Cesar CantuBusiness leaders in the US are feeling optimistic about the economy in a way they haven’t in years, feeding the hopes of tech service providers who’ve spent most of that time dealing with client uncertainty and considerable slowdown in their project pipelines.
A set of surveys and business reports published during the first months of 2024 point to a brightening in the eyes of CEOs and other decision makers. Following several waves of macro crises –from the Covid pandemic, to the Russian invasion of Ukraine, high inflation and supply chain shocks–, it seems as if businesses are finally seeing light at the end of the tunnel.
The latest CEO Economic Outlook Index –published by the Business Roundtable, a CEO association with over 200 members from the US– pointed to “signals of a resilient, accelerating US economy” in the eyes of business leaders. The overall index scored above its historical average for the first time since 2022. There was an increase in the index for staff expansions, as well as strong jumps in the indexes for capital investment increases and improved sales expectations.
Key takeaways 🧵
The overall Index increased by 11 points from last quarter to 85, slightly above its historic average of 83 for the first time since 2022. pic.twitter.com/lQvjZOoXxV
— Business Roundtable (@BizRoundtable) March 6, 2024
The Conference Board’s latest “Measure of CEO Confidence” landed above the optimism threshold for the first time since Q1 of 2022. Although optimistic sentiment prevailed in the latest edition of the Measure, the Conference Board underscored that business leaders “remain cautious about risks ahead.”
A recent survey by PwC shows that optimism over the global economy doubled (from 18% for 2023 to 38% for 2024) among CEOs, this thanks in great part to concerns over inflation and macroeconomic volatility fading.
On the CFO side, a survey by the Federal Reserve of Richmond showed an increase in optimistic sentiment for the US economy among financial executives. Expectations for the performance of their own businesses remained considerably above their hopes for the economy.
Perception isn’t reality, but the fact that business executives are feeling less tormented by the macro landscape might allow providers of tech services to keep their hopes up for 2024.
Though the previous year was far from catastrophic for IT vendors, there were constant mentions of customers big and small agonizing over their budgets. Tech spend remained a priority among businesses, yet many top executives kept a tight grip on the flow of money, focusing on projects with a proven track record or that had the numbers to back up the risk.
As the first quarter of 2024 comes to a close, the US economy is showing the sorts of signs that might convince C-suite executives that the situation is taking a turn for the better. The US economy registered 3.2% growth by the close of 2023, topping 2% for six quarters straight and quelching some of the fears over the noxious effects of high interest rates.
Fed chair Jerome Powell has kept investors guessing over when interest rates will begin to be lowered from their 23-year high. Inflation increased slightly to 3.2% in February, feeding those uncertainties. Even then, some expect a cut to happen as soon as June of this year.
The comeback of cautious optimism
“Caution” and “optimism” seem to be the two prevalent words among service providers and market observers when describing the buyside’s state of mind. Wallets aren’t opening wide, per se, but business leaders seem to be reaching more confidently towards their back pocket.
“Cautious optimism is definitely coming back. Some of the monetary policy, what’s happening with the US dollar, inflation, etc., is creating a little bit of freedom there,” commented Keith Daser, Founder of consulting firm Delivery Digital Inc.
Some of the market’s leading providers underscored that, though optimism is rearing its head, the money isn’t flowing as freely as they would wish it to. Tech spend remains a priority, but it is being allocated in more strategic ways.
“With increasing cost pressures, clients remain cautious on spending and are reprioritizing their programs to deliver maximum business value,” stated Nilanjan Roy, CFO at Infosys, during the company’s latest call with investors. “Overall, while the near-term outlook remains volatile, we will benefit from the recent deal wins and the new account openings.”
A similar outlook was presented by Accenture CEO Julie Sweet in the company’s most recent earnings call.
“The pace of spending continues to be impacted by the macro environment,” Julie Sweet stated. “All strategies continue to lead to technology and companies need to reinvent every part of their enterprise using tech, data and AI to optimize operations and accelerate growth. To do so, they must build a digital core.”
Shopping for shiny, new toys
The business world is going through a new cycle of disruption. AI’s worth is being put to the test in many a corporate office, and the ranks of true believers keeps growing.
The result is greater focus or at the very least interest in projects directly involving AI or which develop technologies core to AI capabilities in business. AI is the hot new thing in the market, and it has reached a point where everyone’s afraid of lagging behind.
There’s never been as much attention on IT from the entire C-suite. But they’re still unlocking all of the dollars—Keith Daser, Founder, Delivery Digital Inc.
“There’s huge pressure on organizations to use a lot of that spending on the new, shiny things,” said Keith Daser. “I think of the work around AI, the work around business apps, the work around those business transformational IT spends, that’s where we’re seeing a lot of the spend go to, which is creating a ton of pressures.”
“There’s never been as much attention on IT from the entire C-suite,” he added. “But they’re still unlocking all of the dollars, so IT leaders specifically have to get creative on where within the piggy bank this is coming from.”
Infosys and Globant painted a similar picture in their latest earnings calls. Infosys CEO Salil Parekh spoke to investors of “lower traction for digital transformation programs” and “increasing interest in Generative AI programs.” Globant CEO Martin Migoya stated that, at the end of 2023, there was higher demand for “projects with AI components.” Globant’s AI-related business, he added, “is outpacing the total growth of our service offering”.
The AI hype train has yet to show signs of slowdown. With big players such as Microsoft and NVIDIA reporting record revenues thanks to the technology, and newer ones like Databrick banking big on it, it seems as if the business case for AI is clear cut.
Things aren’t as simple, however. We’ve reported previously on how cautious optimism is reflected on tech spend. Even when business leaders are willing to take risks, they’re not just taking leaps of faith. AI projects, like any other tech-related endeavor in business, have to justify their cost with measurable, trackable data. In other words: sales pitches have to be more precise.
The latter provides an opening for nearshore providers, many who’ve already established themselves in the minds of business leaders as more affordable, quality alternatives to their onshore and offshore counterparts.
“Leading to this point, the pendulum was swinging towards businesses avoiding risk and sticking with proven local partners,” commented Keith Daser. “I think that as these pressures come into play, and as some of the different technologies level the playing field, particularly automation in service delivery, there’s an opportunity, short to medium term, for these nearshore providers to differentiate and actually recoup some market share. Because I feel the pendulum swings back and forth every five to ten years.”
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