Joel’s market pulse - Q4/2024

In this Q4/2024 market analysis, 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 overall picture of the Finnish economy has not improved, and similar negative themes continue to linger in the market, as discussed in the Q3/2024 market pulse. Furthermore, the European economy has experienced sluggishness this year, particularly as its largest economy and 'engine,' Germany, has faced slow growth. According to a survey of economists, many believe this will prompt the European Central Bank (ECB) to lower interest rates sooner than anticipated. However, swift solutions remain unlikely.

Finnish market in dire straits

The statistics on Finnish bankruptcies have not improved; instead, the negative trend has continued (see Graph 1). The total number of bankruptcies this year will exceed that of previous years, with a decreasing trend only in the industry and construction sectors, while other sectors have seen an increase in bankruptcies towards the end of the year. This highlights the harsh market conditions and ongoing problems in the Finnish economy. Job losses and broader economic damage are rising. Relatively high interest rates, low demand, and fierce competition are causing many companies to struggle. According to the Confederation of Finnish Industries' (EK) business cycle barometer, insufficient demand remains the primary reason for these challenges.

In addition to the surge in bankruptcies, the trends in change negotiations and unemployment remain concerning. The gap between open positions and unemployed job seekers has steadily widened throughout the year (see Graph 2). From both individual and economic perspectives, this is alarming, as the trend is now worse than during the COVID-19 crisis. Since the situation is largely driven by declining markets rather than technological advancements, it underscores the "panic state" of companies and the broader market.

Adding to the strain, change negotiations are no longer confined to the private sector. An increasing number are occurring in the public sector, with notable examples being the Hospital District of Helsinki and Uusimaa (HUS) and government agencies. These cost reductions are likely to impact the private sector both directly and indirectly, as the public sector may be forced to reduce its sourcing from companies. While IT investments are often viewed as a solution for cost savings, it remains uncertain whether such investments will occur at the same pace. Consequently, public sector budget cuts pose a significant challenge to the IT services market.

The public sector initially provided vital business continuity for many IT-service companies when the market faced a downturn. Now, however, that support may be disappearing. According to analyses by Inderes, although the public sector has an urgent need to streamline processes through digital development, ambitious cost-cutting goals may delay these investments. This will likely result in fewer projects or lower project pricing, ultimately impacting the profitability of public sector business. Overall, the challenges in the public sector are expected to have a negative ripple effect on the broader market.

While the economy remains deeply troubled with no clear turning point in sight, the Central Organisation of Finnish Trade Unions (SAK) has surprised many by demanding total salary increases of 10% over the next two years. This proposal is expected to create significant pressure on companies and could even lead to a deadlock in the employment market. Although the demand is logically justified by the high inflation of recent years, critics argue that the timing is poorly suited to Finland's current economic challenges. In the worst-case scenario, widespread strikes could occur, exacerbating unemployment and pushing more companies into bankruptcy—further damaging the already fragile economy and impacting sectors like IT services.

Graph 1: Filed bankruptcies

Graph 2: The estimated total number of open positions and unemployed job seekers, individuals

M&As in tech

M&A activity in the tech sector has not yet rebounded to the levels seen in the early 2020s, but some recovery has occurred as valuations have declined. In 2021, the average enterprise value-to-turnover ratio in SaaS-company M&As in Finland was approximately 10x, whereas now it is around 5x, reflecting a significant drop in valuations. By the end of Q3/24, there were approximately 46 SaaS company M&A deals this year. There is speculation that M&A activity in the IT sector will increase next year, particularly among publicly listed companies, with probably even more potential among privately held ones. One could argue that, due to market consolidation and prolonged intense competition, many small and medium-sized companies may become acquisition targets for larger players.

A notable M&A deal in the Finnish tech market was Tietokeskus’s acquisition of Enfo, announced in October. One key reason cited for the acquisition was market consolidation, a trend often highlighted as a primary driver for M&As of IT-service companies. Another reason was the aim to challenge international players operating in the Finnish market by competing with “bigger muscles.” This type of development is expected to continue in the IT services sector.

There is also ongoing speculation about companies divesting parts of their business. For example, Tietoevry is reportedly planning to sell its Tech Services unit. This decision follows the company’s earlier move to cancel plans to sell or list its Banking unit. Tietoevry CEO Kimmo Alkio explained that the cancellation resulted from the “strengthened performance of the unit.”

Banks have performed well due to favorable interest rates and relatively low credit losses, making the Banking unit more valuable than previously anticipated. Meanwhile, the Tech Services unit has faced lower demand and challenges in a weaker IT market, which explains Tietoevry’s interest in selling it. This move could create opportunities for international players to enter the Finnish market through M&A, acquiring an existing business rather than starting from scratch. It also raises the question of whether the Banking sector has become “the new best customer segment,” taking over from the public sector, which dominated in 2023.

In our Q3/2024 market pulse, there was discussion about the so-called “graceful exit” phenomenon. While it is difficult to pinpoint a perfect example, Unikie’s acquisition of Houston Analytics’ business from its bankruptcy estate comes close. This development could indicate that some IT market M&As are being driven by opportunities to acquire distressed assets, which may also explain the relatively low bankruptcy rates in the sector.

US investments

An interesting development in the Finnish market has been the slight increase in significant investments by US-based companies. This trend could be partially related to the Finnish NATO membership and, therefore, decreased geopolitical risk. Another contributing factor may be the relatively low valuations in the Finnish market, making it an attractive investment opportunity for US companies. These developments have the potential to open new possibilities for Finnish businesses and inject much-needed optimism into the market.

One prominent example is the acquisition of Accountor Software, a provider of financial and human resources management software, by the US-based global investment company KKR. In recent years, US companies have primarily focused on acquiring Finnish startups or growth companies, such as Wolt, SiloAI, and M-Files. The KKR-Accountor deal stands out as an exception to this trend. Shortly after the acquisition, Accountor Software launched a public tender offer to acquire the SaaS company Heeros, effectively resulting in KKR indirectly acquiring two Finnish companies—one of which is listed on the Helsinki Stock Exchange.

Another area of recent US investment in Finland involves data centers. In this type of investments, geopolitical risks are particularly relevant due to the immovability of the infrastructure. For instance, Microsoft began its data center project in Espoo this fall, while Google announced plans to build a new data center in Kajaani. Although data centers do not directly create large numbers of jobs, these investments have positive local and national impacts. They increase demand for electricity, which can, in turn, drive green energy projects.

These developments highlight the Finnish market's potential and underscore how infrastructure investments can indirectly strengthen Finland’s IT development capabilities, at least to some extent.

Where are the investments?

Investments from US companies are building trust in the Finnish market and its potential. However, overall investment in Finland decreased by 8.8% in 2023 and is projected to decline by another 3.4% this year. This raises an important question: why are Finnish companies cutting costs instead of investing?

According to Sitra research, this trend has been a cause for concern for years. Finnish companies have focused on saving rather than investing, which has resulted in a lack of productivity growth compared to similar economies. Sitra’s report highlights that Sweden, for example, has invested significantly more in intangible capital—such as software and databases (including data)—than Finland.

Empirical evidence supports this conclusion, as many executives have indicated that their development budgets for next year will either remain flat or decrease further. This cautious approach reflects current market uncertainty. Yet, waiting for the market to bounce back is unlikely to yield positive long-term outcomes. Such a reactive stance makes companies vulnerable to market shifts instead of proactively seeking new opportunities for growth.

Inderes estimates that the most critical cost-cutting needs have already occurred in the private sector, yet new investments in digital development remain low. This stagnation negatively affects IT-service companies and may accelerate market consolidation while making strategic partnerships increasingly critical. Investments in digital development, forming partnerships, and collaboratively seeking new ways to gain a competitive edge would benefit both client companies and IT-service providers in the long term. To flip the question: could IT-service companies themselves innovate new business models that better support client growth?

While turbulent times often require tough decisions, it is counterintuitive for companies to focus solely on cost-cutting rather than investing—especially when digital development has been a significant driver of productivity growth over the past few decades. Investments in technology and digital transformation are essential to turning the current slow growth into future success. The market is waiting for bold players who are willing to take risks, lead the way, and transform those risks into long-term gains. Such proactive actions could create a positive feedback loop, benefiting the broader economy and placing Finland back on a growth trajectory.

On a positive note, many companies have increased investments in Artificial Intelligence, particularly generative AI. This presents one potential avenue for productivity growth. However, relying too heavily on a single technology is akin to "putting all your eggs in one basket." Broader digital development is still needed, as many processes can be automated even without AI, yielding a positive return on investment (ROI) in the short, medium, and long term.

Hopeful reports suggest that the Finnish economy will see slow growth next year, with a gradual decline in unemployment. If the market outlook continues to improve, investments must be made sooner rather than later to ensure companies are prepared to capitalize when the next boom period begins. The winners of tomorrow are made today. The question remains: who will take the lead early and reap the rewards when the time comes?

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