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Join us as we take a closer look at a few of the most intriguing topics from the EY article Top 10 opportunities for technology companies in 2023. The episode begins with an exchange on the importance of technology in today’s business landscape and views on the current and future market for mergers and acquisitions (M&A).
The hosts discuss how companies are focused on the profitability of their core business and how an agile mindset is needed to deal with the current challenges with talent and workplace models. They then delve into the impact of supply chain challenges, followed by dialogue on the perpetually increasing significance of sustainability for tech companies.
The hosts expand on how companies are transforming their business models to meet customer needs and maximize revenues. Then they dive into topics that include cloud computing, cybersecurity measures, data analytics and automation. They expand on each of these and their potential impact on business operations. The hosts stress the need for the ongoing evaluation and updating of technology to stay ahead of the curve and remain competitive.
Hear insights from:
Ken Englund, EY Americas TMT Industry Markets Leader
Tracy Watt, EY Global TMT Sector Strategy, Operations and Solutions Leader
Key takeaways:
The hosts believe the tech sector is fundamentally strong and will overcome adverse conditions as a driver of economic growth, even though they expect the volatility levels to remain high on most fronts.
For your convenience, full text transcript of this podcast is also available.
Welcome to the EY Tech Connect podcast, where we have candid conversation about the most pressing priorities facing tech, media and entertainment, and telecommunication companies and provide strategic insights on the key issues that matter to them. As industry ecosystems evolve in new directions, we use these discussions to reflect on how companies can not only take advantage of new opportunities but also tackle emerging challenges.
Tracy Watt
Hello, and welcome to the EY Tech Connect podcast. I’m your host for today, Tracy Watt, Global Strategy Operations and Solutions Leader for our technology, media and entertainment, and telecommunications industry market. If you’re new to our series, welcome and thank you for joining us. Today, we will be discussing some of the key areas we think technology companies should be focusing on in the as outlined in our annual report entitled, “Top Ten Opportunities for Tech Companies in 2023.” We won’t cover all of them today, but we will focus on a few of the top ones that seem most relevant to the market right now. I’m joined by two of my colleagues, Ken Englund, EY Americas TMT Industry Market Leader, based in the Bay Area, and Olivier Wolf, our Global TMT Strategy Leader from EY-Parthenon, based in London. Thank you gentlemen for joining us on EY Tech Connect.
Ken Englund
Thanks for having us.
Olivier Wolf
Thanks, Tracy.
Watt
I think the most pressing piece for us to talk about is the current and future M&A market. We’re seeing a lot of volatility in the market — the high inflation, energy crisis, war in Ukraine, a frozen PE market and falling consumer confidence — none of which paints a pretty picture for the market right now. Olivier, what do you think? Will the M&A market continue this way, or are there opportunities for tech companies to take advantage of in 2023?
Wolf
Thanks, Tracy. Well, it is true that the tech M&A market has slowed down in 2022, particularly in this second half of ’22, due to the volatility that you’ve outlined. However, we do expect to rebound in 2023, and this is for three reasons. Firstly, as volatility drops, deal pricing will stabilize, and the financing cost of the deal will come down. And that means that prices will settle at a lower level than in ’22 where those prices were particularly frothy. And this will bring corporate buyers back into market and will make them more competitive than they have been in the past compared to private equity. That as applied previous years, not just in ’22, private equity has been a very active buyer. And then my final point is that private equity will come back to the market as well. They still have billions of dry powder to deploy. They’ve been very active buyers in the tech sector, and they will continue to be very active in the space.
Watt
Thanks, Olivier. And just to follow on from that, what part of the market do you think will rebound the quickest?
Wolf
So from a subsector standpoint, we see activity in the health tech and FinTech sectors in particular. And that will be both ways. It will be financial services companies and the health care companies buying tech businesses. And it will be tech businesses buying in the financial vertical and in the health care vertical as well. And then from an underlying technology standpoint, we see continued strong activity in the more leading-edge parts of the technology stack and namely in three: AI, edge computing and, finally, blockchain.
Watt
Excellent, thank you. Ken, one of the things that you and I have been talking about recently is the opportunity for more spinouts and spin-offs. Can you give us a bit more information on what you’re seeing there?
Englund
Yeah, Tracy. I think we’re starting to see a good amount of activity in that space. But what we’ve concluded is there’s with the recent EY survey and we found that a third of companies are actively looking at some sort of divestiture and spinout from that perspective. So, the way we kind of think about it is, companies are looking to run their core businesses better and more profitably, which are going to lead to some opportunities for more focus of possible transactions from that perspective. It’s going to allow companies to put more attention on these other businesses as unique stand-alone businesses and allow them to strengthen and maybe reimagine those businesses. Because if you think about it, a spinout really is a chance to reposition both sides of a company on that part, from that perspective. So we think there will be a lot of activity in that space as we move forward.
Watt
Fantastic. It sounds like there’s great opportunity there. Now let’s move onto the topic that probably most employers’ and employees’ minds are sort of focusing on this right now, which would be the talent market. Up until a few months ago, I think we would agree that the biggest workforce challenge for tech businesses was this Great Resignation, with 56% of employees in technology sector indicating that they were considering leaving their current roles, whether they were in pursuit of higher pay or better wellbeing programs or new career opportunities. But today some companies are facing shortages in talent, and others are dealing with hiring freezes and layoffs in response to the economic uncertainties. Ken, do you want to give us your thoughts on the opportunities open to tech companies and what they should be focusing on when it comes to their talent agenda?
Englund
Yeah, I think the first word that comes to mind is agile, right. I mean it’s only been a couple of months that we flipped from being sort of this Great Resignation to now hearing literally every day about layoffs and freezes in tech from that perspective. And I … I think tech is both unique in some ways to the rest of the labor workforce, given just the ability to sort of be able to do work in any location and to be able to virtualize it. What we’re seeing is a couple of things when a company looks at this. One and first and foremost is a focus on retention of high performers. This is going to be a real focus in how rewards and money are spent to retain these high performers or attract them even in this case. While you hear a lot of high-tech layoffs and freezes, there’s still an active market to hire talent. I mean there’s a lot of smaller-growing companies. We also see this as an opportunity for smaller companies to really get a lot of talent into their business that maybe they weren’t able to attract six and 12 months ago. So, history has sort of shown this as a really good opportunity from that perspective. I think the other piece is sort of total experience at a company is still going to matter. People are going to choose where to work based upon the nature of where they work, the culture, the total benefits, wellbeing. So we see a lot of the core factors still being the same, but a little bit of a pivot.
Watt
And then your point there, you know, about people making a choice, right. I guess the next question would be what do you think about, you know, a lot of companies, or not maybe a lot, some companies, you know, saying hey, everybody come back to the office versus some people saying, no, I think we should make it a hybrid model? Do you think, obviously, I don’t think that one size fits all here, so, how do you think companies will end up dealing with those different demands from their workforce?
Englund
Yeah. I think a majority of the companies will operate in a hybrid model, whether that’s two or three days in the office a week or a fixed week in a month. I think that will be the majority of companies. But I do think there will be an opportunity to distinguish your company from other companies based upon your policy. If you have established an approach that’s very much in person, highly collaborative, that may be a distinguishing part of your culture going forward. And then the same maybe the other, if you want to be a totally virtual company, that will be an integral part of what your culture looks like, and you’ll be uniquely targeting particular talent in the market. So, I think it really is an opportunity to think about your workforce model and your culture being pretty well intertwined. But again, I think a majority, maybe 75 or 80% of companies will adopt a hybrid model.
Watt
Options for everyone it sounds like there then if it all works out. Olivier, maybe moving on to one of the things we mentioned in the intro is that you’re based in London and Ken’s in the Bay Area. Do you want to talk a little about maybe the differences between the US and Europe that you’re seeing there and giving us a little bit of the Europe perspective, so to speak?
Wolf
Yeah, absolutely, Tracy. Really interesting to hear your perspective, Ken, on all this. I would say, the trends seen from here in Europe are essentially the same. But the difference is, it’s just less acute. So, I would say, for example, the skills shortages were there as well in Europe, just less acute. But the opportunity described by Ken exists here as well to infill talent that have been scarce so far. And this is now a good opportunity to pick up some more talent which has become available. Again, less acute in terms of the redundancy programs that have been put together by the various tech companies, that’s been some of that here in Europe but less so. But the opportunities coming from that are similar. On the question of hybrid work, I think we’ll land to roughly the same position, perhaps a little bit more work from the office, which is maybe partly geography, partly culture. But fundamentally still quite, I think that the number that you’ve mentioned, Ken, for the proportion of hybrid days will be pretty similar.
Watt
Thanks, Olivier, I appreciate it. And then maybe one click deeper, Ken, you know, we’ve got tech and then we’ve got Silicon Valley tech. What are we seeing companies doing depending on where they’re based?
Englund
Yeah. I think it’s a really good point. Tech is a really broad topic, right. And there are tech hubs all over the world and all over the US. For me, personally, I think Silicon Valley clearly will be much more hybrid, even though there’s a great proximity density of people from that perspective. Just personally, I have over a half dozen clients that I spend a significant amount of time with, and none of them are back in the office on a significant routine basis. So, I think what we’ll continue to see it really varying and I think it’s important not to paint the whole workforce within tech kind of with a single brush, right. Geography and location is going to matter, and I think Silicon Valley will be sort of a unique animal, even within that.
Watt
Thanks, Ken. So, I think this is one of those subjects we can continue on here, but let’s shift gears and talk about supply chain and sustainability. I think we’re seeing a huge change in tech companies with their strategy around supply chains. And one of our recent EY surveys found that 78% of tech execs are looking at decoupling their supply chains, including near shoring and reshoring. All of this change obviously comes with a huge cost to companies. Ken, do you think companies are willing to take on these supply chain costs? And you know, is it the customer who’s ultimately going to pay the price here?
Englund
I think it’s going to be a shared situation. I mean if you think about sort of sustainability and resiliency overall in the supply chain, those costs are going to be distributed. I certainly believe consumers ultimately will, whether you’re buying a consumer electronic or a car, as well as the individual component suppliers or manufacturers from that perspective. I think it’s just the way that things have come out given the last couple of years with COVID and some of the geopolitical problems, intentions, that these are going to be borne across the way. What we should also expect though, and I think the appreciation for it is if all of you have heard about it, I mean, my mom even knows about supply chain problems, right. So, like it’s a pretty common understanding that there’s a cost with what we’ve built in just-in-time supply chains, right. And really what the market describes is, we’re going to build supply chains that look like just in case instead of just in time.
Watt
I like that, Ken, and I think you’re right. People probably didn’t bother with supply chains until it became something that actually impacted them in terms of getting goods, et cetera. Olivier, sustainability is such a broad topic, but an area that we’re seeing getting a lot of attention is around data centers. The sheer volume I think of energy that they’re using is staggering. And I think you know the governments around the world are seeking to impose laws, and employees and customers are looking for companies to make a difference here, right, if they can. How do you see the tech companies around the world addressing these issues?
Wolf
I think tech company need to really take action here. Until recently, tech sector was seen as a sector compared to say energy or transport, which had very little exposure to the problem of CO2 emissions in particular. But two things are changing. One is government is stepping in to impose considering the whole supply chain and the Scope 3 concept, which essentially means if you’re a software company, you have to worry about the emissions created by your supplies, including data centers. And the second thing is just the sheer growth of the sector. Today, the tech sector contributes to roughly 2% of CO2 emissions. By 2040, it will be 14%: one, four. So, tech suddenly, well not suddenly but suddenly over the next 15 years or so, will become a very large emitter of CO2. The tech sector had been fairly comfortable until now, but given that trend, action need to be taken and leadership teams just need to start integrated the need to think through the whole value chain, Scope 3 and emissions for their sector and for their business.
Watt
Clearly a long way to go in the area of sustainability and probably just the beginning that we’re seeing right now. Maybe if we pivot now and talk about something a little bit different, which is that of consumption-based business models, which are becoming increasingly important in tech and in other industry markets as well, right. Our recent EY research find that over 90% of TMT companies already generate a portion of their revenues from anything-as-a-service models, with subscriptions being the dominate choice. Ken, how do you think customers are driving these changes?
Englund
I think, Tracy, a couple of pieces around that are driving the trend. If you think about sort of the historical timeline of sort of perpetual consumption, subscriptions and now consumption as you would maybe describe it as sort of by-the-drink conversation. First what we’re seeing is customers are going to want flexibility in what they do. So, this isn’t really a binary discussion whether customers are going to want maybe one option. They’re going to want to be able to look at all of them. It sort of drives a broader trend of sort of the consumerization: the direct-to-consumer model of consumption of enterprise software into big businesses, right. So, as individuals, we look to buy as needed, subscription consumption, that’s how enterprises are starting to consume as well from that perspective. I think it also drives a much bigger discussion is that customers want to see value in what they use. This idea of just buying and not using is sort of going away, so more of an effective, efficient discussion in that perspective. It creates opportunities for customers to really be fitted for purpose in what they purchase. It also allows a company selling products to have maybe a premium price for a unit price versus kind of a broader subscription. What we do believe is that it’ll create a lot more variability in the market in terms of revenue for these companies. The other thing I would just add that’s really interesting, I spend probably half my time outside of tech as it relates to subscription and consumption models. So, the things that are being done in tech are really being applied to other industries, whether it’s consumer products or industrial companies, so we think the trend is definitely here to stay.
Watt
Yeah, for sure, I agree with you on the, on the cross-sector side as well. Olivier, what do you think the companies are doing well implementing these changes? Are they doing a good job here in terms of transforming their business models, and, you know, keeping up when they decide they want to move to a different model. How are they doing in terms of transforming their own business models?
Wolf
Good question. I think in the tech sector specifically, companies have been doing pretty well for some time in terms of becoming SAS, as-a-service subscription business models. And that’s been going on for a while, and companies are experimented in shifting their operations on the commercial side, on the ops side, on the finance side towards that different way of pricing and selling their services. The consumption bit is an additional feature to add to the way they sell and operate. That will take some time because these transitions do require quite a lot of heavy lifting on the operational side. But they’ve already done these types of transitions before. So that will just happen over the next year, and we’ll see more of these consumption models being fully implemented by supplies. A separate point though, Tracy, just, it’s fine to move to consumption, and, as I said, many tech companies have been selling through subscription for some time. The interesting feature today is also inflation, and it’ll be interesting to see how, whether on their subscription or on the consumption model, companies integrate the need to add inflation to their services and how they educate their customers as to the need to shift the price, not just in the way they price the model, but in the level at which the price will settle.
Watt
Thank you for that perspective, Olivier. I think pricing is a topic we could hold a whole separate podcast on. The next topic we have is around the Internet of Things and edge computing. Enterprises need to process increasing amounts of data from things like contactless payments, smart home sensors and self-driving vehicles. I think we’ll all agree that the list just goes on and on there. The place I want to focus on though is the transferring of that data back and forth to large enterprise cloud platforms. It’s a very costly and time-consuming effort, especially when rapid real-time responses are needed, as we’re seeing around Internet of Things. Ken, how do you see companies addressing these issues using edge ecosystems?
Englund
Tracy, a couple things. Maybe first, I would just say, I sort of look at it from a historical frame of reference. If you look at where we were 10 years ago talking about the cloud, I think we will look back five years from now and talk about sort of the edge from the same perspective. So what I first would say is the edge is not synonymous with the cloud. I think we’re going to see very distinct architectures that are required. They will collaborate, and they’ll be part of the overall cloud ecosystem, but they will be a unique and important differentiator for companies, both companies that provide solutions in that space and companies that use it. Also, we think of it quite synonymously with IoT and manufacturing, but as you said, payments, health care, it’s going to be really prevalent throughout the discussion from that perspective. The most important thing we’ll see here in the early days is companies will move forward via ecosystems and partnerships. So, there’s not going to be sort of one specific solution around this edge from that perspective. The ability to line up pretty quickly with new and innovative growth companies to go build these products and then over time, I think we’ll see a convergence, right. You may see some similar parallels to just what sort of the cybersecurity market looks like over the last decade. So, there’s a lot of opportunity for new business models for companies, as well as a lot of new technology enablement.
Watt
Excellent, thank you. I appreciate the perspective. Wrapping up here, our final question, Olivier, many of the things we’ve discussed today, focusing on improving technology companies and their businesses but everything that we’re talking about is going to cost a lot. What do you see the companies are doing to proactively address the increased costs and making sure that they’re staying profitable while keeping their businesses agile?
Wolf
Yeah, it’s a fair challenge, given that both Ken and I have spoken of things which will increase costs. So, I think we’ve talked about relocalization, which, as Ken said, will raise the cost across the supply chain. I’ve talked about sustainability and the cost of energy as applications become more computing intensive and energy intensive. So that’s more costs as well. What could we do? I think I’ll just add, Tracy, it’s both cost and revenues that will help companies improve and protect profitability. So, starting on the cost reduction, we’ve talked about talent. So we’ve seen some of the readjustment of the cost base on the talent side, but, as Ken said, that is going together with being more selective and hiring a specific talent that is required. So it’s really optimizing the cost base around the talent side. Secondly, and I’m seeing it with some clients who deliver services across … across the tech space, it’s just better and more use of AI, which just helps with productivity across the board. Thirdly, I’ve mentioned sustainability, but the implication of also being more conscious of sustainability is optimizing the cost of energy, particularly for those people reliant on data centers. So, again, there’s improvements to be made around that area. That’s on the cost side. On the revenue side, I’ve already alluded to pricing. And particularly in an inflationary environment, which applies both to the cost base and to a number of input prices, it’s fundamental companiesare brave and reevaluate their pricing and despite the market where, you know, it’s been quite deflationary in tech for some time, habits will have to shift and customers educated into starting to expect a stronger push on higher pricing.
Watt
I think that sums it up nicely, Olivier. Ken, anything you’d like to add to what Olivier has just said?
Englund
I would add just a couple of things. Olivier, you nailed it. I think in these times, there’s going to be a huge amount of focus around productivity. We go in waves like, growth at all costs, hire a bunch of people, drive forward. But I mean the winds have tilted quite a bit. Your fundamental discussion around AI, ML, deep analytics, automation are going to be first and foremost in people’s minds over the next 12 to 24 months. It presents a great opportunity within tech to really eat their own dog food so to speak, right, make sure they’re applying these technologies internally, building products on them and then pushing them out to the other industries. The other thing that’s interesting is data privacy: cyber, cyber and more cyber. It doesn’t go without a day where there’s some sort of breach that have pretty big implications for these businesses. So, from my perspective, when we link together edge computing, ecosystems, more distributed supply chains, just the
underlying ability to protect enterprises is going to be good business for everybody and going to be a critical item. That’s top of mind for me as well when we think about the top 10. I don’t think it’s leaving the top 10 anytime soon.
Watt
I think we’ll all agree with you there.
Thank you, Ken and Olivier, for joining me today for what was an engaging and thought-provoking discussion. The opportunities we talked about today for 2023 appear to be exciting for technology companies — from M&A and the potential for deal pricing to stabilize and the return of the corporate and PE buyers; talent and the question of where and how people will choose to work and the opportunity for smaller companies to pick up some excellent new talent; the need for a just-in-case supply chain and Scope 3’s impact on supplier relationships; consumption-based business models adding more revenue variability and giving customers more options; how edge will be part of the overall ecosystem with unique and important differentiators and how companies will utilize their ecosystem relationships; and lastly, it’s a great time for tech companies to make sure they’re applying their own technologies internally. If you are interested in reading “The Top Ten Opportunities for Tech Companies in 2023,” you can find it on ey.com/TMT.
Thank you for joining us today on EY Tech Connect podcast. For more thought-leading perspectives, visit ey.com/TMT. You can also follow us on Twitter at EY_TMT. Don’t forgot to leave us a review and subscribe to our series. Thank you for joining us today!
