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RESEARCH TRIANGLE PARK – We’ve seen the headlines—companies are reacting to economic uncertainty and financial pressure with big layoff announcements.
But that’s not the only option—recent data shows that some companies may choose to cut software costs rather than lay off employees.
Cledara, a company that specializes in helping organizations manage and optimize their software subscription spend, released data earlier this year about the trend of companies adapting to the economic downturn by saving on software spend.
According to Cledara’s data about software spend, December 2022 showed a 2.9% reduction in spend as companies began reducing software costs.
Software gets the axe
Software is, of course, a necessary expense for businesses. But in recent years, many companies have become reliant on an ever-growing suite of tools and applications. (In the same way my household went from one streaming subscription five years ago to upwards of 10 subscriptions today, with monthly fees for everything from our Apple TV to our Ring security data, companies have also seen an increase in the suite of tools they’re paying for.)
These bloated tech stacks and suites have led to a significant increase in software spending—which can draw the attention of cost-conscious leaders in times of economic turmoil.
“Software spend is often businesses second-biggest expense after headcount, so cost-cutting measures like removing software subscriptions with duplicate features, removing licenses that aren’t being used, can lead to big savings,” said Richard Gargan, analyst for Cledara, in the report
New data released last week showed a rebound in January 2023, with an overall increase in software spend of 1.3% led by larger companies increasing spend by 8% and stabilization of spend among smaller startups.
“We’re seeing a rebound in software spend by larger startups as they adapt to the economic situation,” said Gargan in the report on January numbers. “While cost-cutting measures like removing duplicate features and unused licenses can help reduce software spend, it’s important for companies to invest in the right tools and solutions to drive growth and productivity.”
The January rebound was led by IT and security sales, which saw a 55 percent growth rate. But customer success and dev ops categories saw an 8 percent decline, and analytics and HR categories saw a 13 percent decline, which could indicate a potential shift in corporate and startup priorities.
The workforce advantage
By prioritizing cost-cutting measures that do not involve laying off employees, companies can protect their staff’s well-being and maintain their organizational knowledge and expertise.
It could also help them stay competitive if our labor market continues to be tight. (The idea being that it might be better to cut the chatbot rather than the customer service rep because it’ll be easy to replace a chatbot down the line but might not be so easy to replace the employee…)
In the long run, this might help position the company for success when the economic situation improves.
What does this mean for Triangle tech companies?
A lot of big companies in our area would be affected by a trend of software cuts. IBM, Cisco, Red Hat, SAS, Lenovo, GDC, Bandwidth… I could go on.
But I think it’s worth considering that not all software companies will be affected equally. In the Triangle, we have a lot of companies that offer cloud-based solutions, security solutions, or open-source software—and these solutions may be better positioned to weather a decrease in software spending, as these solutions can be more cost-effective, vital, or flexible than traditional software licenses.
Additionally, it’s important to remember that companies may choose to cut software spending as a cost-saving measure, but they may still require software solutions to remain competitive and meet their business needs. As such, there may still be demand for some software solutions—like operating systems, security solutions, or network technology—even if spending is reduced.
We’re lucky to have a lot of that expertise right here in the Triangle.
Ultimately, the impact of a reduction in software spending would depend on the severity and duration of the spending cuts, as well as the specific companies and industries affected… and there are mixed opinions about whether we’re heading into a long recession or a sunnier economic forecast.
Either way, the Research Triangle Park has a diverse economy with a range of industries—so businesses in the area may be able to pivot and adapt to changing market conditions, as we’ve done many times before.