Cybersecurity spending isn't recession-proof. But it's pretty close.
Due to regulatory forces and intensifying cyberthreats, experts say that security budgets are more likely than other tech segments to be preserved during a slowdown.
Concerns are growing that a broader economic slowdown is coming our way over the next year or two, prompting a number of tech companies to preemptively freeze hiring or lay off employees. No sector within the tech world could expect to be totally immune to worsening economic conditions, of course. But for many reasons, the cybersecurity industry is likely to be spared more than most, according to industry experts.
With many in the industry gathering this week in San Francisco for the return of the in-person RSA Conference, the question of what’s in store for security budgets is sure to be a popular discussion topic. History isn't too helpful when considering the impact of a downturn on cybersecurity spending, given that security budgets are so much larger than they were during the Great Recession of 2007 to 2009, said Jeff Pollard, a vice president and principal analyst at Forrester.
Still, if a global slowdown is ahead, "I do think that cybersecurity spending will be more resilient than other areas," said Pollard, a specialist on security budgets and the role of the chief information security officer (CISO).
Some prominent cybersecurity vendors are expecting the same. On Thursday, CrowdStrike and Okta said that they’re each raising their revenue guidance for their current fiscal years (both of which run through the end of January 2023). CrowdStrike and Okta raised their fiscal 2023 guidance by about 2% and 1%, respectively, from the prior guidance disclosures in March.
The perks of regulation
The confidence felt by security vendors, Pollard said, stems from the fact that a large amount of cybersecurity spending is now essentially built in, due to regulatory and market forces that didn't exist to the same degree during the last major downturn.
And on top of existing regulations, newly proposed SEC rules around cyberattack disclosure could soon provide another incentive for public companies to refrain from slashing their security budgets, said former CISA director Chris Krebs, who is now a founding partner at cybersecurity consulting firm Krebs Stamos Group.
If adopted, the rules would require a “material cybersecurity incident” such as a ransomware attack or data theft be disclosed within four business days. While pressures on security budgets may grow, "the requirements aren't going away," Krebs said.
Along with the need for many businesses to meet regulatory and compliance standards around security and data privacy, many cyber insurance policies also necessitate some level of spending on cybersecurity, Pollard noted.
Companies that cut back too much on security spending might see a negative impact on revenue, as well, since it could discourage potential customers from doing business, he said. There's now a "much higher bar" for the cybersecurity posture that customers have come to expect from their suppliers during security reviews, such as demonstrating competence around data security and privacy, and incident response capabilities including breach notification.
"You've got to spend money on cybersecurity," Pollard said, "because it's going to cost you deals if you don't."
A board-level concern
Meanwhile, cybersecurity is now a far higher priority in the C-suite and board level than it used to be, given the intensifying threat landscape, said Steven Weber, a professor at the University of California, Berkeley, who specializes in international business and information security. Particularly at the board level, the mindset has shifted dramatically in the past few years, said Weber, who also serves as an adviser to the boards at several publicly traded companies.
There's now a "sense of vulnerability and liability at the board level" that didn't exist previously, he said. In the wake of incidents such as the SolarWinds breach and a spate of high-profile ransomware attacks in 2021, 88% of boards now see cybersecurity more as a business risk than a technology risk, a survey from Gartner found in the fall.
For the leadership at many companies, cybersecurity is now seen "as something we have to protect — and that [may require] cuts elsewhere in order to protect it," Weber said.
With the shift to digital, businesses can no longer afford to draw a distinction between "getting the job done" and "getting the job done securely," said William MacMillan, a senior vice president at Salesforce and formerly the CISO for the CIA.
"It doesn't work anymore to say, 'We can cut back on security as long as we get the business done,'" MacMillan said. "Because you won't get the business done if you don't prioritize getting it done securely."
That means security is likely to be "more recession-proof than probably any other area of technology," said Jay Leek, managing partner at cybersecurity-focused VC firm SYN Ventures and the former CISO of The Blackstone Group. Just because there's a recession, that "doesn't mean the cybersecurity threats go away," he said.
There could be other impacts on security teams, however. The pressure could grow on CISOs to demonstrate the return on investment from security spending, which is seen as more difficult in cybersecurity than in most other areas of technology, experts said.
Measuring the effectiveness of a cyberattack detection tool, for instance, is notoriously challenging. "You can't always say, 'Hey, we found all the things,'" Pollard said. "That's hard to prove."
It’s also likely that some businesses will look to decrease security spending by consolidating more of their tools with a single vendor, to take advantage of the discounts associated with doing that, he said.
Impact on startups
The massive influx of venture investment into cybersecurity in recent years also means that some security startups — especially those that have done a lot of hiring on the back of limited revenue — would likely see a greater impact than more-established players during an economic slowdown, Pollard said.
VC funding for security companies surged from $12.4 billion in 2020 to $29.3 billion in 2021, according to advisory firm Momentum Cyber. And 30 cybersecurity startups achieved billion-dollar valuations last year, compared to six in 2020.
"The companies that have solid foundations, that have great customer relationships, that are doing good things from a security perspective — I think we'll see them thrive," Pollard said.
But for other security startups, "I think we are going to see a bit of a reckoning," he said.
So far, the security industry hasn't seen hiring freezes or layoffs on a broad scale. The two exceptions in recent weeks are cloud security firm Lacework, which laid off 20% of its staff, and attack detection firm Cybereason, which reduced its staff by about 10%.
Lacework leaders disclosed the layoffs in response to what they called a "seismic shift" in "both the public and private markets" recently. The company had raised a $1.3 billion funding round in November, which it called a record for the security industry, and previously reported having more than 1,000 employees as of March.
Cybereason, which raised $325 million in funding last year, cited its inability to go public in the near term as the driver for its layoffs, which impacted 100 employees. “As the bullish tech market conditions have turned and the tech IPO market has essentially closed, companies like us must now exercise more strict financial discipline and prioritize profitability over top line growth,” the company said in a statement.
On the whole, though, today's business realities and cyberthreat environment suggest that cybersecurity won't see the worst of the spending cuts, experts told Protocol. "I think it'll be a lot less than we see in other places," Pollard said.
Veronica Irwin contributed to this report.