How to Build Technology Market Forecasts In Uncertain Times
Tip No. 1: Use scenarios
I now operate with three scenarios for the US and global tech market.
- Right now, the best-case scenario assumes that the pandemic’s infection and death rate in the US and Europe will follow the path of China, Singapore, and South Korea, with a peak in Q2 2020 and the resulting two-quarter recession being steep (with US real GDP down as much as 12% on an annual basis in Q2) but an economic recovery starting in Q4 2020.
- A worse-case scenario assumes that the pandemic’s public health impacts will last through 2020, until a combination of shutdowns, quarantines, improved detection and treatment, and new vaccines brings it to a halt. In this case, the recession would last for four quarters and real GDP for the US would fall by 4% in 2020 and another 2% in 2021.
- In the worst-case scenario, second waves of COVID-19 reappear in countries that had appeared to tame it, and the pandemic lasts into 2021. Economic stimulus efforts prove insufficient to halt the downturn until well into 2022, when a weak economic recovery begins.
Tip No. 2: Tap unconventional data sources
As a tech market forecaster at Forrester, I normally use as inputs data from government statistical agencies around the world as well as data on the revenues of over a thousand tech vendors. However, this data comes out with a lag of at least three months (one calendar quarter) and often several quarters.
To look ahead to the state of economies, I have relied on economic forecasts from the International Monetary Fund (IMF) and the Organisation for Economic C0-operation and Development (OECD). For sectors of the tech market, I have used revenue projections for leading vendors by equity analysts, as posted on Yahoo Finance. But these forecast sources are also lagging, so I have turned to other sources.
- The economists at major investment banks last week came out with their forecasts for the US economy. Goldman Sachs projects a 24% annualized rate of decline in US real GDP in Q2 2020, following a 6% drop in Q1. JPMorgan Chase forecasts a 14% fall in Q2; Bank of America, -12%; Deutsche Bank, -12,9%; and UBS, -10%. I will use these as reference points in preparing my own forecast for US economic growth, which will then drive my forecasts for US tech market growth.
- For industry tech market projections, I have normally used data on gross output and tech investment by industry. But those come out with even longer lags, so I have started to use data from the U.S. Bureau of Labor Statistics on employment by industry to map out where the economic impacts of COVID-19 and its containment efforts will be. These are imperfect measures of economic output or tech market activity. Employment is only loosely related to revenues. Many industries such as restaurants, entertainment, lodging, or retail that are experiencing big job cuts spend relatively little on technology relative to revenues. But with adjustments, changes in employment can be used to predict changes in business revenues and output, which then can be used to make forecasts for what those industries will spend on technology goods and services.
- New data sources are continually emerging. For example, Johns Hopkins University has a website with continually updated data on the number of COVID-19 cases by country and location, which can be used to make predictions about geographic impacts.
Tip No. 3: Use some rules of thumb about how CIOs cut budgets when their company’s revenues drop sharply.
Every CIO with any experience in weathering recessions has a playbook of what to do when the CEO says to cut tech budgets. This playbook can be used to identify the categories of tech spending that will be cut sequentially over time as the outlook gets worse.
- First, cut hardware spending. Plans for replacing old PCs, servers, storage devices, routers, switches, or other hardware get scrapped. These are discretionary investments that make sense to minimize maintenance costs and support growth. In the 2008–2010 recession, US computer equipment investment dropped by 13% from the Q1 2008 peak to the Q1 2009 trough and communications equipment investment by 20%. Firms may increase spending in computer and communications hardware that supports work-from-home initiatives, but these will be exceptions, not the norm.
- Second, pare back the new project portfolio. This will impact spending on tech consulting and systems integration services and on software licenses and new cloud subscriptions. A project portfolio that was prioritized on the basis of return on investment should get reassessed based on business criticality. Some new projects that help the company cope with the disruptions caused by the pandemic should be retained or even expanded. But most new projects that don’t meet that test will get delayed or postponed. Any projects underway should get reviewed to see if they can be halted or scaled back. As a result, spending on contractors, consultants, and systems integration vendors will drop. In the 2008–2010 recession, tech consulting and systems integration services spending fell by 3.4%. New software license fees or new cloud software subscription fees associated with these canceled projects will also get cut. In the last recession, we estimate that software license spending for applications dropped by 13%. Growth in US cloud subscriptions, which were much smaller, slowed from 23% in 2008 to 12% in 2009 and 2010.
- Third, review cloud application subscriptions. This is a new area that was not a big factor in the 2009–2010 recession. Most cloud software spending is governed by multiyear contracts, which generally don’t provide for reductions in fees in the event of a recession. Still, many departmental purchases of software-as-a-service (SaaS) applications, which surged in recent years, are on yearly or month-to-month contracts. As CIOs review these SaaS app portfolios for duplicates and low usage or value, we can expect to see cutbacks in spending here.
- Fourth, renegotiate telecommunications agreements. Demand for videoconferencing and data services will undoubtedly rise as companies expand their support for work-from-home. But CIOs will try to offset those spending increases with lower rates on other forms of voice and data telecom services. In the 2019–2010 recession, US business and government spending on telecom services dropped by 5%. We can expect similar declines this time.
- Fifth, renegotiate outsourcing agreements. Many outsourcing agreements were initiated when the business environment was very different from today. The terms of payment are often fixed by contracts, but the threat of cancellation, even with penalties, can cause outsourcers to agree to renegotiate to lower costs. However, these negotiations take time. US tech outsourcing spending fell by 3% in the last downturn, with that drop showing up more in early 2009 than in late 2008.
- Sixth, lay off workers. This is usually the last resort for CIOs, but in extreme cases, they will do this. In the last recession, US spending on tech staff slowed in 2009 and was flat in 2010 but never actually declined.
Under the best-case scenario, we expect CIOs will go through step four. But under the worse-case scenarios, steps five and six will come into play.