It seems like, in very short order, we’ve moved away from a “growth over everything” mentality to one that focuses on operational efficiency, and this is true for startups and mature companies alike.
In truth, though, the shift probably happened slowly over time as the economy got shakier (or at least a growing belief that it was shakier) and companies decided to tighten the purse strings.
We’ve seen this play out in a number of ways. The most visible is the constant onslaught of tech layoffs in recent months, with Microsoft, Alphabet, Amazon and Salesforce all announcing big staff reductions. While the pace seems to have slowed some in February, more than 100,000 people were let go in January in a massive tech company purge.
Even though companies clearly overhired during the height of the pandemic, and there are still plenty of open tech jobs, the message is clear that cost cutting is taking precedence over growth investments.
We have even seen cloud infrastructure spending take a hit, an area that has been in constant growth mode for years. But things began to slow down in a big way at the end of last year, and AWS reported at its most recent earnings call that it was seeing growth drop into the teens in January.
As we reported at the end of the year, companies are still spending on tech, but they are looking at their expenditures much more closely. CIOs we spoke to were all taking a more controlled kind of growth, where each dollar spent is facing much more scrutiny.
They don’t want to shut the door on growth, but they want to look at things like operational efficiency and cutting back without adversely affecting the company’s core priorities.
The big question is how they do that, and do the financials suggest that they’re successfully balancing what could be seen as conflicting priorities between growth and efficiency?
What CIOs are saying
The CIOs we spoke to certainly recognize there has been a shift, and as they look at their budget priorities, they want to be smart about spending. They all said they want to look at efficiencies where it makes sense, with the understanding that the tech budget drives growth, and you don’t want to overcorrect when it comes to budgeting.
Monica Caldas, CIO at Liberty Mutual, said she’s looking at technology as a competitive advantage. She didn’t reduce her budget but has been carefully scrutinizing how she funds the company’s technology priorities. But that’s something she said she would do anyway, regardless of the macroeconomic environment.
“When I think about the CIO job, part of the mission is to maximize value creation. That includes looking at how you operate, and are you efficiently and effectively deploying the funding that you have. And so we have a cost-optimization framework that we’ve deployed. I would say it’s like three years now and we continuously tune that engine and that includes looking at procurement, maximizing the partnerships and value creation,” she told TechCrunch.
Caldas said they also look at the kinds of spending decisions that business units must make. “We’re continuing to evolve and tune our muscle of being more efficient and creating more value,” she said. “We have a framework in place that’s not a project to cut costs; rather, it’s a way of operating, and we continuously are scaling that across our operations.”
Sometimes it takes working with business units and fine-tuning the spending so it’s concentrated on the priorities most aligned with the business needs. “So where they kind of left me out to debate it one by one with my partners in the business before, we’ve now made some decisions to centralize and as a company, really focus harder than we had in the past on spending, and we’ve changed some policies and rules,” said Sharon Mandell, CIO of Juniper Networks.
She said that this is all done to maintain the overall success of the company’s core goals in the name of cost savings while still leaving Juniper in a good place if the economy really crashes. “So we’re being more careful than we were in the steady state before [the economic slowdown], so that if things do go sideways, we’ve already taken some advanced steps to manage the costs downward,” she said.
Mandell is by no means alone in her quest for efficiency. Alvina Antar, the CIO of Okta, said that she’s seen a need to “ruthlessly prioritize” expenditures. “So we’ve got budget, but it’s a matter of where we’re applying that budget,” she said. Okta has three many priorities as it sets out the budget, and part of that is aligning with the company’s market approach. CEO Todd McKinnon explained this approach in an interview with TechCrunch last year:
“We bought [Auth0] to change, and we bought them because we needed change to win this customer identity market,” he said at the time. “Our strategy is that we have to win both the workforce market and the customer identity market. And the only way we’re going to turn identity into one of these most important platforms for every company is we have to [own] both use cases.”
As Okta works to combine the two companies, it’s looking at ways to reconfigure processes that are being repeated across the organization, part of an overall strategy to achieve what Antar calls “durable growth.”
“There is significant investment that is required to process reengineering, and we’ve made a company decision that we are going to prioritize scaling because we don’t believe that we can meet the market bets that we just described without the focus on scale,” she said.
What the market says
The CIOs we spoke with work for large companies; this is hard to avoid because smaller companies likely don’t have the CIO role filled. All the same, we were curious about what we’d learn from a few recent earnings reports to see if we could find in-market support for what the CIOs told us.
The CIOs quoted homed in on the importance of keeping their companies stocked with the tooling that they need to succeed, with a focus on ferreting out less efficient spend to ensure that their invested IT dollars go as far as they can. That push for capability with constrained costs may be turning up in how many seats of a particular tool that a company buys. Datadog, for example, noted in its earnings call that it is seeing “slower user growth with existing customers.”
There are signals that where spend is being controlled the most varies somewhat depending on company size: Datadog noted in its earnings that it is seeing larger companies be more cost focused, while Amplitude indicated more budget pressure from smaller customers during its own call. This means that we cannot simply listen to the CIOs and presume a blanket effect on spend; it’s going to be more nuanced than that on a per-category and customer-cohort level.
Even more, the impact of CIOs hunting for high-ROI spend could prove to be a boon for cloud-based companies. ServiceNow said in its recent earnings call that SaaS spending — hosted software — is expected to grow more quickly than software and general IT spend this year. And Atlassian detailed that cloud products potentially offering lower TCO for customers are appealing and helping the company transform into a more subscription-focused business.
If you are in the business of selling software, the news that CIOs are hunting for savings and only want to invest where they can ensure the biggest impact on their overall business’s momentum is not necessarily ill tidings. Sure, it may make certain new deals smaller, and it may be harder to add more seats.
But much as we learned in early 2020 when the pandemic hit, modern companies cannot run without software. Instead of a shake-out of spend, it appears more that we are seeing a maturation of the buy-side’s expectations. If you build something truly useful, you should be just fine.