Responding to slowing growth: why the tech industry faces a more challenging outlook in 2022

Nick Watson,
Raja Lahiri,
Matt Stringer
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Two years into the global COVID-19 pandemic, large numbers of tech companies have benefitted from the organisational drive towards digital transformation that accelerated almost overnight in every sector. But after a period of rapid growth, the market began to show signs of slowing in 2021.
Four tech trends companies need to be aware of in 2022

Coupled with ongoing supply chain issues and skills and labour shortages, many tech companies are facing a more challenging outlook moving forward in 2022. But, as always, with a market as dynamic and innovative as tech, there are a lot of opportunities for companies to not only extend their competitive advantage but lay solid foundations for future value and growth.

We spoke to tech experts from across our member firms about how key trends could affect companies over the next 12 months and what their short-term strategic priorities should be.

The latest data from our ongoing IBR research programme highlights that 2022 looks set to be a year when many tech players transition from growth and increased activity to a focus on embedding, consolidating and optimising existing processes. We interviewed 475 senior mid-market executives from tech companies in 29 markets. Together they paint a picture of a sector much more concerned about resilience than in the previous two years. Record high barriers to growth, driven largely by macro factors, are driving the need for leaders to focus on the underlying strength of their operations.

Changing market conditions mean that the strategic priorities for tech companies in 2022 look quite different to those of 2020 and 2021. Common themes among the executives we spoke to were digital product and service development, strengthening supply chains, continuing to adjust to hybrid working and driving sustainable business practices.

Here are four of the biggest trends impacting the tech industry, and what actions companies need to consider.

Knock-on impact of inflation on profitability and access to capital

Rising inflation presents a clear challenge for the tech sector, and the global economy, over the next 12 months. There are elevated concerns about labour costs as well as energy costs in many markets. These higher costs are going to have to be passed on to consumers and many in the industry are anticipating record-high selling price increases or focussing on their profitability.

The principal risk here is the impact this will have on performance after two years of high growth. Other market dynamics are likely to compound this issue for many companies. Economic uncertainty is still a major concern for strategic planners and while the ongoing shortage of finance has eased from a peak in H1 2021, many executives still cited it as a business constraint moving into 2022.

What should tech businesses be doing?

Nick Watson.png“There is no doubt that inflation is starting to bite,” says Nick Watson, Partner and Global Head of Technology at Grant Thornton UK. “Whilst this may result in a short term flight out of riskier capital and a reduction in investment in some parts of the sector we continue to see active investment appetite for recurring revenue based technology and tech enabled services which appears here to stay.  Managing capital will become a heavier priority for the “cash burning higher risk tech companies in 2022.”

Steven Perkins round image.png“Given the rapid growth over last two years, there is the likelihood of a slowing growth rate and pressure on valuations,” says Steven Perkins, National Leader – Technology and Telecommunications, at Grant Thornton US. “Technology companies need to streamline operations to drive efficiency and effectiveness. Tax changes around the globe and mounting regulatory oversight will also drive restructuring.”

120x120 round image raja lahiri.jpg“For tech companies, 2021 saw all-time highs in terms of capital raising from PE/VC investors and also, global listings, both under direct route and SPACs,” adds Raja Lahiri, Partner at Grant Thornton Bharat. “In 2022, we are already seeing signs of valuations of tech companies moderating. I think mid-market tech companies should focus on profitability and unit economics and build a plan of sustainable revenue growth. We also expect more due diligence by investors and more regulatory tightening around listings. Companies should plan themselves around their readiness around business model, governance, business systems and processes and financial reporting.”   

Internationalisation continues across sales, servicing and supply chains

Building on the momentum of the previous two years, many companies will continue to prioritise international growth. Around 60% of executives we spoke to are allocating more employee resources to this goal in 2022, despite the added complications of higher energy costs, transfer pricing, supply chains, compliance burdens and continued concerns about ongoing disruptions to transport infrastructure.

This is the highest percentage of any industry we monitor. In fact, 57% plan to sell their products and services in more countries in 2022, and 52% plan to use more non-domestic suppliers and outsourcers.  

Much of this expansion relies on the ability of sales teams to create connections and deliver a robust pipeline of new clients. Interestingly, while many companies are confident in their ability to deliver services and products virtually, we are likely to see a significant return to face-to-face sales processes over 2022 across a range of sectors. This trend is likely to be apparent in the tech sector too. Particularly with regard to lead generation, the post-pandemic position for sales will be closer to what it was pre-pandemic than its current form.  

What should tech businesses be doing?

Internationalisation presents a huge opportunity for tech companies, but also opens them up to several distinct risks, particularly around compliance. Companies need to make sure compliance keeps up with growth. This means ensuring tax positions are prepared for any jurisdictions they may enter, but also that governance processes are aligned to their international ambitions as well.

Many mid-market tech businesses grow very fast,” says Nick, “which makes keeping up with the more rigorous compliance requirements expected of larger companies challenging.  If not managed this can create significant risk, particularly if companies are expanding into markets with different compliance regimes.”

But within the international economy, local contexts are continuing to evolve and diverge. This creates even more complexity for companies. It is essential that companies factor this into their strategic planning. “There is a real trend towards the ‘balkanisation’ of regulations across all the domestic markets companies might want to expand into,” says Steven. “The key to successfully entering a new market is speed and agility and becoming bogged down in potentially costly compliance issues is not going to help.”

Tech companies need to enhance their global risk and compliance management framework as they expand across the world,” adds Raja.  “The global trends and risks and opportunities around digital tax, employee regulations as well as visa restrictions need to be carefully factored into strategic plans.” 

Talent, culture and tax in the new world of work 

For many companies and employees, one of the most significant impacts of the pandemic has been the widespread shift to hybrid working. The tech industry is used to high turnover, competition for talent and ongoing shortages of skills in emerging technologies. And the move to remote working could continue to aggravate these issues for some companies.

A remote workforce opens companies up to a world of talent, but also means that there are more options for employees looking to move on too. Balancing company cultures to create equivalence between in-office and remote working environments, formalising co-location rules and implementing the right infrastructure to create as much value as possible from hybrid working are likely to be priorities for tech companies in 2022.

What should tech businesses be doing?

“The biggest challenge to growth of tech companies is clearly talent and with remote and hybrid work becoming a norm, employee engagement and attrition are a big challenge,” says Raja. “In my view, talent retention, upskilling of digital talent and focus on culture should be a key strategic priority going forward. Tech companies need to expand their global talent base especially in countries with a deep tech talent pool and create centres of excellence in new areas like cloud, quantum computing, AI and cyber security.”

Understanding the potential tax implications of mixing remote, in-office and hybrid working is an immediate priority for any company looking to adopt these models. There could be an impact on a wide range of taxation, including corporate tax, transfer pricing, employment taxes and those relating to benefits.

Matt Stringer.PNG“From a tax perspective, both international expansion plans and the impact of new hires are hot topics right now,” says Matt Stringer, Partner, Head of International Tax at Grant Thornton UK. “A workforce with greater international reach and increased mobility creates a more complex tax profile. Businesses are having to educate themselves quickly on things like permanent establishment risk, overseas employment taxes and social security requirements. I am personally working with numerous global businesses on their hybrid working plans, taking into account such international tax risks.”

The growing importance of ESG 

Like most other industries, the tech sector will continue to critically examine its processes as part of the ongoing ascension of environmental, social and governance (ESG) factors to the top of the strategic agenda. When it comes to sustainability, increasing stakeholder pressure from customers, employees and investors, as well as continued changes to rules around ESG reporting, will require technology companies to take action across a number of areas, including climate change.

Diversity, equality and inclusion (DEI) as an aspect of effective governance is also taking centre stage and 2022 will see more companies setting themselves targets to make meaningful progress in this area. 

ESG is increasingly not only being seen as an additional compliance piece, but also as something that is tied to value creation and future-proofing over the long-term. 50% of the executives we spoke to believe financial success and sustainability are equally important for their businesses, with 59% thinking the issue has become much more important during the pandemic.

What should tech businesses be doing?

“Companies need to think about how to position themselves in this space, and how aligned their ESG and broader commercial strategies are.” says Steven. “We are having lots of conversations around environmental taxes, emissions data and building out DEI plans in organisations. This is not just tied to governance and reporting but also as being part of a company’s competitive advantage, particularly with regards to access to capital. With the current pressure on capital markets in tech, those that can demonstrate good ESG performance may have an advantage.”

“ESG is one of the top agenda for boards so tech companies should enhance their ESG readiness, ESG reporting and embed ESG principles in all aspects of their operations,” says Raja. “ESG reporting is key for proper disclosure and transparency for investors and the wider stakeholder community.”   

When we spoke to the executives, common barriers to better ESG performance included lack of clarity around new regulations, measurement frameworks and the skills and capabilities needed. Developing a clear strategic plan about how to overcome these challenges will be an important next step for many companies in 2022.

Effectively responding to the market conditions

In the tech industry, disruptions can occur at any moment and previously successful strategies can quickly become redundant. Despite this, some things will always be priorities for tech companies: agility, insights, expert partners and data-led strategy.

We are on hand to help you navigate the new world of work, manage risk, mitigate changes in the market and make sure you are well positioned to take advantage of new opportunities. Talk to one of our tech experts or your local Grant Thornton member firm today.