Worldwide IT spending is anticipated to grow 8% in 2024, not just due to artificial intelligence investment, but also investments in software and IT services, according to Gartner. In a recent CIO survey, 80% of CIOs will increase spending on cyber/information security in 2024, in many cases due to concerns around AI. In addition, Gartner predicts further investment in customizable cloud platforms, sustainable technologies, autonomous supply chain technologies (e.g. “custobots”) and intelligent applications for end users.
Top Business Challenges for the Technology Industry
“How technology companies have endured has had much to do with their stage of lifecycle and their industry vertical. Young tech companies that were not surviving on revenue but fueling growth from capital have kept themselves to task with platform development. More mature firms either survived or thrived by aligning themselves with the altered economy.
Businesses whose technologies align well with remote work, e-commerce, and supply chain have obviously been winners.” KYLE BALDWIN, SHAREHOLDER, TAX SERVICES
Thousands of layoffs within big tech firms over the past 12 months have made headlines. Globally, tech layoffs overall are up 50% compared to 2022. A surge of post-pandemic hiring is cited as one reason for the layoffs now as companies rethink their skillsets, cut costs and pursue efficiency through more automation. Investment in AI is also funneling money to other business goals from roles in recruitment, middle management, administration and even experimental divisions, according to a report in Techopedia. In Tennessee, significant layoffs over the past year have not occurred in technology; rather, they’ve occurred in the manufacturing, automotive, logistics and distribution industries.
The morale hit to company culture in big tech companies, however, is causing many tech professionals to rethink their careers, and they are proactively leaving to explore other industries or roles due to their adaptable skillsets. This can provide opportunities for smaller tech companies and other businesses to attract talent.
The pace of technological innovation appears to be accelerating; however, innovation is hampered by a few factors. This includes big tech limiting smaller businesses from advancing their work by recruiting talent from those companies as well as from academia. Large organizations move more slowly than small start-ups. Less funding for early- stage businesses will hamper faster solutions for discovered weaknesses in AI. These businesses are also faster at integrating diverse applications that will improve user experience.
Protection of R&D credit access and other tax incentives are critical for the tech industry, energy, manufacturing and healthcare industry (among others), to explore and test alternative technology solutions. The end user benefits when innovation is encouraged and financed, but the current finance climate is favoring known and proven entities.
“The speed at which technology is changing is accelerating exponentially. Features such as machine learning, artificial intelligence, business analytics, and mobile enablement are no longer only available in enterprise level solutions targeted at Fortune 500 companies. There are many software applications that have this functionality at price points appropriate for small and midsized businesses. Having timely information, visual representation of trends and potential risks, and the increased operational efficiencies that AI and machine learning provide results in lower costs and/or increased profits.” STACY SCHUETTLER, CEO, LBMC TECHNOLOGY SOLUTIONS
Access to Capital
The faucet turned into a trickle for tech start-up financing through 2023, but late-stage and growth- focused companies can still access private credit for cash flow as they wait for private equity backing or an IPO. Valuations are down and growth is slowing as sales cycles take longer. Tech companies are also redirecting cash toward new business models or M&A deals as a long-term growth strategy.
“IPO markets will be attractive, but PE is still robust.” BLOOMBERG ANALYST
Growth Opportunities & Optimism
There is no doubt that artificial intelligence has been the buzzword of 2023. Expectations are that AI will continue to prompt exploration in productivity and efficiency improvements within companies, but also new business building. New AI capabilities will accelerate investment in new businesses, according to McKinsey & Company’s recent report on CEO growth predictions. Companies are building their own AI platforms for analytics and reporting as well as for research and development. They are also pursuing AI capabilities to create new products and services faster.
“Investments in technology and people are intertwined—and companies that realize they can’t have one without the other are able to attract and retain higher-performing employees. Over the past few years, many companies have accelerated moving to new platforms as many weren’t prepared to shift to a remote work environment. Moving to these cloud-based solutions helps eliminate the cost of equipment, network administration, and security concerns that are real costs to a company that houses and maintains their technology infrastructure onsite.” STACY SCHUETTLER, CEO, LBMC TECHNOLOGY SOLUTIONS
2024 Business Performance and Strategies for the Technology Industry
Sales & Profitability Strategies
After raising prices of products and services in 2023, technology companies would be wise to keep their pricing in check through 2024 while focusing on efficiency and productivity measures. In addition, tech companies can bolster their sales and marketing efforts while capitalizing on core competencies.
In addition to organic growth, business leaders can look at complementary businesses for M&A, especially since end users are looking for all-in-one solutions to streamline management and costs. A strong business model and performance will attract more funding, improve valuations and support a stronger position for innovation or exit.
Capital spending has been down among technology companies overall as they pursue efficiency measures. Focusing on change management now will lead to a bigger focus on long-term goals in the coming year. Cost-cutting has been favored on Wall Street, with valuations improving over the past year. Healthier financial statements will support access to capital despite economic uncertainty and higher costs of borrowing.
Business leaders universally plan to increase their IT budgets and prioritize IT infrastructure projects in 2024, which should bolster industry growth.
Although deal volume was down in 2023, deal value improved closer to 2022 levels in the second quarter of the year. Deals are happening between smaller and mid-sized firms, with big tech mostly absent. The most activity has been in the cybersecurity and AI start-up sectors.
Analysts are mostly bullish that M&A will pick up in 2024, with median M&A valuations in Q2 2023 of $45 million. That’s good news for start-up tech founders looking to grow through M&A or sell in the short- term.
“Between inflation, recession, workforce struggles, and hindered access to capital, businesses will sink or adapt so they can swim. A big part of adaptation will occur in the AI space. This has already affected all aspects of the PE landscape. AI adoption is much like the adoption of any new technology or process in a company. Following a deliberate plan and taking measured steps in innovation are the key to unlocking AI’s potential.” JON HILTON, SHAREHOLDER, CONSULTING & BUSINESS INTELLIGENCE
Key Business Topics for the Technology Industry in 2024
A cautious, but growing optimism about company revenues despite concerns about a possible recession have companies in our survey planning to increase their IT budgets to update their infrastructure and focus on security concerns.
Technology companies should be ready for increased market demand by continuing to attract talent from the 2023 pool of big tech layoffs and by building visibility for their products and services through sales and marketing. When taking on new customers or projects, back office efficiency is critical to support timely receivables and to deliver incentives for key talent retention.
Deal volume and valuations of technology companies have significantly decreased since the frenzy of 2021. However, the old axiom of buying low will fuel VC activity in the tech industry through 2024; early-stage and standout start-ups will mature in the next 12 months to roll out products and services.
The lesson here is that technology companies with a solid business model and management team can attract financing and partnerships in the coming year, boosting their valuation for growth and/or exit.
“AI, finance and marketing tech are hot investments for 2024.” TECHEU
2024 Outlook for the Technology Industry
Following massive layoffs and sidelined financing, tech analysts are bullish about 2024, with expectations that AI and cloud computing investments will climb as much as 25% in the coming year.29
Pent-up expectations and rollouts of new products and services alluded to by big tech are fueling Wall Street optimism even as a discarded talent pool reconsiders their options and loyalties. For small and mid-sized technology firms, the prospects of financing should improve in the coming year with right-sized budgets and a focus on growth and talent retention in their core business areas. For companies looking for M&A deals or exits, this climate should also improve across sectors.