From
Jorge Nieves
Director of Innovation at Vortex
The economic landscape and the accelerated growth of the sector in the last two years, going through the Covid-19 pandemic (and therefore due to the acceleration of project development which has favored a bubble), it created the perfect storm in an industry that seemed immune to these kinds of union movementsbut which today demonstrates its fragility after the layoffs announced in various companies in the sector, including companies that seemed untouchable.
Lots of tech companies has grown strongly in the past two years due to health restrictions due to the Covid-19 pandemic, with heavy capital injections and aggressive expansion, such is the case with digital entertainment companies that have exploded due to the increase in stay-at-home, e-commerce , which have grown hand in hand with internet sales to avoid social contact or fintechs whose operations have benefited from contactless payments and banks’ delay in digitizing them.
To meet the temporary high demand, many of these companies have expanded organically and inorganically; investing in both development and human capital, without measuring a key factor: real profitability. Few could see that the resource demand curve had long since flattened because this unbridled rage could not be sustained without a solid and proven business model.
There have been many factors that have caused this blow to technology-based companies, although they all lead to the same cause: cutting funding. From now on, the world economic scenario threatened the model: on the one hand, the war in Ukraine forced all economic forecasts to adjust to the new reality, while the steep and rapid rise in interest rates in the US and many other countries have made credit more expensive to try to control the historical increase in the cost of living, ending the era of cheap money that high-risk companies and investors had access to.
Excited by the promise of unprecedented growth, there were no considerations when it came to hiring talent, advertising and embellishing projects with huge budgets try to reach the top of each category, assuming that they would improve the results, without counting on the definitions of the business, on the maturity and on the structure of the team that goes beyond the technical question. Therefore, the performance of a team without taking these considerations into account is erratic and the arrival of the financial winter has put an end to the chaos: the dismissal of personnel was one of the consequences, but not the only one. The correction is also reflected in the loss of investment in advertising, which reaches 50% or more, and from there it descends to the entire supply chain.
Why what the money from endless funding did was invent these misconceptions from the business and allowed it to move forward without too many questions, but when the money available was limited, something became evident that no one focused on: the potential profitability of a company and a mature and responsible business model is what really matters.
At the same time there is the issue of regulations. When there are novelties that emerge and the market is not ready to welcome them, the issue of regulation remains gray, and this discrepancy makes the business model unfeasible. Adjusting the regulations takes time and money… and the latter is what is missing.
What to expect in 2023?
For now, we need to know that in the future we will see much less activity in the technology sector, because while for some companies it is just a cost adjustment, for others it represents the end of a frenetic growth cycle.
The most important thing is that the labor market in the IT sector is still tight and the sector’s unemployment rate remains remarkably low. Furthermore, the strong demand for professional profiles in the sector remains, only that now the IT job market has lost the fierce competition that has characterized the sector, with salaries and benefits inflated to attract talent. The industry needs quality workers who can adapt to a real market, where profitability is essential to maintain jobs and scale projects.
But none of this will work if you don’t start with propose a concrete, real, sustainable business model that observes long-term profitability.
Source: Clarin
