There are a lot of factors that impact our ability to address technology in business terms. Some relate to the exploding complexity of technology, some to the slower evolution of business goals that technology might serve, some to external forces like regulations and the financial markets…it’s complicated. Right now, though, enterprises are telling me that their biggest challenge is navigating a business transition that’s accompanying a technical shift on one hand, and likely driving one on the other.
The global inflation of 2023 and the resulting hikes in interest rates created a pretty significant economic shift. By raising cost of money, it put profits under pressure. Because inflation was threatening purchasing power, it was difficult to increase sales, so cost management was a big driver. Then, as 2024 dawned, we saw at least the beginning of a return to normalcy. Interest rates haven’t fallen, but they seem to have stopped rising in most market areas. Buyers are getting more confident, and sellers are therefore less defensive. We’re not done with uncertainty, but we seem to be done with increased uncertainty.
The transition from good times to bad is always hard, but enterprises say that the transition from bad to good can be just as hard, and perhaps even more dangerous to navigate. The visible problem is that returned opportunities need to be addressed quickly or they’re lost to competitors. The less-visible but perhaps more sinister problem is that sometimes the cost-management period can hide or uncover (or both) flaws in business and technology planning that now have to be addressed, even as enterprises are trying to address returned opportunities.
Addressing emerging or returning opportunities is a combination of marketing, sales, and production, but the timing of those factors can vary significantly. We had a period of supply chain problems, for example, during which companies had orders on the books that couldn’t be filled. Obviously, a return to normalcy there meant prioritizing production and shipments. On the other hand, suppressed demand like we saw in 2023 requires marketing/sales priority when things start to open up again. Right now, 84% of enterprises tell me that they’re in a suppressed-demand-recovery scenario, 13% say they’re in a production recovery scenario, and the rest say they’re in both.
In tech terms, the difference in these scenarios is sometimes characterized according to what layer of the organization is hit first. Companies and the financial media call the customer-facing piece of a company the “front-office” piece, and the rest the “back-office” piece. Technical tools aimed at supporting workers and operations can be classified the came way, based on what layer the workers are in. So right now, a large majority of companies are looking at front-office issues.
This is part of the reason why I think we’re seeing renewed focus on software and reduced focus on network and IT infrastructure. When you need to target line operations you need application software to do it. This means software relating to sales and marketing support and CRM. The fastest path to linking new tools to operations is SaaS, which is why the Street favors SaaS companies like Salesforce in this initiative.
But at the same time, enterprises are struggling to make sense of their “cloud problem”. So far this month, the percentage of enterprises who are telling me that they spent too much on the cloud in the last year has grown to nearly 90%. There seems to be a corresponding increase in the number who are thinking about “repatriating” some of their cloud moves. Most of the stuff they’re talking about relates to online sales and support, so how do you reconcile that with the fact that front-office sales/marketing seems to be targeted for increased spending?
That’s essentially what enterprises are struggling with. Almost all of those who say they’ve spent too much on the cloud are questioning how they used the cloud, or whether they should have, rather than questioning the value of the applications themselves. It’s not what I did, but how I did it, in other words. Many (about two-thirds) admit to rushing out to address what they saw as the post-pandemic boom, taking advantage of the cloud’s ability to deliver something faster. They now realize that agility came at a higher price than they’d expected, so what they’re trying to do now is deal with the most egregious overruns.
This, of course, argues against “rushing out” to the cloud again. To try to reconcile these competing forces, enterprises say that they are expanding their usage of some cloud applications, taking advantage of their easy (but sometimes expensive) elasticity in the face of load, while at the same time looking at how they can cut cloud costs. Right now, that means changing or even pulling applications that aren’t “front-office”. It also means looking at shifting work to other cloud providers.
Google recently made news by eliminating its data transfer charges for customers who left Google’s cloud for another provider. Part of that was surely driven by increased regulatory scrutiny; nobody wants to wait for regulators to make you do something, lest they make you do something truly objectionable. You offer instead a couple of low-apple ringer concepts to draw off the ill will of governments. But part may also be due to the fact that companies facing a major cost to shift cloud providers could well decide to shift out of the cloud instead.
By mid-year, enterprises tell me that they believe their tech modernization will expand to back-office applications, which include ERP and production/shipping management. This is where they think they might (just might) see increased interest among their management in IoT projects. However, they do not see themselves jumping into public edge computing. The biggest reason is the once-bitten-twice-shy factor of having over-committed to the cloud, but enterprises almost universally believe that edge computing will be more expensive than cloud computing, less generally available and dependable, and thus even more risky a move. They want edge hosting done on the premises.
How about networking? There’s no current indication from enterprises that there are any network plans in the works that could increase spending on network equipment or services, period. In fact, there’s the opposite. Over half of enterprises want to reduce service costs, and over two-thirds want to reduce network capex. Everyone wants to reduce operating costs and improve availability. Network spending changes would have to come because of increased network demands created in turn from one of the higher-priority items.
All of this, of course, depends on whether there is actually an economic improvement this year, which depends on central bank interest rate policies. If interest rates were to rise, we could expect immediate and enormous pressure on companies to cut costs, which cannot be achieved through new projects because they’d take time. Cost-cutting would rule again, and impact every tech sector. Even steady rates, as opposed to early rate cuts, will defer any economy-driven shifts to later in the year. A lot depends on interest rate timing, so that may be the thing we need to watch most closely in the next couple months.
