This post lays out seven trends we believe will shape IT services businesses this year. For tips on how to plan for or capitalize on each of these trends, download our ebook here.
2023 will test IT services business leaders in entirely new ways, probably including some we can’t predict. In fact, it’s that very uncertainty that will test them most.
The market, and most management teams, are coming into the year with a mix of doomsayers and cautious optimists, and both sides make convincing arguments.
“Dr. Doom” Nouriel Roubini, who successfully predicted the 2008 financial crisis, warns that the global economy is headed for “the mother of all stagflationary debt crises” that ends in high unemployment, high inflation, and a steep stock market crash in the U.S. Fitting moniker.
On the other hand, companies in every industry are still beating targets, still hiring talent, and forging ahead. As I write this blog, inflation seems to be leveling off and the stock market is starting to inch its way back up. It can be a confusing time for even the most seasoned tech CEO.
Succeeding in an environment like this requires getting back to the basics – finding a path to profitability, understanding customer needs, and focusing on company strengths. It also requires keeping a pulse on what’s happening outside your company’s (virtual) walls. With that in mind, here are seven trends that cloud services leaders should keep their eye on this year.
Trend 1: Customers, not talent, will be the battleground
In 2022, the chorus was “find me the people”. In 2023, it’s “show me the revenue”.
We’re only 18 days into the new year, and tech companies have already laid off more than 24,000 employees. Ouch. With talent now easier to find, the battleground is shifting to customers.
Customers will absolutely continue to invest in technology because they have to. However, sales cycles are getting harder and moving slower. Big “transformational” projects are getting even more scrutiny from buying committees, which for enterprise deals, often include more than a dozen decision makers. Customers are looking to wring more value from their existing investments (and their partners).
All this means that vendors and services partners must demonstrate measurable, near-term ROI. Those who do this well, and who can adapt to buyers’ new realities, will have an advantage this year.
Trend 2: IP and automation move from marketing to mandatory
Packaged, repeatable IP has become a must-have rather than a nice-to-have for services firms in the cloud’s third wave. This trend will accelerate this year, as cash-strapped customers and time-strapped consultants look to deliver results more efficiently.
That shift from investment mode to efficiency mode means services firms are emphasizing assets on the bottom of the IP maturity pyramid, focusing on accelerators and tooling that can support a leaner workforce and improve project margins. And spending less on full-blown products that require significant up-front investment and a dedicated sales and marketing budget.
Companies are also (finally) investing in systems and tools that will help them run the organization more efficiently, predictably and profitably. Those that do invest here are going to be in a better position to grow as the headwinds return.
Trend 3: The Tercera 30 goes vertical, and deeper into healthcare and manufacturing
The verticalization of software isn’t a new trend. Bessemer’s State of the Cloud report predicted that “the vertical SaaS wave will become a tsunami.” All those industry investments are now starting to gain traction.
Most of the ISVs in our Tercera 30 already have a vertical play, and many of the biggest companies on our list are betting big on Industry Clouds, with manufacturing and healthcare moving higher on the priority list.
These vendors, and the buyers they serve, will want to know that their services partners have a playbook for their industry as well. Now more than ever, a generic, “don’t worry, we can do anything for anybody” approach won’t cut it.
Go vertical. Or risk having your revenue line go horizontal and flatline.
Trend 4: Analytics and AI move up in importance and out of their silos
The title of data scientist was only invented in 2008. A few short years later, an article in Harvard Business Review called it the sexiest job of the 21st Century, saying that “more than anything, what data scientists do is make discoveries while swimming in data (…) a hybrid of data hacker, analyst, communicator, and trusted adviser. The combination is extremely powerful—and rare.”
The rise of the modern data stack, combined with easier-to-use AI tools like ChatGPT, is beginning to democratize those capabilities. Data analytics continues to be pushed up the organization into the hands of business users, while software becomes more intelligent.
The demand for data-rich applications is also pushing deeper partnerships between SaaS vendors and data cloud vendors like Snowflake and Databricks. It presents an opportunity for firms who can make those applications a reality inside an enterprise.
How data is used — and who can wring powerful, business-changing insights out of it — is changing, and fast.
Trend 5: Services consolidation continues, but deals get smaller
Services M&A will ramp back up in 2023 as cash-strapped firms look for a good home and well-funded firms look to fill gaps in their portfolio. The most attractive targets will be services firms that have solid unit economics, proven playbooks and accelerators (see Trend 2) and differentiated vertical expertise (see Trend 3).
Unfortunately, not every firm will make it, especially firms that don’t have the capital, cash flow or scale to weather the storm. Leaders in these firms will find themselves looking for a home for employees – even if the economics aren’t in their favor.
Trend 6: Software vendors prioritize partners that BYOC (Bring Your Own Customers)
As budgets tighten, the flow of customer handouts from ISV channel partners will be much tighter this year. Remember Trend 1? Software vendors that are fighting hard to find win customers won’t appreciate partners who aren’t pushing just as hard.
The channel will continue to be a solid part of any cloud services firm’s go-to-market strategy, but software vendors will expect a better balance of trade when it comes to leads. This will be a new world for many firms that have built sales teams and budgets based solely around channel coverage.
Partners may also get pressured by vendors to reduce the scope of projects or reduce bill rates to help keep the cost of implementation lower. Tread carefully here. In some cases this may be needed, but a bad deal that hurts customer satisfaction (and expansion) will have lasting consequences.
Trend 7: Retention and mental health (finally) get more attention
If we’re being honest, this is more of a critical need that we hope will become a trend. Even if things don’t get quite as ugly as “Dr. Doom” Nouriel Roubini predicts, this will be a bumpy year — and a lot of your younger staffers will have never lived through a year like this before.
A combination of layoffs, leaner teams, higher utilization and stressed out managers is going to translate into anxiety and burnout. Both of which have long term implications for individuals and the company if not adequately addressed. Employees who seem perfectly fine on the surface may be suffering in ways you don’t have a clue about.
Effectively supporting mental health requires awareness, training and investment. Companies are finally catching on to this fact, and shouldn’t be tempted to cut back on mental health benefits as a way to cut costs. Their teams will need them more than ever.
For more on all of these trends and what IT services companies can do to make 2023 the best it can be, download our ebook.
P.S. And don’t forget to explore the rest of our resources. There’s a lot of useful, distilled advice from Tercera and our advisors — all at the right price for today’s economy: free.
