Joel’s market pulse - Q2/2024

In this Q2/2024 market analysis, our Key Account Manager Joel Liukkonen takes us on a deep dive into the current state of the market. How are the current market conditions and how do they affect the Finnish IT consulting market?

The beginning of 2024 has been intriguing for the IT service market. While there have been some positive signals, the overall trend remains similar to the downbeat performance of 2023. Earlier this month, the long-awaited reduction of the European Central Bank (ECB) interest rate finally occurred, yet uncertainty persists as the market had expected multiple reductions this year. Currently, only 0-2 reductions are expected in the second half of the year. This highlights the challenging and unpredictable market conditions as European inflation remains higher than the ECB's target.

Simultaneously, the European Parliament elections have generated more questions than answers. French President Macron decided to dissolve the national parliament and France is now expected to host an election. This has added further unwanted uncertainty into the European market. The primary concern is the potential political risks associated with far-right or far-left parties winning the upcoming elections. Such outcomes could introduce new political risks and potentially influence the ECB's decisions.

But why do interest rates matter? They significantly influence companies' willingness to make new investments. According to a study commissioned by the Finnish Banking Group OP, one-third of companies plan to increase their investments when interest rates fall. Digitalisation is highlighted as a key investment area. The survey focused on companies generating over €100 million in revenue. This suggests that if market conditions, particularly interest rates, improve, these companies are likely to make new investments, thereby accelerating the growth of digitalisation services. Additionally, even though about one-third of companies currently do not plan to increase their investments, the actions of the majority might prompt them to reconsider their stance.

Finnish tech market in Q2/2024

Due to the challenging macroeconomic landscape, the Finnish IT market hasn’t grown as rapidly as in previous years, but it is still experiencing growth. As illustrated in Graph 1, the growth coefficient has been lower, yet the market is still expanding at a rate of 2-5%, depending on the chosen period. Compared to many other industries, the IT market is actually performing relatively well. However, the issue lies in companies’ higher expectations for growth. When heavy growth was expected to continue, many companies ended up overstaffing. This discrepancy between expected and actual growth has resulted in continued layoffs this year as companies take steps to protect their declining profitability.

Graph 1: Turnover of the IT-sector in Finland

Another way to analyse the situation of the Finnish IT market is by reviewing publicly listed companies on the Finnish stock exchange. Inderes tracks 11 listed IT consulting companies in the Helsinki stock exchange, and the median organic growth for Q1/2024 was -2%. Six companies experienced negative revenue growth (between -2% and -20%), while five saw positive growth (between 2% and 7%). Graph 2 highlights that this trend has continued since last year. It could be partly explained by the beginning of the year having fewer working days compared to the previous year, as the number of days causes some fluctuation in the consultancy business.

Furthermore, most companies anticipate that H2 will be better than H1. This should be taken with a "healthy amount of skepticism," as most estimations and goals have been overly optimistic. However, many of these companies would be forced to make a negative earnings warning if their overlook of the year would have changed. This indicates that the market is still uncertain and highly competitive. The amount of investments is still lacking and is unlikely to improve significantly this year.

Graph 2: Finnish publicly listed companies' revenue growth

However, the market is not entirely negative. Gartner recently estimated that the global IT service market will grow by 9.7% this year. They also projected that outsourcing will see significant growth, potentially even surpassing the amount spent on in-house development. In a challenging market flexibility becomes crucial, which explains the rising popularity of buying consulting services. Today, the job market fundamentals have evolved to recognise external consultants as just another contract model alongside traditional employment.

One indicator of this shift is the significant increase in the average duration of consulting engagements, as companies aim to retain talented consultants they know and trust. Additionally, the number of cases lasting over 12 months is rising, as shown on Graph 3. If these fundamentals continue to change and Gartner's estimates hold true, the market outlook for the second half of the year could be brighter than it was last year and at the beginning of this year.

Graph 3: Average case length per quarter based on the data in the Thriv Times newsletter

Challenges facing individual tech talent

The past year and a half has been particularly challenging for many individual tech talent. Supply has been high while demand has been lacking, causing the once hot market to cool significantly. According to the Microsoft Work Trend Index report, many IT professionals are worried about the impact of AI on their jobs, with 49% expressing concerns about job security. Nvidia CEO Jensen Huang even suggested that programming might not be the best career choice.

However, the Microsoft report stated that many company executives are still worried about not finding enough talent for their open tech positions. These conflicting messages reflect the reality that while AI is expected to automate many processes, skilled employees remain crucial, especially in the short and medium term. As discussed in our previous article, human factors are expected to remain somewhat constant in the future. When the market conditions improve and supply and demand balance out, the previous talent shortage could resurface.

For freelance IT consultants, it is now more important than ever to know what the client wants and what they are willing to pay for the external workforce. One way of staying informed about these topics is by subscribing to our Thriv Times newsletter via the talent page on our website.

Market dynamics and future scenarios

The current market dynamics also reveal a silver lining: the average length of engagements for tech talent has increased, as shown on Graph 3, indicating that skilled individuals are still valued. However, as explained in our previous blog post and an article by Inderes, the market has shifted towards consolidation, with larger companies focusing on fewer partners. For individual tech professionals and smaller consultancies, partnering may be the best or even the only way to stay competitive. While longer subcontracting chains could lead to lower margins, new partnerships might open up more opportunities.

Looking ahead, we see three potential scenarios for the second half of 2024.

1. Positive scenario: This scenario envisions a stack of positive market news leading to new investments. Decreasing inflation rates beyond expectations could prompt central banks to ease monetary policies, creating a more favorable investment landscape. The scenario is plausible but quite unlikely to be experienced still this year as the cycle from news to investments tends to have some delay.

2. Negative scenario: This scenario suggests that the market has not yet hit bottom. Potential political risks in Europe, escalations in global conflicts, or other unexpected events could contribute to this outcome. Although less plausible than the positive scenario, it remains a possibility if multiple adverse events occur simultaneously.

3. Moderate scenario: The most likely scenario is the continuation of slow market growth for the rest of the year. A mix of positive and negative events will affect different companies differently. Some will thrive and invest, while others will struggle. In this scenario, H2 is expected to be better than H1, but without significant improvements. Steady growth will lead to a more balanced market with neither a talent shortage nor a development lag.

The coming months will provide more clarity on which scenario will unfold. Key indicators to watch include Q2 earnings calls and the upcoming French elections, which could offer further insights into what to expect for the rest of the year.

Stay tuned for the Q3/2024 market analysis and don't forget to subscribe to the Thriv Times newsletter to always stay ahead of the curve!