Tech analyst Forrester discovers enterprise software is recession-proof

A figure presented by Forrester reveals that despite inflation hitting a 40-year high and expected recessions, the growth rate of enterprise software spending is expected to turn up at a steady 12 percent. Throughout the time though the research might be contemplating good news for people working for a software vendor, it's a bit more assorted for IT departments.

Utilizing data from companies' financial results and company filings as well as other secondary research sources to populate internal models, Forrester exhibits how enterprise software vendors were able to maintain their prices and margins despite the economic headwinds. US blue funk of a long and severe recession – in the face of a four-decade inflation peak – is mirrored elsewhere. The UK saw inflation run over 10 percent in August, with economists growingly confident of a recession. The situation is pretty much the same in the Eurozone.

But enterprise software vendors are not expected to acknowledge trimming prices. According to the report from Forrester "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." It further added, "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."

Forrester recognizes "robust demand" for security, database management, operations management, vertical software, and cloud-based enterprise applications as boosting the trend. Over the next two years, it predicts half of the 657 publicly traded software companies it follows to grow revenue between 10% and 20% per annum. And while it may not come to notice, the aggregate market capitalization of publicly traded software companies has expanded more than sevenfold from $718 billion in April 2010 to $5.4 trillion presently. That's a CAGR of 18% even after the market's big selloff this year.

In other words, the economic circumstances among customers won't have a clash on prices and margins which is thus far much higher than in many other industries. In fact, according to the Bureau of Labor Statistics, application software pricing is outpacing other areas of tech spending in the US. "The relative producer price index for application software has blown sky-high in the latest 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 next reason for Forrester's optimism in enterprise software is those customer businesses will continue to put money into the projects, even with the likely economic downturn.

Moreover, the COVID-19 pandemic has swelled cloud and digital transformation investment while at the same time, customer communications and contact center software companies came across strong growth in part on the back of a yearning to track customers digitally in the new normal.

In back-office software, businesses are also likely to carry over to fund projects as they decrease behind in efforts to refurbish the software, both in look and feel and cloud hosting. According to the analyst firm, 24 percent of software decision-makers deploy Custom ERP Software Solutions on-premises in comparison to 19 percent who backed modern SaaS deployments.

the research concluded "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."