Why did the market for technology services become so challenging?

Next Mile wrote this in September 2023 for a friend of ours in the custom software development business. Given our position between OEMs and services vendors, we have a rare perspective on both.

Markets, institutions, buyers, and competition have all changed behavior multiple times in the past three years, leaving some technology professional services (PS) firms for dead and the rest scrambling to adapt. Multiple factors culminate now, making 2023 the most challenging non-crisis market for technology services we’ve witnessed.

You’re not alone. Publicly, the recent bear market for tech services has gone mostly undiscussed. Privately, everyone’s busy figuring out what to do about it. Next Mile knows several dozen hardware, firmware, design, custom software, and software product implementation professional services firms, and most are experiencing some combination of these symptoms:

• Selling technology professional services suddenly became much harder. To quote one seller from a prominent mobile development shop, “When I started in 2018, I knew nothing, but my job was easy. Today, I actually know what I’m doing, but it’s not working!”
• New client acquisition feels unusually difficult. For incumbent providers, retention and account growth have both been decent to good, but replacing clients who inevitably churn has been challenging to say the least. Projects became vastly more difficult to sell compared to any productized offering, capacity-based team-in-a-box, staff aug, or subcontracted arrangement.
• Pricing power has dropped in most disciplines, but has increased in some. Custom software disciplines like UX, interactive development, management, strategy, and QA seem to have it worst, whereas firmware and (AI-related) data engineering continue doing well. Bread-and-butter hardware design services, software product implementations, and managed services chug along at normal pricing, but reduced volume.
• Small tech layoffs are happening right now. Yes, big tech layoffs grabbed headlines earlier in the year, but today’s layoffs will prove meaningful, too. Smaller implementers’ disruption breaks projects, hinders progress for thousands of customers, and puts those delivery firms’ survival at risk.

Let’s look at probable culprits in the market, competitive, buyer, and provider landscapes.

“It’s COVID” or “it’s the economy” may be true, but they’re not helpful or descriptive. Viewing today's softness for technology professional services as a series of smaller past, present, and looming phenomena puts the situation in sharper relief:

• Abyss of economic uncertainty. Stare into the whirling paradox: inflation's soaring today but not tomorrow, oil drops then shocks then drops, asset prices smother dreams while forever on the precipice of collapse, and now AI will deliver salvation but take your job within a year inside a record-tight labor market. For technology PS companies, understand that your customer’s customers can’t behave predictably, so your customers are busy trying to crack that code, reducing the certainty and urgency behind their strategic and budgeting decisions.
• Demand comedown. Lockdown pulled demand for goods and technology talent forward from the future into the present throughout the pandemic era—now the inevitable slack has arrived. Compounding the demand pull is counterdemand: what was gorged on during the pandemic era is necessarily less popular now.
• Stimulus hangover. An unprecedented volume of money entered the economy through businesses during the pandemic. It had to go somewhere, like technology professional services, but now it’s gone. Stimulus could return—keep an eye on U.S. government debt service, near-term economic activity, and per usual, political handouts.
• Return to humanity. Not a return to “normal”. Frictionless, digital, on-demand crypto-utopia was the most recent inevitable future, but the resurgence of human-centered services like restaurants, tourism, and transportation rebalanced the equation. Scan your socials and witness your friends making YOLO experiential purchases like foreign travel, fine dining, and similar. I don't buy the "temporary reactance to being cooped up" explanation for the shift back. We've had a mass rethink: part unspoken celebration of not being dead, part needful self-embrace to wring droplets of agency and enjoyment into lives otherwise consigned to...this.
• Bonus depreciation rampdown. U.S. Internal Revenue Code Section 179 enables businesses to expense 100% of the purchase price of qualifying capital purchased during the tax year up to $1,160,000.00 with bonus depreciation rules applying beyond that. Technology professional services classifiable as research and development by the purchaser, a.k.a. much of what providers sell, can often be depreciable. Trouble is, tax rules changed, and now bonus depreciation ramps down to 80% 2023, then drops to 60%, 40%, 20%, and finally 0% each year afterwards, effectively capping business’s ability to invest and receive tax benefits for doing so somewhere around $3M, in theory. No one fully understands the implications of this yet, but it’s creating caution.
• Corporations are cutting back on digital, mostly wisely. In interactive, they’re axing or downsizing secondary digital programs that don’t deliver core customer value. In connected products, they’re folding formerly-special digital disciplines down into standard product development processes. We ourselves drove some of this for clients throughout the second half of 2022 and the first half of 2023.

Any of these phenomena would hobble the market for technology professional services, but now they’re all happening concurrently.

That depends entirely on who you see as your competitors. If you, as a PS firm manager, view other PS firms as your chief competition, then the answer is “not really”. You’re all fighting over less lunch and may not realize who you’re really up against:

• Doing nothing. Seller’s enemy number 1. Given the shifting ground your prospective customers are on themselves combined with their overburdened and overstressed staff, doing nothing’s bigger than ever. Sprinkle on decent interest rates, and there’s minimal penalty for hoarding cash. When your prospects can’t execute their initiatives with either strong certainty or acceptable risk, they’re unlikely to find a business justification, a budget, or enough internal bandwidth to shepherd something forward. It was nice to meet you, we’re going over here now.
• Products are the number 2 experience that professional services compete with, primarily on the dual promises of speed (“it’s 90% there”) and ongoing support. It’s not all rainbows in product land—churn’s usually higher than expected, margin’s lower than expected, and mounting costs or consolidation destroys companies as fast as they’re created. Implementations usually remain necessary, too (as ever that last 10% takes 50%+ of the effort).
• Fantasies about AI. Everyone in tech knows that AI-generated code requires human control, curation, and integration. Outside of tech, imagination and assumptions about AI code reign. Remember, you’re up against the perception that AI has (or should or will) make you obsolete, not the facts.
• Hyperspecialists. Unicorn hunting isn’t just for hiring managers anymore. “Oh, you know Angular 16 but don’t specialize in 15? Deuces…loser.” When you’re selling services, you’re in the business of smart people who learn and discover things, so hyperspecialization feels self-limiting and abominably dehumanizing.
• New vein of talent. Big tech’s layoffs put applicants back into the labor market, making prospect companies even likelier to onboard internal technology talent instead of seeking an external firm.

Minnesota’s notorious billboard personality Kris Lindahl always says “your biggest competition is the experience customers get from the rest of the world” and he’s more right here than ever.

Buyers and influencers inside customer organizations have evolved over the past ~8 years or so, thinking and acting very differently than before. Combining the aforementioned market and institutional contexts, technology’s track record for the average business, and recent shifts in staffing and skills, and you get a world where:

• More technology staff work inside client organizations. You’ve heard about the “skills gap”, but that doesn’t tell this story. If you, as a business, must deliver value through a digital channel, then lacking your own technology staff is a strategic threat. Full dependence on an external agency becomes an even uglier strategic problem, placing real savings and earnings in someone else’s hands, creating a gap many companies close with their own digital experts. This phenomenon also explains why staff augmentation remains popular, and why team-in-a-box worked through the late 2010s: internal technical leaders get the skills without giving away the control. Buyers and influencers often perceive less uncertainty this way (versus trusting your process).
• DIY is increasingly pervasive. This aligns with a. budget constraints and b. continued productization of software-solvable problems, and c. more software types working directly for clients as mentioned above.
• Buyers prefer direct relationships. Most buyers prefer 1-to-1 relationships with the purveyor of whatever technology backbone their software will hinge on, even if that means they’ll wait in a long line to choke that “direct” throat. Integrators and PS firms can feel like middlemen who bring nothing but the sacraments and rites of process and inaction.
• Buy vs. have. I can buy from you, Mr. PS Firm, and endure your 50-step miracle process, or I can click here and have now. Most people don’t want to buy at all, they want to have. Digital products offer the perfect alternative: a demoable simulacrum confusable for an immediate reality, even though its tailoring will take real effort.
• Conditioned disappointment pervades. Add a dash of cynicism to the previous point. Increasingly, buyers protect themselves from digital failures, failures they see as inevitable based on past experience. To quote one corporate buyer of technology products and services, “I can either be disappointed fast or disappointed slow. If a product has 70% of what I need, I’ll pick that and suffer the consequences. I’m going to be disappointed anyway.”
• Ghosts of failure and missing ROI haunt prospects’ outlook. In many cases, more cases than you would ever believe, PS firms’ customers are still waiting for their digital investments made in the 2010–2015, 2016–2019, and pandemic eras to bear fruit. The wait for tech to pay off goes all the way back to the 1970s. Worse, the merits and specifics of your customers’ investments don’t matter if they didn’t work: failures train people in the institution to believe that digital’s costly or bad, so they'll react with “we tried that”, even if it’s not specifically true.
• Stakeholders are desperate for endings. It’s a cold fact, but your buyers would prefer you weren’t so necessary for so long. They want you to finish, they want your CapEx depreciable, and they want your OpEx off the books so they can make money with the thing you built.

In business as in life, there are things you should fight and things you should accept. It’s up to you to decide how to handle these!

Yes. Definitely yes. Next Mile helps customers procure and manage a lot of technology professional services. Being on the receiving end of innumerable pitches, proposals, and delivery milestones on clients’ behalf, we’ve gazed on in astonishment at countless unforced errors like:

• You don’t have a “thing”. “We do X”. “The ______ team”. Hyperspecialists have an undeniable point here: in a limitless sea of providers, potential buyers can’t orient you when you sell generic software engineering, putting you in line to be another do-everything promiser even if you’re the GOAT. The clearest and loudest win, not the best. Swipe right for scrutable firms, swipe left for tryhards.
• You sell process, people, or plans, probably in nebulous sprints and story points. Your customers speak duration, dollars, and dates, and their customers expect the same clarity and commitment from them. You demand equivalent performance from your lawn care service, babysitter, and gym membership, so stop the obfuscation.
• You sell with a coalition and a 100-page deck thinking it demonstrates your pantheon of talent. All this does in a corporate pitch is sow confusion and ensure that you spend the first 40 minutes making intros and the next 20 “passing the baton”. You’re not renegotiating a disputed border at the U.N., you’re trying to help somebody! Follow the (Sith) rule of two (one seller, one technical expert) to avoid wasting your prospects’ precious time.
• “We can do that” raises hackles. With budgets more precious, all buyers are extra weary of the “sure, we can do that” behavior they encountered from overconfident professional services firms in the past. Yes, CS experts can learn any stack, but buyers hate, hate, hate “pay to learn”. They’re searching for a specific answer to a specific problem, not panacea engineering.
• You’re evasive about selling outcomes. Instead, sell a solved problem for an acceptable price. This requires you listen, understand, empathize, and put skin into success instead of risk-managing your way into interminable projects and strung-along clients. The beauty is that outcomes give your doers attainable targets.
• You still make your problems into customer problems. They’ve been wise to this for a long time now. No customer cares about your internal calendar or keg tapping rituals, just make sure it doesn’t impact them. More and more, clients have no issues telling you “that’s a you problem.”
• You behave like a factory, putting too many steps of service between the customer and their desired outcome. Not only can your company’s complexity become the customers’ problem, overcomplication dehumanizes the customer experience, adds confusion, complicates accountability, and casts you as a faceless, insincere entity despite every intention to the contrary. Faceless professional services? Nice oxymoron. We’ll author a more detailed overview of the steps of service in digital later.

Don’t beat yourself up too hard if your firm is in this list. Don’t think solely in overly-simplistic “rights” and “wrongs”, either. More important are “signal actions” and “noise activities”. Valuable actions create signal, valueless activity creates noise. The ugly part is that you can be doing “right” things that were signal 10 years ago but became noise recently.

Admittedly, we’re light on answers. Our advisory business is a bit different from technology fulfillment, and this situation is unfolding as we write. You can at least fix the “you” problems:

1. Position and focus your identity (thanks, DK, for these):
   1. Who’s your one customer?
   2. What problem do you own?
   3. Why are you better?
2. Simplify your offering:
   1. Rewrite them as if they were products.
   2. Identify the outcomes you repeatedly deliver.
   3. Understand how the customer will experience a given offering. Start by defining it and then see if it’s true.
3. Go on a process diet:
   1. Write down all the steps a customer endures to get what you deliver. Seriously, make the list just to see how long it is.
   2. Ask yourself if this is how you would want to be served.
   3. Pare down your steps of service, focusing on interaction points, handoffs, and especially deflections (“Well, I have to ask so-and-so…”).
4. Review your sources of friction with customers and make changes:
   1. Analyze past incidents through the customer’s lens.
   2. Solve for identified difficulties.
   3. It’s hard to overcome defensiveness, but remember, internal perspective on service challenges deserves less weight than given because you don’t buy your services.

This work cuts directly at the heart of your business, so it will prove grueling…and worth it.

Talk to your industry friends openly and honestly. Nearly all of the search-term-relevant journalism adjacent to this topic is marketing puff.