Let's dig into the takeaways from Q1 CY2024 Earnings Calls.   Here are the 8 key themes I observed.

1. Discretionary spending remains tight: The single most common line uttered by every CEO in their Q1 earnings calls was that discretionary spending remains tight.  CIO’s no longer have the extra money to spend on proof-of-concept and nice-to-have projects, and instead are facing choices of which of their technology spending categories to prioritize
2. Near-term ROI is the biggest factor in winning deals: CEO’s reported that of the deals they did win, it was attributable to being able to return immediate ROI to the customer.  The key word is immediate, CIOs can’t invest in long-term ROI horizons that pay off in 2-3 years, they need to see a demonstration of how IT services are going to bring them economic value on day 1
3. Digital transformation is still around and has a bright future: Despite the cuts to discretionary spending, enterprises are still spending on digital transformation, especially on projects related to building their digital core.  The digital core is a single version of truth for enterprise data, categorized into a single ontology, optimized with cloud, and consumable via an API.  Enterprises are realizing they can’t take advantage of the promises of GenAI and automation until they can supply those algorithms with quality enterprise data.  And the good news here is that most enterprises are extremely early in their digital core journey, with most estimates leaving 90% of the future work still to be done
4. Investing in people is back: Accenture’s launch of LearnVantage, combined with its acquisition of Udacity set a clear signal that enterprises are looking to invest in reskilling their existing workforce, a potentially huge new market opportunity for service providers
5. From the great resignation to the great stay: Attrition is back to pre-pandemic levels, hiring is significantly down, and most IT services vendors decreased in aggregate headcount as compared to a year ago; what a difference a year makes.  But the one metric that shows this isn’t sustainable is utilization.  Utilization is reaching near record highs for most vendors, which means that the short-term strategy of hiring fewer people and doing more with less can only go so far
6. Margins are increasing, but their long-term stability requires a return to revenue growth: The majority of IT services vendors announced margin improvement initiatives in CY23, which yielded success into Q1CY24.  However, short-term cuts to spending on office space and headcount aren’t sustainable for long-term margin expansion, which will require a return to revenue growth
7. The GenAI hype cycle is over: While many of the earnings calls still devoted significant time to discussion GenAI, the focus is moving away from the initial hype and into what is generating tangible growth.  One thing that is clear is that IT services vendors have an opportunity to help enterprises develop the guardrails and compliance frameworks that ensure LLMs and other GenAI algorithms are being used in a safe way, minimizing the risk of hallucinations and data training data leakage.  Additionally, the ability for code assistants to help understand legacy code in languages like Fortran and COBOL is driving real efficiency as historically developers in those languages had to invest lots of time in understanding messy code bases
8. Q1 is predicted to be the bottom of the trough, but will it? At the end of CY23, CEO’s were predicting a return to growth in Q1CY24.  Now that Q1CY24 results are in we can see the Q1CY24 was another quarter of decelerating IT services growth (when viewed in constant currency).  The Better Way SmartView is the only market forecast that provides a quarterly view of the IT services market, I hope you are as excited as I am to get the Q2CY24 view and see when the market returns to growth! 

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