Forecast vs. reality: Evaluating Tercera’s 2023 predictions

As we step into a new year, it’s a prime opportunity for reflection and improvement.

Last January, we highlighted seven trends we thought would impact and test IT services firms in 2023. Those trends covered everything from shifting strategies within the Tercera 30 (the 30 cloud software ecosystems we believe hold great potential for services firms), to the rise of IP and AI, to a growing focus on mental health. Quite the range!

So how did we do? Did our insights align with the unfolding realities of the industry? Not surprisingly, some did and some didn’t. But overall, we didn’t do too bad and we’d give ourselves a high B.

Here’s the rundown across each trend (described in more detail in this ebook).

 

Trend 1. Customers, not talent, will be the battleground

Grade: A

In early 2022, finding and retaining top talent were the biggest barriers to growth. Towards the end of the year, layoffs were on the rise and deals were starting to slow as customers battened down the hatches to weather a potential recession, so we expected investments to shift from employees to customers. And we weren’t wrong.

Tech layoffs continued through 2023, increasing more than 50% from the previous year. Deals and deal cycles slowed and increased in difficulty. Many software vendors revamped their sales and marketing teams as a way to cut costs and find a more efficient go-to-market motion — moves that will likely prove lucrative in the long run, but in the near term hurt services partners who depended on that deal flow.

Growth rates across the Tercera 30 decline

So why don’t we give this prediction an A+? Because acquiring hot talent is still hard. There may be more available labor overall, but finding scarce talent in areas like data, AI and security remains a battle.

Trend 2. Intellectual property (IP) and automation move from marketing to mandatory

Grade: B-

IP and automation have always been critical for services, but with companies looking to improve productivity through AI and showcase differentiation, we predicted services IP would become a must-have instead of a nice-to-have. This did happen to some extent, but many firms chose to pull back on big investments and system upgrades in favor of profitability.

We did see an increasing focus on AI and IP integration into sales and delivery teams. In a survey we conducted this summer of 50+ IT services firm, 43% of respondents said they are leveraging AI to create efficiencies and scale, using it to write code, create marketing content and support everything from DevOps to RFPs.

A number of our own portfolio companies are piloting internal roll-outs. For example, Zennify, a consultancy specializing in digital transformation within financial services, developed an AI co-pilot called Arti that enables employees to access existing assets and data sources to resolve issues and develop solutions faster.

So, while we did see some investment in services IP and automation, the level of investment was lower than we expected.

Trend 3. The Tercera 30 goes vertical, and deeper into healthcare and manufacturing

Grade: B

One of the biggest trends we see in the third wave of cloud computing is software and services firms delving deeper into industry-specific solutions. By 2022, the most mature enterprise software vendors (companies like Oracle, SAP, Microsoft and Salesforce) had developed industry clouds, with newer SaaS companies following suit. In fact, two of the Market Challengers in our 2022 Tercera 30 were industry-specific SaaS players – nCino and Veeva.

With this as the backdrop, we expected the Tercera 30 to continue verticalizing and to make greater investments in healthcare and manufacturing given post-COVID supply chain challenges and the growing need to digitize dated medical systems.

We did see progress here. For example: ServiceNow launched supply chain workflows, Snowflake launched its Manufacturing Data Cloud, Salesforce announced its Life Sciences Cloud, AWS announced its Manufacturing and Industrial Competency, and Google Cloud rolled out new AI models for healthcare. Just to name a few…

But on the flip side, Oracle warned investors about near-term weakness in Cerner’s revenue growth and we saw the two industry-focused players on our 2022 Tercera 30 drop to make room for nine new ISVs that were more horizontal in nature – most in the AI, data and security segments. So while we got much of this one right, we didn’t knock it out of the park.

Trend 4. Analytics and AI move up in importance and out of their silos

Grade: A+

Unless you’ve been living under a digital rock, you know this prediction couldn’t have been more accurate. In 2022, ChatGPT opened people’s eyes to what’s possible with AI and global adoption was already starting to tick up so we expected that trend to continue.

It did.

Investors poured billions into both startups and well-known AI brands like OpenAI, Anthropic, Nvidia and Cohere. According to G2, 643 new AI-related products dropped between September 2022 and September 2023 alone!

GSIs invested heavily in their AI and data practices, and spent millions hiring and training up AI specialists – partly to capture customer demand but also to prepare their own business for the disruption AI will bring.

In less than a year, we’ve seen AI quickly move beyond IT and data scientists and embed itself into nearly every function within the business, from marketing and sales to accounting and procurement. According to research that Salesforce conducted this summer, 61% of workers already use or plan to use Generative AI, and our bet is that number is even higher heading into the new year.

Trend 5. Services consolidation continues, but deals get smaller

Grade: A

The global M&A market for IT services firms peaked in 2021 and early 2022, but began to steadily decline in the second half of 2022. Heading into 2023 we expected M&A to start ticking back up with cash-strapped firms looking for a good home and well-capitalized firms wanting to fill gaps in their portfolio. At the same time, we expected those deals to be smaller than in previous years.

So how’d this prediction pan out? About how we expected.The volume of M&A deals across IT and digital transformation services did increase year over year, remaining surprisingly strong even through market uncertainty. Accenture alone acquired more than 40 companies in 2023. However, the value of global M&A transactions and overall valuations declined. Great assets in hot markets with good fundamentals continued to receive strong valuations, but they were more the exception than the rule.

Digital transformation services M&A volume slightly up in 2023, but valuations are down
Source: Canaccord Digital Transformation Update 2023

 

Trend 6. Software vendors prioritize partners that BYOC (bring your own customers)

Grade: A+

Software vendors have always looked more favorably on partners that have their own demand engine and can bring deals to the table. However, with growth starting to slow, we expected that balance of trade would become even more important within these relationships, and that services partners would see fewer customer handouts from their software channel partners.

This prediction was right on the money.

In 2023, many software companies restructured and right-sized their sales and partner teams, causing deals to slow and hurting the lead flow to many partners dependent on them. It also forced partners to rebuild relationships – sometimes multiple times within the year. And some software players, hurting for revenue, started to redirect deals to their own internal professional services teams rather than routing them to customers.

Those partners that brought leads and customers to the table, continued to see tailwinds.

Trend 7. Retention and mental health (finally) get more attention

Grade: C

This was, unfortunately, one of the biggest misses on the list. As HR teams shifted modes from “How fast can we hire?” to “How do we keep our great employees engaged?”, we thought retention and mental health would finally get the attention both deserve.

We did see some heightened focus on employee wellbeing, and generally speaking, everyone from entry-level employees to CEOs seem more comfortable talking about mental health. Yet all that talk didn’t (as far as we can tell) translate into more paid benefits, prevention programs, or training.

In 2023, many companies needed to keep costs down and voluntary attrition wasn’t as much of a problem as it had been in previous years. So, in retrospect, it’s not surprising that retention programs and mental health benefits were seen as more discretionary spending. However, as layoffs subside and employees become more open to making a move, it will be interesting to see if the companies that did invest here perform better in the long run.

Final Grade: B+

Overall, we did better than expected and improved on our performance from last year. Our home runs were the greater emphasis on customers and the continued expansion of AI. Sadly, the biggest miss was the prioritization of mental health and retention.

While we’ll take the B+, it’s clear that next year we might need to get a little more aggressive with our predictions if we’re going to live up to our value of being constructive contrarians. If you have suggestions or comments, hit us up on LinkedIn or send us an email at info@tercera.io.

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