The great pandemic-related IT shopping spree may finally be over. For two years, U.S. businesses spent freely on building digital infrastructure, connecting remote workers, and turning legacy products into digital ones. The spending needed to be done quickly, as cities locked down and markets shifted to digital spaces.
But IT buying is now shifting back as CFOs and chief information officers (CIOs) take a harder look at the return on investment (ROI), say experts and tech vendors. Faced with a potential recession next year and the prospect of missing margin and profit goals, managements are becoming more deliberate in their decision-making.
“They don’t have this imperative [anymore] to transform the business overnight to survive the pandemic,” said David Wagner, director of research at independent sourcing adviser Avasant.
In earnings calls over the last three weeks, tech executives described how buyer postures have changed.
The macroeconomic environment remains at the forefront of business planning, and customers are adjusting to the changing environment in real-time. — Amit Walia, CEO, Informatica
Dell, for example, is hearing talk from customers of reassessment of budgets and reprioritization of spending. Customers are buying just for their immediate needs, said Dell COO Chuck Whitten, according to an S&P Capital IQ transcript of Dell’s third-quarter earnings call.
On other earnings calls, according to S&P transcripts:
As NetApp moved through its fiscal second quarter, it witnessed customers increasing budget scrutiny, higher-level deal approvals needed, longer selling cycles, and smaller deal sizes, said NetApp CEO George Kurian.
The sales cycle for small business customers increased 11% at Crowdstrike, said the cybersecurity software company’s CFO Burt Podbere. That was enough to push $15 million in small business sales (about 2% of total October quarter revenue) into the fourth quarter.
“The macroeconomic environment remains at the forefront of business planning, and customers are adjusting to the changing environment in real-time,” said Amit Walia, CEO of Informatica, on an October 26 earnings call. “Cloud adoption remains healthy, [but] customers have become more measured in how they purchase.” While deals are still closing, Walia said, “new deals are being inspected with more scrutiny.”
The software executives were careful not to suggest business customers were slashing IT budgets en masse.
But some are, said Joe Frampus, veteran IT consultant and managing partner of Avasant. Firms “didn’t need to look [as closely at] their budgets the last two years and now they’re saying, ‘Maybe we don’t have to spend all this money,’” Frampus said.
One enterprise client of Frampus’s was at the point of choosing a vendor but was forced to go back and re-justify the spending. Frampus spent four months convincing the company’s board [of directors] the investment was worthwhile.
[Firms] didn’t need to look [as closely at] their budgets the last two years and now they’re saying, ‘Maybe we don’t have to spend all this money.’ — Joe Frampus, Managing Partner, Avasant
The Avasant consultants don’t expect a major decline in technology spending next year, but they do project the increase will be lower than this year’s 5%. (Avasant is still collecting data for its annual worldwide IT outlook, coming next month.) In the AICPA’s fourth-quarter economic outlook survey of 550 CPAs, released on Dec. 1, executives estimated their companies’ increase in IT spending “to ease a bit from a 3.4% pace to a 2.7% rate of increase.”
Cloud deployments and software-as-service spending will not be exempt from the belt-tightening, said Frampus and Wagner. CFOs and IT leaders are re-applying controls and centralizing IT spend in all areas, having relaxed governance during the pandemic. In addition, businesses are just now starting to weigh the potentially costly migration to a private cloud, said Frampus, instead of assuming it’s a good move.
Cutting down the multitude of point solutions and consolidating IT vendor relationships are also on the agenda. For years, enterprises invested in best-in-class point solutions for individual parts of their software portfolio, said Wagner. But now they are balking at the expensive integration of systems and the cost of managing a large number of vendor relationships.
Businesses will typically look to go back to all-in-one solutions like an ERP or customer relationship management system that would deliver 90% of existing functionality, Wagner said.
Economics is also not the only thing slowing down sales and approval processes, in Frampus’s view. “I hate to say it,” but the new style of working has made it so “executives aren’t used to sitting in a room” and ironing out problems together, he said.
During recent due diligence of an outsourcing deal, which took place virtually, Frampus could tell the [vendor’s and customer’s personnel] weren’t engaged. “I had to force them to go into rooms together so that everyone got what they wanted out of the deal,” he said. “It took much, much longer than I expected.”