Inflation Bites, Tariffs Sting—Can SaaS and Automation Keep SMBs Afloat?

[00:00:02] It's Tuesday, February 18th, 2025 and I'm Dave Solvig. Four things to know today. Inflation Bites and Tariffs StingCan SaaS and Automation Keep SMBs Afloat? AI Industry 5.0 and IT Growth, Germany's tech expansion meets a talent shortage. Less data, more smarts, a study says LLMs don't need massive data sets to learn and $4 billion in loans?

[00:00:27] Kaseya's balancing act between expansion and expense. This is the Business of Tech. Small businesses across the United States are feeling the impact of tariffs imposed by President Donald Trump on imports from China, Canada and Mexico. These tariffs, which include a 10% tax on Chinese products, are causing manufacturing costs to rise, leading many small business owners to increase prices for consumers.

[00:00:54] As reported in The Verge, Valerie Schaefer Franklin, co-owner of a handmade leather goods company in Oregon, reported a 20% price hike on specialty screws due to the tariffs. The interconnected nature of modern manufacturing means that costs are passed down the supply chain, affecting those businesses that produce goods domestically. As uncertainty looms, many small business owners are struggling to balance their inventory costs with the potential for decreased sales due to rising prices. And that's being seen more widely.

[00:01:24] Inflation has surged at the start of this year. The Consumer Price Index rose by 0.5% in January, marking the highest increase since the summer of 2023. Over the past three months, prices have risen at an annual rate of 4.5%, significantly above the Federal Reserve's goals. Notably, grocery prices have seen dramatic increase, with egg prices up 15% just in January and 53% over the past year.

[00:01:51] As covered by Rich Freeman over in Channelholic, the market for software as a service, or SaaS, has shown significant improvement, particularly in the vertical SaaS segment. While horizontal SaaS applications experienced a healthy growth rate of 28% last year, vertical SaaS solutions surged even higher, with a remarkable 45% increase in sales.

[00:02:13] According to Tracy Wu, a principal analyst at Forrester, this growth is driven by businesses seeking industry-specific solutions that address unique market and regulatory challenges. For instance, two-thirds of law firms in the United States still rely on traditional methods such as pen and paper, highlighting a significant opportunity for modernization.

[00:02:34] Companies like Clio, a legal SaaS vendor, are capitalizing on this gap, recently achieving a valuation of $3 billion after a $900 million funding round. The article emphasizes that specialized consulting services associated with vertical SaaS are becoming essential for managed service providers to maintain competitive advantage in an increasingly complex ecosystem. Why do we care? I'm concerned about the troubled waters ahead.

[00:03:01] Small businesses already struggling with rising manufacturing and supply chain costs will likely tighten IT spending or shift toward lower-cost solutions, particularly if they consider IT an administrative cost rather than a revenue driver. Expect increased interest in automation and AI-driven operational efficiencies as small businesses look for ways to cut costs without sacrificing productivity. Not all SaaS is the same.

[00:03:27] The 45% growth rate in vertical SaaS, outpacing general SaaS at 28%, shows that industry-specific software is where the market is headed. As regulatory and industry-specific challenges increase, businesses are willing to pay for tailored solutions rather than generic, one-size-fits-all platforms. Service providers and IT consultancies that specialize in vertical SaaS deployments, integrations, and compliance advisory will have a major competitive advantage.

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[00:04:49] The IT market in Germany is projected to grow by $31 billion by 2028, driven by a nearly 4% annual growth rate. The growth is attributed to the rising adoption of IT solutions among small and medium enterprises, as well as big data solutions in larger companies. However, the country faces significant challenges due to a shortage of skilled IT professionals, which hinders recruitment and retention efforts.

[00:05:14] According to a report by Technovio, insufficient qualifications limit the pool of potential candidates, leading to high salary demands for qualified professionals. Additionally, 57% of researchers in Germany are integrating artificial intelligence into their work, surpassing the global adoption rate of 44%.

[00:05:31] Key factors fueling this growth include a shift from Industry 4.0, which is a sustainable and human-centric approach, to Industry 5.0, which layers putting the worker at the center of the production process. Other factors include the critical role of big data in analytics and increased investments in manufacturing execution systems.

[00:05:53] More broadly, according to a recent market analysis by Forrester, organizations in Europe are expected to increase their IT spending by 5% in 2025, reaching a total of $4.9 trillion. This growth is driven by accelerated investments in artificial intelligence, cybersecurity, and cloud infrastructure. Forrester also predicts that Asia-Pacific tech spending will grow by 5.6%, with India leading the charge at a projected 9.6% increase.

[00:06:22] The report highlights that software and IT services will account for 66% of global technology spending in 2025, fueled by investments in cybersecurity and modernization of legacy systems.

[00:06:33] Michael O'Grady, principal forecast analyst at Forrester emphasized the unprecedented pace at which technology investments will reshape industries over the next five years, with software spending by enterprises and governments expected to reach 1.7% of global GDP by 2029. Why do we care? While the majority of my listeners are in the U.S., my audience is global, so when I spot useful data, I want to highlight it.

[00:07:01] The real story here is the underlying challenges, specifically the IT talent shortage and high salary demands. It certainly rhymes with the U.S. market. The intersection of growing AI adoption, that 57% of researchers using AI, and industry 5.0's focus on human-centric production creates both opportunities and risks for providers. Companies struggling with hiring will turn to IT service providers, automation tools, and AI-driven solutions to fill the gaps.

[00:07:30] This presents an opportunity for providers and IT consultancies offering managed AI security and automation services. Researchers from Shanghai Jiao Tong University have discovered that large language models can effectively learn complex reasoning tasks without the need for extensive data sets. Their study introduced the concept of less is more, demonstrating that only with a few hundred carefully curated examples, these models can achieve impressive results.

[00:07:59] For instance, a model fine-tuned on 817 training examples reached 57.1% accuracy on a challenging benchmark, outperforming models trained on significantly larger data sets. The findings suggest that the inherent knowledge acquired during the pre-training phase allows these models to generalize effectively, making it feasible for enterprises to customize models without the extensive resources typically required. Why do we care?

[00:08:27] This research challenges the prevailing assumption that fine-tuning large language models requires massive data sets. If models could achieve competitive performance with only a few hundred carefully selected examples, this could drastically lower the cost and resource burden for enterprises looking to customize AI solutions. We're seeing the further commoditization of the models. Let's note that data remains the key leverage.

[00:08:53] Commoditization heavily benefits companies with access to high-quality domain knowledge. Organizations with deep industry expertise will have an edge in selecting the best examples, leaving those without such expertise at a disadvantage. Morgan Stanley is exploring options to raise nearly $4 billion in leveraged loans for Kasei, Inc., an IT management software company backed by Insight Partners.

[00:09:19] This initiative aims to refinance the company's existing private debt. The proposed deal includes two segments, approximately $3 billion in a first lien loan and just under $1 billion in a second lien loan. Initial discussions suggest pricing for the first lien loan could be around 3.25% above the benchmark rate, while the second might be in the high 4% range.

[00:09:46] The transaction could officially launch as soon as this week, although plans remain tentative. Kasei previously secured $3.7 billion in debt in 2022 to finance its acquisition of Datto Holding Corporation. Why do we care? That's a lot of debt. Kasei has recently reported significant profits. This is clearly where the profits are going right now, so a refinance makes sense.

[00:10:13] The business brings the interest rates down and with the potential to push out the maturity dates too. The business theory here is that you use the debt initially to push up revenue and then are in a position that allows you to refinance and pay down the debt, which continues the cycle. Refinancing the debt now also makes the business easier to sell as the balance sheet looks better. Buyers like Broadcom or Cisco both come to mind.

[00:10:37] One possibility, although I find it less likely, is that Insight Partners is looking to load them with more debt to take a payout. Operationally, however, this is the reason to care. Servicing this much debt makes it very difficult to invest in products. Kasei has two or three products in each of the categories it services. It isn't easy to spread your profits around all your products, particularly when you have multiple of ones that do the same thing. Generally, that results in less investment in each product.

[00:11:07] As they say, money doesn't come free. Debt is literally the payments on money. Thanks for listening. Today is National Drink Wine Day. Perhaps pair it with National Crab Stuffed Flounder Day. Nerdy Ocon will be held in Palm Springs, California from April 7th through 9th. Visit NerdyOcon.com to learn all about it.

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