Four Shocks
The software industry has suffered 4 shocks in the past two years.
Table of Contents
First shock
The first shock came when offices closed and an immediate need for remote collaboration tools arose. Not all companies have been able to implement it easily. The growth of some has been affected. This shock has become an opportunity for agile teams to try out a 100% remote working mode, quite different from the hybrid mode that prevailed before.
One of the most symptomatic examples of this first phase was the 30-fold increase in the use of Zoom. Another example is food delivery apps, whose user numbers grew by 41%, a trend already clearly visible in the onset of the crisis in Google searches.
Second shock
The second shock, this time positive, is linked to the digitization of activities. The remote working mode has led to a revolution, including in sectors that had been preserved from it, such as administration. A striking example of the digitization of public administration is that 47% of all local government offices in Germany have introduced new services online since the start of the pandemic. This development has spread to the whole of the EU.
This was undoubtedly an opportunity, especially for domestic companies versus those that relocate. Indeed, policies have become more protectionist. Despite the almost immediate drop in production that led to a 6.1% drop in GDP in the EU (2020), most software companies thrived on a spike in demand for services.
Third shock
The third shock, also positive, was a gradual economic recovery from the weakening of COVID. Production levels have increased markedly as a result of the combined effect of reduced restrictions and a financial boost at EU and country level. Eurostat indicated an 8% increase in the production of manufactured goods in 2021 compared to 2020 in the EU. It also had a positive effect on the IT teams, who were able to return to the offices and increase their efficiency. However, they discovered ghostwriting services that a distance working mode was more effective than face-to-face work. Reductions in office space followed.
This favorable situation has led to a boom in the job market and created a shortage of developers and other IT specialists.
Fourth shock
The fourth shock was the Russian-Ukrainian war which strongly affected the entire EU economy, including the software sector. This major disruption led to massive migratory flows, a straining of the supply chain, exports and, above all, the import of fossil fuels. The positive growth shock will probably be followed by a recession.
In this situation, large manufacturing companies are entering a survival mode. German car companies are beginning to cut their R&D budgets and the development of new vehicle lines. IT development activities are negatively affected.
The PMI (Purchasing Managers Index) is below 50, its tipping point. Additionally, PMI orders were down 10% year-on-year for major European economies. Recession is inevitable.
So what are the options for IT development companies in the troubled times ahead?
Temporary recession or technological crisis?
All the events described above modify both the behavior of manufacturing companies and that of end customers. The former have to deal with an increase in their production costs. The latter see their purchasing power drastically reduced.
The most obvious sign of the crisis in the automotive industry is the drop in new vehicle registrations (-20.3% in the first quarter of 2022), without this affecting the profitability of car manufacturers. The latter predict that German vehicle production will be cut by 700,000 units. A similar situation is observed in other industrial sectors, in particular due to soaring energy costs and plant shutdowns.
This could be a paradigm shift and the beginning of a decline. The less vital needs of the Human Being are gradually being left aside under economic constraint. It is useful to have Maslow’s pyramid in mind to anticipate future priority changes.
This working in tandem (production costs / purchasing power) has several consequences:
- Purchasing power dictates final prices. If it does not improve, it will be increasingly difficult to optimize production levels without reducing projects.
- SMEs are the first to be affected because they are generally less competitive than large companies.
- Customer satisfaction may not suffer from the halt in industrial projects, for example from the reduction in the pace of car renewal. This reduction in the number of industrial projects would lead to bankruptcies among SMEs whose activity was hitherto linked to industrial projects.
- Artificial EU and government support for the tech sector, including software, could decline significantly due to dwindling central bank reserves and rising inflation.
How to prepare your business for the recession?
Several types of actions can be taken to limit the risks. The message is clear: you have to put yourself in “survival” mode. We therefore distinguish 2 types of measures to be taken:
- macro level
- mic level
Actions to be taken at the macro level
The situation at the macro level is beyond the control of companies. There is no choice but to adapt. However, there is nothing to prevent you from reorienting yourself to find the most attractive macro markets, whether at sector or geographic level.
For IT development companies located in Europe, time zones make it impractical to service American clients. Instead, we advise you to look at the Gulf markets, where prosperity is assured thanks to oil and gas revenues. The time zone varies within a range of +1 to +3 hours, which is very convenient for working together and synchronizing teams.
Another option to counter such a crisis could be a reduction in the price of services/licenses in order to make IT services more affordable for their customers. This will have an obvious negative impact on the IT job market, but in our opinion, most established companies still have a sufficient margin of safety and they will be able to at least “freeze” their teams without threatening their survival.
Micro Level Conditions
Micro-level metrics build on ongoing project and team optimization steps. The priority is to retain key customers.
Another measure would, unfortunately, be a change in the human resources policy. In a “survival” mode, it can be envisaged to freeze hiring Medical Ghostwriting Services or even to lay off. Young graduates would be directly affected.
We also refer you to the 9 micro measures that we have discussed in this article. In particular, we discussed the flexibility of the human resources policy.
Conclusions
There are no simple answers to the problems described above, but there are a few options that every IT development company can take to minimize losses and get through uncertain times.
A recession is not yet a crisis. It can therefore be used to lay the foundations for a future economic recovery. The diversification of customers and geographic markets, combined with a judicious recruitment policy, is, in our opinion, the key to sustainable growth.
