As another year ends, it’s time once again to hold ourselves accountable for our punditry. To grade ourselves on our forecasts for 2024. This can be a sobering process, but an important one – especially as we refine our view for the coming year. More on that coming next month!
Last January, we weighed in on six trends facing IT services firms in 2024, covering everything from artificial identity threats to M&A trends. How did we do? Did our wisdom prove prescient? Did our darts land somewhere near the bullseye?
Some hit, but others hung on the outer edges of the dartboard. With grades ranging from A to D, our GPA slipped from the previous year where we gave ourselves a solid B. Based on our own purely objective analysis (of course), along with input from our Advisor community, we believe we landed somewhere in the B- range for 2024. Read on for our assessment.
AI CONSULTANCIES GET MORE ATTENTION THAN AI TOOLS
Grade: B
We knew AI would loom large in 2024, but we investors and buyers to shift more of their love and attention to consultancies. With the influx (saturation) of capital going into LLMs and AI applications the previous year, we thought those looking for returns and to lower risk would turn to the people who make technology work. One look at the 2024 AI, ML and data landscape from FirstMark below, and it’s clear buyers might need a little help making sense of the noise here.
From buyers, consultancies did see a significant uplift from AI in 2024. Accenture alone reported $3 billion in GenAI-related bookings, and boutiques that specialize in data modernization and AI advisory saw greater growth than most. Yet, most capital investments continued to funnel into infrastructure and tools, not services. OpenAI raised another $6.6 billion, and AI accounted for a third of US VC equity investments in the first three quarters of 2024. We are starting to see more early stage investors open to the “service-as-software” model though, so we’re giving ourselves a B here.
CONTRACT SIZES CONTINUE TO SHRINK, BUT SALES CYCLES MOVE FASTER
Grade: C-
This year contract sizes for services companies did continue to shrink as buyers carried on with their cautious approach to digital transformation. CFOs and procurement departments still had the power of the pen, and we saw large, multi-million dollar signings continue to be broken out into smaller, phased projects that could prove out incremental results. A trend we expect to continue into 2025.
Yet sales cycles did not accelerate as we had hoped. For many IT services firms, 2024 still felt like a knife fight. As the year progressed, Gartner ratcheted down its IT services growth forecast from 9% to less than 6%, although projections for 2025 are ticking back up. There is good news: the CEOs we speak with are seeing budgets loosen up in the fourth quarter, with deal velocity picking up, and Gartner is more optimistic with their projections for 2025. But it’s not enough to save our grade. We give ourselves a C here.
“ARTIFICIAL IDENTITY” TAKES CENTER STAGE AS AI BOTH ADDS AND ALLEVIATES RISK
Grade: A
As expected, AI-generated deepfake scams got more elaborate, sophisticated, and difficult to detect. Examples abound. India’s 2024 elections were afflicted by a blizzard of perfectly lip-synced deepfake videos showing politicians and celebrities saying and doing bogus things. A UK multinational engineering firm transferred $25 million to fraudsters after a worker was duped into joining a video conference call with what appeared to be members of his staff.
In one 2024 survey, about half of respondents said their firm had experienced fraud involving video deepfakes, up from 29% in 2022, and Cleveland Research Company found that identity is now #1 on CISO’s investment priority list for next year.
We’ve talked to a number of CISOs and MSSP execs who are finding ways to employ ML and AI to combat these risks. The question is whether they’ll move faster than the bad actors. Only time will tell, but we’ll give ourselves a solid A here.
HYBRID CLOUDS AND EDGE COMPUTING GAIN TRACTION AMIDST A GROWING FOCUS ON COST AND SPEED
Grade: A
We nailed this one. Spending on public cloud services, data centers and edge computing all increased in 2024. According to Gartner research, in 2024 end-user spending on public cloud services grew 19.2% in 2024 to $595.7 billion, and data center spending grew nearly 35%.
Data centers made big headlines in 2024, with big tech investing in nuclear power to support AI and data processing requirements and large PE firms getting into the game. Blackrock and Microsoft announced a $30 billion fund to develop data centers and power plants, while KKR and Energy Capital Partners announced a $50 billion partnership.
Edge computing, which extends cloud services closer to where data is generated and used, is seeing increased adoption as well. A 2024 Gartner CIO survey found that 19% of respondents are already deploying edge computing and an additional 32% are expected to deploy in the next three years.
TECHNOLOGY SERVICES M&A RE-ACCELERATES IN 2024
Grade: D
We missed the mark on this one. Heading into 2024, M&A activity in IT services seemed to be picking up. Our banker friends specializing in services were pointing to activity picking up and taking on more mandates. PE firms were under pressure to put their cash to work after raising large funds that weren’t fully deployed. Interest rates were coming down. And many services firms were under a cash crunch after a tough 2023. All signs pointed to an uplift here, but the spike that we had (optimistically) hoped for did not materialize.
According to Canaccord’s December Market Update, the global M&A activity for Digital Transformation Services by number of transactions and transaction value remained relatively flat. Strategic acquirers were still active, with Accenture and IBM being two of the most acquisitive buyers in the space.
We toyed with giving ourselves a higher grade here, as we did predict correctly that the highest valuations would continue to go to firms that were growing quickly, with a base level of profitability, and in promising areas such as data modernization. But that prediction seemed like a “gimme” in retrospect, so we didn’t want to give ourselves too much credit.
AT LEAST 4 OF THE TERCERA 30 WILL ISSUE IPOS, BE ACQUIRED, OR GO PRIVATE
Grade: C
We got two out of four here. Among the Tercera 30 — our list of the top software companies for services partners – HashiCorp got acquired by IBM, and OneStream issued an IPO.
Others that we had expected to undergo ownership transactions showed signs that they would remain private. For instance, Databricks just raised a whopping $10 billion, pushing a potential IPO further into the future. Another long-rumored IPO candidate, Stripe, offered to buy over a billion dollars worth of stock from current and former employees at a $65 billion valuation. Other firms like commercetools and Celonis that appear to still be doing well didn’t make the move in 2024, perhaps because the IPO markets have not completely thawed for them yet.
At a 50% average, we were leaning into giving ourselves an F but our Advisors encouraged us to go easy on ourselves for making a bolder prediction. So we landed at C.
Where do we stand?
So, with two As, two Bs, a D and a C, I think we’re looking at a B- average overall. Not stellar, but not too bad either.
In January, we’ll publish our forecasts for 2025, and we will, naturally, try to do better. We’ll be weighing in on questions such as, How will the new U.S. administration’s cost-cutting ambitions affect IT services? Will AI begin delivering real value? And will the Hyperscaler Mafia continue outperform?
If you’d like to be notified when we go to press, subscribe yourself to our email list here or if you’d like to weigh in with a few predictions we should consider, hit us on LinkedIn.
