I believe the services industry is at an inflection point, that is, there will be significant changes in the IT and engineering services paradigm. There are two drivers: the changing nature of the economy and the changing nature of IT and engineering services that companies are buying. The situation portends significant upheaval going forward, whether you are running an IT or engineering function or are a provider or vendor providing services to IT leaders.
Change #1: Economy and stagflation
Economic tailwinds are diminishing, and we have global high inflation, disrupted supply chains, and war, all contributing to the increasing probability of a recession – potentially even a sharp recession – in the US and globally.
How does that affect IT and engineering services? The global talent shortage defined the services market over the last two years. Making matters worse, nearly every company in the world is remaking itself into a technology company now. They engage their customers through technology. They compete through technology. They automate and digitize their operations. The actions unleash enormous demand for tech talent.
Although we are still in the early stages of that transformation, more and more companies now commit to both compete and run their companies using tech IT and engineering technology more than ever before. This drives a huge imbalance between demand and supply for engineering and IT talent, and the demand is building.
What will happen when this demand meets the economic contraction?
An economic slowdown will reduce some of the demand pressure. We can already see that as we examine recruiting companies, for example. In some sectors, there is a modest slowdown in the number of new placements. In addition, leading tech companies are starting to slow their hiring, if not stop it.
Thus, we see the early stages of parts of the economy starting to pull back on their use of IT and engineering as they turn themselves into tech companies. An economic downturn will slow it down. Rebalanced demand and supply certainly will go some way to address the situation. But it looks like there still will be an imbalance between demand and supply because of the shortage of tech and engineering talent, even if there is a sharp recession.
Wage inflation in tech and engineering is far outstripping wage inflation in other sectors. I think we are likely looking at a stagflation. In that scenario, companies will operate within an economic recession and within a scarcity of tech talent, which will continue to drive wage inflation for IT and engineering services. We will likely see stagflation that is much more aggressive in the tech talent space than it is in the broader population.
Change #2: IT modernization and cloud market
The cloud market coming out of the COVID-19 crisis was driven disproportionately by the drive to modernize the tech stacks. Digital transformation drove the argument that companies needed to move their entire tech stack to the cloud so they would have the capability to add new technology to that tech stack. This led to headwinds driving the demand for IT modernization.
However, the last few miles of moving applications to the cloud prove much more difficult and expensive than in the early days of the cloud, and moving is much more risky now.
In addition, capital is more constrained now. With interest rates rising, there is less capital available to drive modernization.
As a consequence, the change coming to the IT services market will be a shift from broad-based modernization to focusing on generating specific business value. Companies will seek to understand that business value through the lens of product management and the discipline of product management.
Companies are adding product managers fast, first in their customer-facing technology. Product management wages almost doubled over the past year, and I expect this trend to continue.
Pivoting from broad-based modernization to a focus on investing in IT that generates specific business value will drive a continued talent shortage.
I believe we will face a much more aggressive stagflation environment where tech wages rise much faster than the broader rate of inflation for tech talent.
Change #3: ESG
The focus on environmental, social, and governance (ESG) principles increasingly permeate every department in companies. Companies need to build sustainable IT infrastructure and demonstrate progress in reducing the environmental impact of their operations.
Companies must also drive diversity, inclusion, and social responsibility in their behaviors and investments. They must also monitor how their service providers and vendors behave in these areas.
I speak with more and more firms actively seeking to understand how to authentically apply the ESG principles to their day-to-day operations, especially in their IT and engineering operations.
What is the most prudent activity a company should take now, given the significant changes coming to the market, which I just discussed? Considering a coming recession and likely stagflation environment, my advice is to not lay off IT or engineering talent or slow down hiring. In a talent-constrained world, companies need to continue to aggressively build their talent base for the future.