PNC 2024 Outlook: Technology Sector

As the technology sector looks ahead to 2024, businesses may have hoped to be able to turn the corner on the so-called “year of efficiency¹,” in which many software companies balanced managing operating costs with cautious investment in growth opportunities. However, this trend is likely to continue into the new calendar year, as ongoing economic uncertainty forces businesses to continue to carefully consider expenditures and realize operational efficiencies.

The Outlook for IT Spending

While IT spending is expected to accelerate in 2024, tech companies are still looking for ways to do more with less. Businesses may carry over existing technology projects, but many are unlikely to expand major projects, as they try to navigate macroeconomic pressures through at least the first half of the year.

Most IT spending growth that takes place in 2024 will be concentrated in two primary areas: software and IT services. For software, a primary driver of spending should result from pricing, as price escalators built into multi-year software contracts take effect.

In terms of IT services, the largest spending component is likely to come from continued cloud transformation strategies, which involve an organization transitioning its digital assets (services, databases, IT resources, and applications) from an on-premise environment to a cloud-based infrastructure. IT services companies will also continue to help companies determine the best cloud strategy – implementing the optimal mix of multi-cloud, private cloud, and on-premise.

The macroeconomic backdrop speaks to the ways in which the ongoing economic uncertainty continues to shape the industry overall, according to Matthew Embacher, managing director of the technology sector for PNC Corporate Banking. “In terms of current trends for technology-based businesses, there is ambiguity in the strength and speed of recovery,” Embacher said. “This doesn’t mean that there aren’t growth drivers moving the industry forward – it just means tech companies are being careful about how they proceed.”

Artificial Intelligence as a Driver of Digitization

Regardless of the lack of macroeconomic clarity, businesses continue to invest in digital transformation, with the demand for artificial intelligence (AI) playing a significant part. Although applications of generative AI are still in early stages, it is clear that AI will drive a wave of enterprise transformation across all industries in the coming years. By 2026, 80% of enterprises will have incorporated generative AI, compared to the 5% of enterprises that have done so thus far.²

Throughout 2023, there was a growing demand for semiconductor production, as businesses were increasingly interested in acquiring chips used to train large language models to enable AI processes for making certain aspects of their operations more efficient.

This will continue in 2024, with the focus on AI shifting from training to inference. In the training phase, a machine learning model processes large amounts of data and uses it to learn to make decisions. In the inference process, the trained model can be used to make predictions or decisions based on new data. Each of the two processes involves the use of a different kind of semiconductor, which will lead to continued demand for chips, along with overall growing interest in leveraging generative AI.

The challenge for many businesses will likely be not only establishing monetization models for AI technology, but also positioning their particular use of AI as a differentiating factor for their company.

Governance Challenges Present Opportunities for Tech Firms

Another noteworthy theme on the technology front in 2024 is likely to be governance, as businesses reckon with the proliferation of technology, data, and devices, which resulted in large part from the COVID-19 pandemic. After equipping employees with laptops, cell phones, and various forms of software to enable remote use, IT and legal departments are facing a growing awareness of potential data security concerns.

As a result, many companies are now turning to technology firms for help implementing guardrails around data usage and the channels through which it is shared and captured, as well as with general cybersecurity concerns. Data quality and trust are among the top concerns for organizations and chief information officers, particularly in light of the emergence of AI. Growing governance concerns may represent an area of opportunity for businesses in the technology sector in the coming year.

2024: Cautious Optimism for Growth

Even amid the challenging economic backdrop, Embacher says it’s important to note that the technology industry continues to see growth. “There may be some technology sectors that are currently facing revenue headwinds, but overall as an industry, technology is experiencing a positive growth rate. That growth may be happening slower than boom years, as companies exercise caution, but we expect that growth overall will continue in 2024.”

Ready to Help

PNC’s Technology Finance and Advisory Solutions group delivers a comprehensive range of financing options and advisory solutions to fit the wide-ranging needs of technology firms. For more information, reach out to your Relationship Manager or contact us.

Resources

1. What CEOs Are Saying: 2023 ‘Is the Year of Efficiency’ - WSJ

2. Generative AI Can Democratize Access to Knowledge and Skills - Gartner

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