Global Business Pulse
Technology, media and telecoms (TMT) is one of the few industries to retain more than a glimmer of optimism in the midst of COVID-19, according to our new index tracking the health of the mid-market. And this is particularly true for the technology sector, where 53% of firms feel optimistic about the next 12 months.
With insights from Grant Thornton experts, we examine how meeting the rapid changes in how we work and live has lifted the sector in unprecedented times, and what’s now needed for technology firms to maintain their momentum.
Our research reveals unmatched levels of health in TMT for the first half of 2020. The industry ranks first out of 12 key sectors in terms of outlook – which covers future business conditions, economic optimism, and investment intentions – with a glowing score of +45.5.[i]
The health of the technology sector is central to this, with 40% of business leaders in mid-market technology firms expecting revenues to rise in the year ahead and 41% saying the same for profitability – levels largely unseen across other sectors. This sentiment is reflected in financial markets where technology firms have driven the S&P 500 to historic highs and, in the case of Zoom, has seen company valuation tripled.
The emerging outlook is certainly well aligned to the huge demand for technology solutions since the pandemic struck.
Fergus Condon, global head of the technology sector at Grant Thornton notes, the rapid move to mass remote working has resulted in a behavioural change central to driving sales and adoption in the technology space.
“A new world of world of work is emerging which technology firms have been talking about for three to four years now. Technology is an enabler, but often people only adopt these new tools when they really want or need to; the pandemic has forced this behavioural change.”
While platforms like Zoom and Teams were still novel in many industries just a few months ago, the changing environment has led not only to rapid adoption but to further demand. “It can take people a long time to change but they also get used to things pretty quickly,” says Fergus. “Now they’re up to speed with these tools, clients are asking for more functionality. As a result, product development is going to forge ahead. Technology businesses will get revenue from adoption, but they are also looking to develop the next big thing.”
This surge in demand underpins the sector’s health and is reflected in pricing intentions, with 40% of technology firms anticipating a rise in selling prices over the next 12 months. And our research shows that these businesses are certainly gearing up to invest in continued product development, with 51% expecting to increase R&D expenditure in the year ahead.
The Global business pulse also tracks restrictions to business activity, which include demand and supply constraints and economic uncertainty. Despite the buoyant outlook, TMT saw a notable worsening on future business restrictions, with the index falling 15 points from -49 to -64. In particular, technology businesses are experiencing high levels of economic uncertainty, with 72% identifying this as a constraint to doing business.
While technology firms have fared well amid the pandemic, many have not. And despite the urgent adoption of technologies we are seeing now, 66% of technology firms are concerned about a shortage of orders in the next 12 months. These concerns accurately reflect forecasts for global investment spend – a significant driver of electronics demand in particular – which is anticipated to fall this year.[ii]
As Fergus explains, agility is key to future-proofing companies. “For technology businesses, orders are traditionally borne out of physical or social interaction. These face to face sales won’t be possible for the foreseeable future.
“Three months ago, everyone was worried about survival. Now, firms need to be agile and find new ways of engaging with people to keep the orders coming in. Proving your concept remotely and demonstrating return on investment will be hugely important, as will a degree of flexibility on pricing.”
Despite these concerns, TMT remains an outward-looking industry, with firms retaining international expansion plans over the next 12 months. This comes amid a debate within the mid-market as to what Covid-19 means for exports and international supply chains, and while export expectations have unsurprisingly dropped in most industries, TMT reports one of the highest scores – with 37% of firms expecting to increase exports in the coming year. For technology firms, this is still higher at 38%.
As Fergus explains, technology businesses are in a unique position when it comes to internationalisation, and with the right strategy, can continue to take advantage of opportunities and grow their offering overseas. There may even be advantages in the current climate. “These businesses can be international from day one. If you’re a platform business, you don’t need to export in the same way, as everything is online. You can go from being a one-man-band to being international overnight.”
For this industry, though, US-China tensions remain heightened, and there is more focus on supply chain security in the current environment.
Nick Watson, global head of TMT at Grant Thornton explains: “For the TMT industry, the critical supply chain issue is what happens with China in the hardware space. That’s a vital axis for a lot of technology firms, and many are looking for alternative suppliers.”
And spoked by fractured supply chains as a result of the pandemic, some technology firms are looking to source from suppliers closer to home. “There have been a few cases during the pandemic where firms have been let down by offshore providers”, says Fergus. “Some large technology firms may have had back-office processing taking place in other economies, which then crumbled under the pressure of the pandemic. There is an appetite to bring more supply onshore.”
Owing to the relative health of the sector, 40% of technology firms expect to increase employment in the year ahead, setting them apart from the broader business landscape in this turbulent period. But firms will need to adapt their people and culture approaches if they want to retain talent and prevent moves to competitors.
“The trend we’re seeing right now is a movement of talent towards the larger technology firms, with bigger presences and balance sheets,” says Fergus. The key to finding and keeping talent, he suggests, is effective communication, especially owing to the culture of collaboration central to technology firms, which will have undergone huge changes in the mass move to remote working.
“You have to over-communicate and have an understanding of people’s circumstances. The collaborative office ‘hang-outs’ intrinsic to firms like Google and Facebook are gone and this will impact how employees’ view and experience company culture. And for new joiners in this period, an effective onboarding process within the first three months will be massively important.”
Technology has undoubtedly provided solutions amid Covid-19 and its ability to keep us working and living well whilst at home is delivering rewards. The question is: how can technology businesses maintain their health and momentum with such unclear times ahead? The answer lies not only in continued product development, but in strong financial management.
“Financial stability and having a strong balance sheet are always important, but more so now than ever”, Fergus explains. “Those with strong balance sheets can focus more on that ongoing product development needed to sustain sales after this initial surge.”
Nick agrees: “Businesses are looking at cost optimisation so they will come out leaner. Cash management is key. The appetite for risk is slightly lower than it was, but ultimately, businesses need to take the opportunity to keep their cost bases lean so they can move swiftly and take advantage of the opportunities.”
Please take a look at our methodology section if you’d like further details about the nature of the index before reading further.
Visit Recovery through resilience to read more about the characteristics businesses will need to move from crisis management to restoring and rebuilding.
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