The question spins round and round in the business press, in podcasts and at conferences: Are we in a recession?
Business updates from IT services giants (like Infosys and Wipro) and tech giants (including AT&T, Google, Microsoft and others) may provide some warnings signs (see news timeline further below in this article).
Amid the debate, much of the discussion fails to define the basic economic traits of a recession:
- Old-school economists defined a recession as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment, Investopedia notes.
- However, the National Bureau of Economic Research (NBER), which officially declares recessions, defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales, Investopedia adds.
Are MSPs Recession-Proof? The Good and Bad News
Within the IT channel, some pundits position MSPs as "recession-proof" because of their predictable monthly recurring revenues. Generally speaking, operationally mature MSPs are well-positioned to navigate a recession.
The good news as of July 2022: MSP and MSSP valuations have held up well — despite plummeting SaaS company valuations on Wall Street. Why’s that?
- Generally speaking, MSPs and MSSPs have always been valued based on their EBITDA (earnings before interest, taxes, depreciation and amortization). Sure, there are additional valuation metrics. But M&A in the MSP market has largely been a profit-based conversation for more than a decade.
- Meanwhile, SaaS companies until recently were largely valued based on their annual recurring revenue (ARR) — and many SaaS investors ignored bottom-line profits.
Still, the overall managed IT services sector certainly is not recession proof. The evidence: Even in a healthy economy, roughly 25 percent of MSPs are break-even or losing money each quarter, according to Service Leadership Inc., a ConnectWise business. Certainly, those money-losing service providers could face cash-flow pressures if their customers cut per-user head counts or scale back recurring services.
On the flip side, some pundits argue that MSPs can benefit during a recession. The thesis: As mid-size and enterprise businesses scale back their own IT hiring, they're more inclined to outsource IT services to MSPs and MSSPs. The thesis makes sense and may give some high-performance MSPs a lift. But we don't think a recession would cause an overall tidal wave of IT outsourcing opportunities.
Recessions Don't Stop Great Entrepreneurs
Regardless of the economy, remember that some of the world's greatest companies were launched during recessions and even depressions. Examples from The Great Depression include Publix Super Markets (1930) and Ocean Spray Cranberries (1930). And in the IT world, companies such as Apple (1976), IBM (1911) and Microsoft (1975) all launched during recessions. And Google (1998) and Salesforce (1999) launched just ahead of the dot-com implosion.
In my own experience, Amy Katz and I co-launched our previous business during the 2007-2008 financial crisis. And yet, that business grew every year and had a successful M&A exit by 2011.
Clearly, you can build and scale a winning business in a bad economy -- though the losers (remember all those dot-com deaths?) will generally outnumber the winners.
But Are We In A Recession?
Now, back to the question we raised in this blog's headline: We don't think MSPs should get hyper-distracted by the recession talk and debate. But we do think it's important to keep economic indicators and business developments in mind as you budget for the second half of 2022 and look ahead to 2023.
With those priorities in mind, here's a regularly updated timeline tracking various economic and business indicators:
August 25, 2022: India's top IT services firms are freezing or cutting staff bonuses, worried that tightening budgets at U.S. and European clients who are bracing for a recession will sharply hit their own profits after a pandemic-led boom, Reuters reported. The evidence: Infosys and Wipro recently told their employees they had reduced the variable pay portion of employee compensations, the report said.
August 9, 2022: Microsoft Employee Expenses
- Microsoft is asking teams across the company to rein in some employee expenses as the software giant tries to control costs in the current economic environment. Source: The Wall Street Journal.
July 21, 2022: Customers Delay AT&T Payments; Microsoft Scales Back Hiring Plans
- AT&T said more of its customers are starting to fall behind on their bills, a sign that rising costs are pinching many households even for services most Americans consider essential. Source: The Wall Street Journal.
- Microsoft is cutting the number of open positions in its Azure and security software businesses, though the company is still honoring offers that have been made and will make exceptions for critical jobs. Source: Barrons.
July 20, 2022: Google Pauses Hiring; University Endowments Fall
July 18, 2022: Apple, Goldman Sachs and Microsoft staffing updates; IBM Earnings
- Apple plans to slow hiring and spending growth next year in some divisions to cope with a potential economic downturn. Source: Bloomberg.
- Goldman Sachs will slow plans to onboard new employees and reinstate annual performance reviews paused during the pandemic, a strategy that has historically served to weed out laggard bankers. Source: Yahoo Finance.
- U.S. companies are facing a "new era" in which fewer people are entering the workforce and pressure to pay higher salaries may become permanent, Microsoft President Brad Smith said. Source: Reuters.
- IBM beat quarterly revenue expectations but warned the hit from forex for the year could be about $3.5 billion due to a strong dollar. Source: Reuters.
July 17, 2022: CEOs Express Economic Pessimism
More than 60% of CEOs expect a recession in their geographic region in the next 12 to 18 months, according to a survey of 750 CEOs and other C-suite executives by the Conference Board, a business research firm. An additional 15% think the region of the world where their company operates is already in a recession. Source: The Wall Street Journal.
July 12, 2022: Google Slows Hiring, Microsoft Layoffs and Small Business Pessimism
- Google told employees that it’ll be “slowing down the pace of hiring for the rest of the year,” according to an internal memo by CEO Sundar Pichai. Source: The Verge.
- The NFIB Small Business Optimism Index dropped 3.6 points in June 2022 to 89.5, marking the sixth consecutive month below the 48-year average of 98. Small business owners expecting better business conditions over the next six months decreased seven points to a net negative 61%, the lowest level recorded in the 48-year survey. Expectations for better conditions have worsened every month this year. Source: NFIB.
- Microsoft cut some jobs as it realigned business groups and roles after the close of its fiscal year on June 30. It said it plans to keep hiring for other roles and finish the current fiscal year with increased headcount. Source: Bloomberg.