billion USD in 2021 – growing by $49 billion USD in one year, according to TechCrunch.
Additionally, the flexibility and mobility that cloud computing offers means organizations spends less time and energy dealing with hosting and infrastructure issues, especially as regards maintenance, compared to on-site servers. Increasing bandwidth, if needed, can be achieved in a cost-effective, efficient way as there is no need to update IT infrastructure. Cloud computing also enables mobile access to data via smartphones, and with an estimated 6.6 billion smartphone users in 2022, this easy access is essential.
Focus on maximizing value, not reducing costs
While reducing costs is a goal CTOs across industries are understandably trying to achieve, the focus should be not just on reducing costs, but maximizing value. IT is no longer a necessary cost, but a revenue-generating competitive advantage. The need for software solutions, and the talents that develop them, has never been so high. This explains why, according to the US Bureau of Labor Statistics, demand for software developers will increase by 25% by 2031. The value that software outsourcing partners deliver to organizations includes:
Scalability – CTOs prioritize scalability since it leads to a faster time to market and improved user experience. Software is evolutive and needs to reflect changing expectations and needs, which means adjusting features and functionalities to match market requirements, while being able to handle an increasing number of users. If a company is unable to manage increasing workloads and devote additional resources to the software it wants to develop, a competitor will release rival software before them. Partnering with an external, dedicated development team enables companies to scale to their growth strategies and create new revenue streams. Alternatively, after achieving a product goal, companies need to be able to scale a team down when the aim switches from ramping up to maintaining sustainability. A partnership with a software development outsourcing company delivers this flexibility.
Niche expertise – The costs of recruiting IT talents are ever-increasing. Not only are there the expenses of posting job adverts, engaging a recruitment agency and developing candidate assessment tools, there are also the hidden costs a business incurs. This includes the time existing employees take out of their days to interview candidates, read through CVs and train new members of staff. The last point can’t be underestimated, as adequately training new employees takes time, resources and money – something companies are, overall, failing to do. Gallop reports that only 29% of new hires say they feel fully prepared and supported to excel in their role after their onboarding experience.
A software outsourcing partner provides the expertise that companies lack, whether about cloud computing, AI, data science or other emerging technologies. Close contact and cooperation with an external team will also result in valuable knowledge-sharing with in-house specialists that would be costly and time-consuming to obtain through experience, training sessions and courses.
Ownership – An experienced partner will be able to drive innovation and product engineering, so that the company whose software development it’s supporting can concentrate on its core business. This means understanding the business context behind a product and anticipating future iterations according to market needs. Teaming up with an outsourcing company that can manage software life cycles from ideation to release and beyond empowers an organization to both maximize its internal capacity and derive a significant return on investment (ROI).
The right software outsourcing partner delivers peace of mind
As 2022 draws to a close, it’s clear the world economy is heading into a turbulent time. On November 9th Meta, the parent company of Facebook, Instagram and WhatsApp, reduced its workforce by 13%, resulting in the layoffs of more than 11,000 people. Inflation is on the rise across the globe and CTOs are understandably cautious about undertaking digital transformations. That’s why companies across sectors are turning to Software Mind, whose track record of providing cross-functional engineering teams, speeding up delivery and delivering value has led to long-term partnerships with leading scale-ups, unicorns and enterprise level gamechangers.
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