Let’s face it, 2023 was a tough year for technology companies – inflation, layoffs, high interest rates, market volatility, and elongated sales cycles. All the fun things.
Technology services fared a little better. Growth in the IT services market was more than double the growth of broader technology spending, and many in-demand specialist firms grew upwards of 30-40% year-over-year. However, with dampened valuations and new logos hard won, even the best firms had to learn how to balance growth and profitability more than ever before.
This year will inevitably present its own challenges, but we’re optimistic about what 2024 will bring to IT services companies. Gartner recently released its 2024 worldwide IT spending forecast, and it expects broader tech spending to double this year (6.8% growth vs. 3.3% in 2023). The IT services segment is expected to see the most growth (8.7%), and at $1.5 trillion, will become the largest segment of IT spending for the first time. IT consulting is especially well positioned, projected to grow 10-15% in 2024 across nearly every industry.
IT services is expected to see the most growth of any technology spend area (+8.7%), and at $1.5 trillion, will become the largest segment of IT spending for the first time.
The growing interest in artificial intelligence (AI) is opening up new opportunities for consultancies that can guide enterprises and modernize legacy data and tech stacks. And while AI is creeping closer to the trough of disillusionment, we believe it’s a catalyst for a number of the trends we’re highlighting for 2024.
We know releasing our view on these towards the end of January gives us a bit of an unfair advantage, but why not build on what so many smart people have predicted before us, and then consider how these trends will specifically affect technology services leaders?
Without further ado, here they are:
AI consultancies get more attention than AI tools.
To date, most of the capital for Generative AI has been doled out to software startups and those working on foundational large language models (LLMs). In 2024, we believe the focus will turn to the professional services firms that are advising, implementing and preparing both people and systems for the disruption AI will bring.
Boards are pushing investments in this area, at the same time lawmakers, employees and customers are scrutinizing the technology. Whether an AI optimist or an doomsdayer, nearly every CEO is trying to figure out how to use AI to work more efficiently, boost profitability, alleviate human resource constraints, and create new revenue streams. And they all need help navigating this technical and political minefield.
Many are turning to the Global Systems Integrators (GSIs), all of whom are committing big bucks to their AI and data practices and partnerships. However, we believe it’s the specialist firms that may see the most attention. Customers are growing tired of the high level “art of the possible” presentations. They want firms with deep expertise in a specific industry, technology platform or functional area that can tell them what they are ready for today — and what they are not.
They want firms that can move faster, separate the hype from reality, and help them make incremental progress on AI initiatives. Early adopters – and we are early here – will gravitate to partners who are early adopters themselves. Teams that are using AI extensively in their own business, not unlike what we saw in the first wave of cloud computing.
Contract sizes continue to shrink, but sales cycles move faster.
One banker with whom we spoke labeled 2023 the “year of the CFO.” As companies looked to conserve capital in 2023 and growth slowed, CFOs delved deeper into spending plans and became a bigger part of the buying committee – even for small deals. This slowed deal cycles and, in many cases, downsized or halted contracts altogether.
The services firms with which we speak are seeing the purse strings loosen a bit, and are cautiously optimistic about 2024. However, few are banking on the large-scale digital transformation projects of the past. The market for enterprise, customer, employee and infrastructure transformation is maturing, and high failure rates for these big bang projects have made buyers (rightfully) cautious.
Companies will continue to spend carefully in the area, focusing on essential projects and approaching transformation with a more phased approach. This means a push to shorter, less expensive projects with a more rapid sales cycle. Technology services companies will need to factor these smaller, more frequent deals into their planning and sales pipelines and start honing their “land and expand” playbooks.
“Artificial identity” takes center stage as AI both adds and alleviates risk.
Deepfakes and voice cloning have made headlines over the past year. Bogus images of Pope Francis meeting with satanic priests, and viral phishing cons featuring Taylor Swift have put a growing focus on how AI can be used to create realistic deep fakes. Expect such artificial identity scams to snowball in 2024, affecting reputations, revenues, elections, and who and how we trust.
However, the real economic impact won’t come from pretend pop stars peddling cookware, it will be bad actors using AI and artificial identities to steal personal data, access corporate systems and target ordinary people. Successful breaches cost in excess of $7 million on average, and companies of nearly every size are now being exploited as an attack vector.
On the plus side, vendors and managed identity service providers are also finding ways to use AI as a means to predict threats and vulnerabilities, investigate them, and remediate cyberattacks in real time. AI-powered passwordless authentication, which uses biometrics to navigate the digital world, will become a bigger area of focus. However, companies with dated systems might be hard-pressed to take advantage of this trend.
Hybrid clouds and edge computing gain traction amidst a growing focus on cost and speed.
In 2024, enterprises will continue scrutinizing their cloud spend, but will also continue shifting more workloads to the cloud. Gartner predicts cloud spending in 2024 will grow nearly 20%, with the fastest growing categories being infrastructure-as-a-service (26.6% growth) and platform-as-a-service (21.5%). This, plus the AI wars among the hyperscalers, should bode well for services partners in the AWS, Azure, and Google Cloud ecosystems. Another key trend driving cloud spending is the continued rise of industry cloud platforms.
However, the expense of running data-intensive applications is also pushing some customers to shift specific workloads back to on-premise data centers or to expand their use of edge computing. Edge computing — where data is processed at the edge of a network close to data sources — is projected to have a 36.3% CAGR between 2023 and 2030, faster than cloud growth but on a much smaller base. This could be a boost for legacy storage, compute, and networking vendors that have lost ground in recent years and the partners in those ecosystems.
Technology services M&A re-accelerates in 2024.
In 2023, the volume of M&A deals across IT and digital services remained surprisingly strong. It wasn’t as strong as the boom years of 2020 and 2021, and valuations were lower, but good firms with solid business performance still found homes. These deals were dominated by large GSIs snapping up firms to fill business gaps, diversify into higher-performing areas, and bolster revenue. We saw much less activity from larger private equity buyers, outside of tuck-in M&A for existing platforms.
We expect PE buyers to be much more active in 2024. Over the last few years, many of these firms have raised large funds that aren’t fully deployed and they are under pressure to put that cash to work. The highest valuations will continue to go to firms that are growing faster than their peers, have a base level of profitability, and focus on promising areas such as data modernization, cloud migration, IT composability and disruptive high-demand software ecosystems.
At least 4 of the Tercera 30 will issue IPOs, be acquired, or go private.
The Tercera 30 – our view of the top cloud ecosystems for building or scaling a channel-oriented technology services firm – includes a pretty diverse group of cloud vendors. It includes large established market “anchors” (such as Microsoft, AWS and Oracle); high-growth market “movers” (such as Nvidia, Crowdstrike, HubSpot and Atlassian); as well as privately held “challengers” (such as commercetools, Databricks, Stripe and Contentstack). We believe at least 2 of the ISVs across the anchor and mover will trade ownership, while two of the challengers will issue IPOs.
We’re not the only ones who believe the IPO market is poised to open up in 2024, and we believe it could be opportunity for some of our privately held market challengers to raise the capital they need to scale and build out their vision. This could open up big opportunities for services partners in these ecosystems.
If volatility returns, low stock prices could present buyout opportunities for some of the larger, more undervalued software companies. This could include strategic acquisitions, such as Cisco’s recent purchase of Splunk, or PE firms looking for opportunities to optimize and re-invigorate a business.
Regardless of how our predictions pan out, we can be certain that 2024 will be an intriguing year for the technology services sector, characterized by a pace of change that continues to accelerate every year. We’ll be expanding on many of these trends throughout the year in our monthly newsletter. If you’re not already a subscriber, you can remedy that here.