The tech market should brace for a worsening economy that extends into 2021

Forrester's latest market outlook paints a gloomy picture of the pandemic recession with additional budget pressure on US CIOs.

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As if the pandemic hasn't wreaked enough havoc, a new report from Forrester finds US CIOs and their business partners will be dealing with a steadily worsening recession in 2020--with the potential for even more problems in 2021. Overall, US tech budgets will be down by 6% or so from 2019, but budget cuts will be more like 9% to 12% given planned 2020 tech budget increases of 3% to 4%, according to the US Tech Market Outlook for 2020 to 2021 report.

This is Scenario B of three that the Forrester report presents. Scenario A: A sharp, but short drop in tech spending in the US in 2020, followed by a strong recovery starting in the fourth quarter and continuing into 2021 should be "put to bed,'' the report said. The Scenario C forecast predicts a 9% fall in US tech budgets in 2020 and a 5% drop in 2021. The report calls this "a small but real possibility."

"Scenario B, in which the US economic recession is deeper and lasts longer in 2021, is now the most likely prospect for the US tech market with a 70% probability,'' Forrester said. "But the failure of the US to bring the pandemic under control means that Scenario C with a recession that lasts into 2022 now looms as a 20% possibility."

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The greatest impact, so far, has been concentrated in the customer-facing retail and leisure industries but will spread to other industries as layoffs and business failures ripple through the economy, Forrester said. Many companies in the hardest-hit industries will close, and others will fall into that camp.  

"The biggest change in our US tech market outlook is the sharply reduced possibility of a rapid tech market recover in 2020, and the increased likelihood of a weaker tech market in the second half of 2020 and first half of 2021, and potentially longer," said Andrew Bartels, a vice president and principal analyst at Forrester.  

The report also forecasts that "Cloud software and cloud platforms will resist the downward drag--to a point." This is because cloud computing has proven its value to companies that have had to operate with remote workforces and closed offices, the report stated.

Another finding is that pressure on CIOs to cut tech budgets will increase the longer and deeper the recession is. Yet, cutting too much, too soon has its own risks, the report said. "CIOs will need to have a flexible plan for expanding or reversing their tech budget cuts depending on how the economy performs and the impacts on their firm." 

SEE: Tech Budgets 2021: A CXO's Guide (ZDNet/TechRepublic special feature) | Download the free PDF version (TechRepublic)

The report is predicting that all tech categories will suffer in the US tech downturn and that CIOs and their business partners will be cutting spending across all segments of their budgets.

Computers and communications equipment will be the area that is cut the heaviest, the report predicts. Spending on tech consulting and systems integration services will also be slashed. "In the CIO playbook for cutting tech budgets in a downturn, the second step after cutting hardware spending is trimming the new project portfolio. Those actions inevitably reduce demand for consultants and contractors."

Software spending will steadily slow through the remainder of the year due to cloud contracts, the report said. Other predictions are that tech outsourcing will drop as renegotiations offset cloud platform growth and there will be an 8% decline in telecom services.

One slight silver lining is that the report anticipates tech staff costs will be pared down, but not slashed.

The Forrester report offers a simple recommendation to CIOs. "Prepare for the worst. If Scenario A were still a realistic option, most companies could be planning to be in growth mode in 2021."

The likelihood of that scenario is dropping by the day, the firm said. "The major implications of this US tech market forecast are that CIOs and their business partners at most US companies will need to shift into adaptive or even survival mode in 2021, depending on whether Scenario B or Scenario C prevails."

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