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Tech vs. Enterprise in a Recessionary Environment

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I’m not in the business of predicting macroeconomic trends. I have no interest in speculating about the potential severity of a recession or even if the recession is going to happen at all. But I have been thinking about how a recession might play out for both producers and consumers of technology.

If we consider 2020 a black swan economic event from which it’s hard (or even misleading) to extrapolate trend lines, what we’re potentially looking at is the United States’ first cyclical recession since the 2007-2009 Great Recession. The standard approach to building a tech stack pre-2007 looked very different than the industry does today.

Which means we’re potentially facing our first economic recession since cloud computing and SaaS services became a commonplace approach to building tech stacks.

Tech companies and their customers are operating in a fundamentally different technical context than when they went through the last recession, and now there are different mechanisms and levers available to them. Two levers I have been thinking about are infrastructure and staffing.

Infrastructure

Purchasing servers requires extensive upfront investment. In ye olden days where all infrastructure was procured this way, during a downturn you could try to live off your balance sheet; you could extend the life of depreciable assets and kick CapEx projects down the road. Long-term capital commitments are more difficult to incrementally turn on and off.

The financial mechanisms available to adjust spend levels increase when infrastructure is on demand. There are more resource options to choose from. There are more on-off switches. There is more elasticity in consumption. In theory, enterprises should be able to be more responsive in this environment.

This, however, is the on paper argument.

  • On paper, flexibility in spend levels is powerful. In actuality, we’ve seen that it can be extremely challenging to control cloud spend. Enterprises don’t know always which levers they should be pulling to reduce their cloud bills.
  • On paper, cloud resources can scale down and even scale to zero. In actuality, not all cloud architectures are robustly designed enough to responsively scale down.
  • On paper, companies should have an improved ability to reduce their on-demand spending (and can even use economic downturns to negotiate with vendors off-cycle.) In actuality, many companies consuming a significant amount of cloud resources have multi-year contractual spend commitments in place.

Yes, the tech stacks are different now. But I am not sure to what degree the average enterprise can turn things off and scale down. A lot was made of the “CapEx to OpEx” financial implications in the early cloud era. I’m curious to watch how that plays out in practice in an economic slowdown.

Staffing

Virtually all of the major tech firms have now done a round of layoffs. (Gergely Orosz is doing a great job keeping tabs on layoff news in his Pragmatic Engineer newsletter.) Part of this is in response to the macroeconomic climate. Part of it feels like a bit of a contagion.

Once a few firms within a sector lay off workers, it offers cover for other companies to follow suit. It makes it easier for the CEO and C-suite to conduct layoffs if everyone else is doing it too.
Jack Kelly, Senior Contributor Forbes

The current economic environment gives market permission for cuts and layoffs that are not directly related to the recession. In some cases tech companies overhired or hired ahead of demand curves. Some organizations made bets on business units that are underperforming. Whatever the reason, companies are now taking the opportunity to reassess their staffing levels.

Engineering salaries at top-tier tech firms have grown tremendously in the past decade, and enterprises looking to staff their technology teams have struggled to offer competitive salaries. The outflow of talent from tech rosters β€”and the number of technologists on the marketβ€” potentially gives enterprises an improved ability to compete for talent.

Again, at least on paper enterprises are in a position to benefit from the recessionary responses from tech companies. Whether they are able to capitalize on it remains to be seen.


Related posts: Maybe the Real Tech Debt was the Friends we Made Along the Way

Image credit: Licensed via stock.adobe.com, paul_craft

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