Nearshore Americas

The Buyside Remains Cautious, Yet Digital is Still a High Priority

Buyside executives are still treading carefully when it comes to their spend on digital transformation.

In spite of the expectations of several Nearshore tech vendors, businesses have yet to shake their concerns over a potential macroeconomic downturn, leading to a “wait-and-see” approach to their tech spend and, when possible, to outright cost reductions.

That urgency to be extra vigilant of expenses, even in a segment that is generally considered as strategically important as tech, has been showing among businesses over the past two quarters. 

In their latest quarterly report (ended August 2023), Nike attributed greater overhead to “shifts in timing of technology investments to the remainder of the year.” Delta Airlines mentioned in July that they had several tech transformation projects running at the moment in relation to cloud. Company leadership doesn’t expect to have much space open for extra tech spend until some of those slots are freed.

“Most of the work that we are doing [on digital transformation] is clearly within the run rate, our CapEx run rate. I don’t anticipate any increase in capital as a result of that,” commented Edward Bastian, CEO at Delta, during the company’s Q2 earnings call. “A lot of work that we should start sun-setting by the end of 2024 in terms of moving our infrastructure to the cloud will start to dissipate. That’ll create even more capacity within the existing spend level for digital.”

Although Citi announced another US$3 billion dedicated to tech spend –following an ongoing digitalization trend among major banks–, the company emphasized its aim to become a more streamlined organization, which will require drifting away from third-party tech contracts.

“We’ll see those heads [staff] come down. It’s also important to point out that as part of our effort, there’s been in-sourcing,” stated Mark Mason, Citi’s CFO, during the company’s latest earnings call. “Keep in mind that there are puts and takes associated with that as we look at where we need to in-source versus use external parties.”

In the previous quarter, Mason mentioned “a shift in our investments from third-party consulting to technology and full-time employees” when it comes to executing Citi’s digitalization processes.

Hertz has also been moving away from third-party service providers thanks in part to its cloud  migration initiative. Company CEO Stephen Scherr stated in July that “the savings we will get are not just simply the kind of more conventional savings that come with simply being in the Cloud, it is the ability to move away from a reliance on third-party providers.”

More Focused Spend

Sentiment among tech vendors regarding their clients’ spending habits remained relatively unchanged between the past two quarters. Service providers are still noticing caution and greater focus on projects and technologies that have proven to be solid enough investments. 

CI&T CEO Cesar Gon mentioned that they’ve noticed “budget replanning” among the company’s top clients. Accenture CEO Julie Sweet pointed to a focus among business executives on “good time to value”, which has put more attention on “larger transformation deals”. TCS is also seeing a move towards larger deals “given client caution over the macro overhang [and a] reprioritization of spending from discretionary areas to cost optimization.” 

One of the few areas where tech spend seems less affected by exec scrutiny is CXM. Adobe stated as such in their Q3 earnings release, underscoring an climb in the segment “despite increased scrutiny of enterprise IT spend” and making specific mention of Amazon, Jet2, Lufthansa, SAP, Dollar General and other clients following this trend. 

Vendors are also hoping to see more opportunities coming from Generative AI (GenAI) solutions. CI&T’s CEO characterized GenAI as a “good door for a stronger 2024 in terms of demand.” According to TCS, the technology “continues to dominate our conversations with IT and business leaders in every market”, though the company keeps its reservations.

“There is demand, but I wouldn’t rate it to be very high. I think all directions indicate that this is something that will mature and the potential for embedding it and embracing it all across our IT services value chain is huge,” stated TCS COO N.G. Subramaniam in the latest earnings call.

A recent CEO survey done by KPGM shows that there’s enthusiasm among CEOs for GenAI. According to the survey,  57% said they are willing to invest in buying GenAI tech and 47% mentioned plans to develop the AI skills of their own workforce. The majority (62%) expect GenAI investments to pay off between three to five years; 21% see returns in less than two years.  

In spite of the avalanche of studies and media reports on the immediate future of GenAI in business, the landscape still feels mixed. CFOs have yet to be entirely sold on the technology, which has yet to prove as revolutionary as its more enthusiastic proponents make it out to be. Investments seem to be focused at the moment mostly on improvements to the existing portfolio of services, with AI-assisted customer care being among the most common applications.

When Will the Bonanza Return?

Smaller nearshore tech vendors previously told NSAM that they expected a tick up in overall demand in the last quarter of 2023 or early 2024, at the latest. Nevertheless, as the economic horizon remains uncertain and new global conflicts add even more macro pressures to the mix, their hopes might end up sinking.

Bigger players stuck to reserved language in their latest earnings calls, avoiding statements that could be construed as too optimistic or pessimistic.

“It’s hard to predict 2024,” stated CI&T CEO Cesr Gon. “We see good signs in these new bookings for Q4, but I think we will have more certainty about what’s going to happen probably by the end of this year or early next year.” 

Sign up for our Nearshore Americas newsletter:

Business leaders are responding to macroeconomic challenges in a variety of ways. There are certainly examples out there of businesses going full steam ahead with their tech spend, but the general trend seems to bend more towards cautious spending, stretching resources and making sure that previous transformation processes go through before jumping into another big bet.

Tech vendors are aware that they won’t be able to cruise and easily catch sales like it happened during the COVID and post-COVID years. Some have told NSAM that they know their organizations will have to “double down” their marketing efforts, doing a better job at informing decision makers about the actual, measurable benefits of their tech solutions, especially when the technology hasn’t had enough time in the market to prove its worth.

We’ll keep an eye out for what’s said during the last quarter of the year. We don’t expect the tune to change, though. The global economy still seems immeresed in a virtual “permacrisis.” If the previous years are any indication, businesses will respond with extra caution.

Cesar Cantu

Cesar is the Managing Editor of Nearshore Americas. He's a journalist based in Mexico City, with experience covering foreign trade policy, agribusiness and the food industry in Mexico and Latin America.

Add comment