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Tech Services Forecast For 2024

In every quarter in 2023, the tech services environment became increasingly more difficult due to a growing more-for-less mindset instead of a build-for-the-future orientation. The discretionary spend component of the market largely evaporated. Here is an analysis of whether that will continue to affect the tech services market in 2024 and what it means for companies’ spending decisions.

Before projecting what will happen within tech services in the coming year, let me define “tech services.” It is both the business tech services that companies provide internally for themselves as well as the tech services provided by their third-party service providers.

2023 started with a pullback on technology spending, closely followed by discretionary spending in tech services. The significant growth post-COVID changed to caution and now the discretionary spend component of the market has largely evaporated. Market sentiment turned from a build-for-the-future to a more-for-less orientation.

As we at Everest Group look forward to 2024, we see the more-for-less mindset continuing into at least the first two quarters and likely continuing beyond that. It definitely will lead to scarce discretionary spending. However, we believe this more-for-less sentiment will bring changes – even growth – to the marketplace.

Areas Of Growth In Tech Services in 2024

Vendor Consolidation Opportunities. The second aspect of growth areas is because during the COVID boom and the talent shortage that accompanied it, companies added a lot more third-party service providers to their mix. We now see a strong move to portfolio rationalization or vendor consolidation. Companies want to reduce the number of providers, create larger contracts with the remaining providers, and then use those contractual volumes to reduce costs. 

Modernization Movement. Well, one of the market factors in 2023 was the deceleration of the modernization movement, particularly the migration to the cloud. Migration to the cloud and the modernization that accompanied it created a significant component of the industry’s fast growth during COVID-19. That slowed down dramatically post-COVID in 2023.

We believe that modernization will continue to be slow during 2024 (at least in the way it was characterized post-COVID when companies believed that they should invest in moving large estates out of legacy into the cloud as an option value so that they could continue their digital transformation journey with a more flexible set of technologies).

Although there are still large legacy estates that companies want to move, there is no longer significant funding in the market to move those estates without a strong, compelling business case to move them.

The business case of cloud saving a company money was largely debunked. The unit price may drop in cloud; but once in a cloud environment, the quantity used causes the cost of components to rise. So, in a world where cost equals price times quantity, the price may be the same or lower. The quantity goes up because of the flexibility and the ability for businesses to use the technologies, and the total cost goes up.

Consequently, the move to cloud to save money is not a compelling argument. Having said that, there are many cases in which modernizing the underlying technology can reduce FTEs and reduce costs. We see a strong appetite to continue this, which we call self-funded modernization, where the modernization efforts clearly result in a lower run rate moving forward.

Nevertheless, there will be growth in this area in 2024. There is an ongoing appetite to modernize, but budget seems to be largely available only where companies can clearly demonstrate it saves money. The overall modernization market is clearly decelerated and is unlikely to return to the heady days of 2021 and 2022.

Digital Run Opportunities. Another area of growth is the area of digital run. Instead of companies investing in areas that have yet to be modernized, digital run includes companies that already made significant investments in digital tech in a business function. They want to add more investment in those areas with high-density tech because their business operations and their digital tech stack are now intimately connected. As the business needs shift, there is money available to adjust the tech stack to meet the business goal so they can become more aligned.

Generative AI Opportunities. A large area of growth for 2024 is generative AI. It is clearly a very powerful tool. 2023 has been a year largely of experimentation, recognizing the power of generative AI, largely driven by the marketing coup that ChatGPT created, which captured the imaginations of the world that it spawned.

There have been a lot of pilot projects, but we have yet to see those translate into production in any meaningful way. As we look at 2024, it is clear that, at least for the first two quarters, we expect the experimentation to continue. Only towards the end of 2024 do we expect significant movement in companies overcoming the change management, legal, and security issues and being comfortable enough with them to move into production.

BPS Opportunities. An area where we believe we will see accelerated growth in 2024 is the area of business process services (BPS or BPO). This taps into the more-for-less and the modernization secular themes where companies can combine technology and business operations to lower their operating costs. We see them reaching for that and accomplishing their modernization goals and their need to save money at the same time. Thus, the BPS segment is set to have another good year and likely will outgrow the technology services component of the marketplace.

Source: https://www.forbes.com/sites/peterbendorsamuel/2023/11/28/tech-services-forecast-for-2024/?sh=6cdeb7ad1977

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