Tech analyst Forrester finds enterprise software is recession-proof
As mission-critical nature of software supports prices, users also find reason to invest
Despite inflation hitting a 40-year high and expected recessions, growth in enterprise software spending is expected to plow on at a steady 12 percent, according to figures from Forrester.
While the research might be good news if you work for a software vendor, it's a bit more mixed for IT departments.
Using data from companies' financial results and company filings as well as other secondary research sources to populate internal models, Forrester showed how enterprise software vendors were able to maintain their prices and margins despite the economic headwinds.
US fears of a long and severe recession – in the face of a four-decade inflation peak – are mirrored elsewhere. The UK saw inflation exceed 10 percent in August, with economists increasingly confident of a recession. The story is pretty much the same in the Eurozone.
But don't expect software vendors to respond by cutting prices.
"Software solutions are mission-critical in nature and vital to the day-to-day operations of a modern enterprise. Leading software vendors can raise prices consistently without losing demand, resulting in high and stable margins," the report said.
"With average software gross margins of 70 percent, software companies can efficiently control their spending and protect margins in downturns; they can then allow these margins to increase with economic growth," it said.
In other words, the economic situation among customers won't have an impact on prices and margins – already much higher than many other industries. In fact, according to Bureau of Labor Statistics, application software pricing is outpacing other areas of tech spending in the US (see below).
"The relative producer price index for application software has increased in recent years as compared to other technology sectors. Adobe recently increased the cost of its Creative Cloud offering, while Microsoft increased the prices of its Office products late in Q1 2022," Forrester points out.
But the second reason for Forrester's optimism in enterprise software is that customer businesses will continue to invest in projects, despite the likely economic downturn.
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The COVID-19 pandemic has accelerated cloud and digital transformation investment while at the same time, customer communications and contact center software companies have had strong growth in part on the back of a desire to track customer digitally in the new normal.
In back-office software, businesses are also likely to continue to fund projects as they lag behind in efforts to modernize software, both in look and feel and cloud hosting.
According to the analyst firm, 24 percent of software decision-makers deploy ERP on-premises compared to 19 percent who backed modern SaaS deployments.
"Back-office financial applications have long been an area of underinvestment, with the pandemic catalyzing a shift toward modern software. Cloud-based back-office software, such as financial management applications and human resource management (HCM), will also see robust growth, driven by pent-up demand to replace legacy apps," the research found. ®