July 12, 2022
When costs go up, spending goes down. That’s the case in nearly every industry, including information technology. So as U.S. inflation continues to rise on the way to a likely recession, IT specifically and the tech sector in general are feeling the pain.
According to a recent article in Business Standard, “U.S. employers in the technology sector cut nearly nine times more jobs in May.” During that same month, the tech sector cut 4,044 jobs—a massive increase from the 459 cut between January and April and reportedly “the highest monthly total since December 2020 when tech companies cut as many as 5,253 jobs.”
Here’s how Avery Dennison CIO Nicholas Colisto summarized the increasingly concerning situation: “We are feeling the impact of inflation with price increases in the cost of hardware, equipment, and services. Also, rising consumer prices and their impact on wage inflation are making talent acquisition and retention more competitive.”
As a result, IT executives are looking to “consolidate and standardize to create efficiencies,” as CIO.com wrote. And they apparently can’t do those things fast enough. After COVID-19, a 2022 survey showed, inflation is their top concern.
Earlier this year, a Gartner article offered tips to business leaders that might help mitigate the impact of inflation. One of them was to renegotiate IT contracts “to remove bundled support and unnecessary add-ons… You might also explore free or usage-based licenses to respond to temporary peaks in demand. To reduce software costs, consider discontinuing support and maintenance for licenses that are no longer in use If possible, move to third-party support to avoid wasteful support-bundling rules. Finally, reduce your support level from higher-tier to standard support.”
It’s great advice—all of which has a negative impact on IT providers.
Other complicating factors during this once-in-decades inflationary rocket ride, the CIO.com article notes, include increasing labor and contract costs coupled with limited areas for “cost refuge”—such as offshoring, which no longer makes financial sense because the price of goods and services is doubling and tripling even overseas.
Responding to those issues and related ones requires a strategic tightening of the proverbial purse strings and closer monitoring of costs. Encapsulating the thoughts of Rick Villars, group vice president for Worldwide Research at IDC, CIO.com wrote that, “Most IT departments have well-organized procurement functions and solid CapEx spending models, but many of the tried-and-true practices that have helped keep costs in check in past years when IT had more capital expenses won’t help in the era of SaaS, subscription services, and usage-based models.”
As Villars explained in a March 2022 statement that coincided with the release of IDC’s Future Enterprise Resiliency and Spending Survey, Wave 1, which included responses from 798 IT and business leaders around the world, “At start of 2022, most IT organizations planned to maintain or increase technology investments with an emphasis on expanding use of as-a-services options while also catching up on dedicated infrastructure modernization. They also anticipate that general inflation and IT supply chain issues will alter cost assumptions, but a majority of those are considering increasing their ICT budgets or implementing more effective IT cost ops planned rather than delaying technology investments.”
It’s a good bet that many respondents failed to anticipate just how high inflation would rise. They are, however, anticipating future costs as inflation and supply chain issues force them to pay higher prices for things like workstations and servers than they would have otherwise. And if they need something immediately, especially with the ongoing transition to remote and hybrid work, it will run them extra. Some will pay the premium, some will opt to wait for price drops. It’s just a matter of urgency.
Rising costs are also prompting CIOs to spend on major initiatives now rather than later, when costs will almost certainly be even higher. “It’s about the value that CIOs might be bringing to the business,” one IT consultant told CIO.com. “That’s value that IT can bring to help mitigate the pressures that inflation is putting on the company as a whole.”
Avery Dennison’s Colisto echoed those sentiments, saying that in response to rising demand for digital business initiatives he and his team are “being more discerning” about their expenditures and focusing more on “strategically imperative initiatives.”
With inflation rising sharply and no clear end in sight, experts say, CIOs are increasingly under pressure to educate themselves from a holistic perspective so, as one IT professional explained, they can better understand “how government and regulatory actions could impact the economy and their organizations and how best to respond with a holistic view of these broader economic issues.” In trying to figure out how to be more resilient amid mounting uncertainty, CIO Caren Shiozaki told CIO.com, CEOs are relying on CIOs for guidance more than ever before.
Acknowledging that being strategic about inflation-related cost management while retaining a capacity for growth can be challenging, Gartner VP Randeep Rathindran also offered an explanation for why it’s so difficult right now. “[M]any executive teams,” he noted, “lack the muscle memory to tackle the type of inflation scenario we’re seeing today” simply because many of them have little or no prior experience dealing with it.
“We haven’t seen broad-based input-price inflation like this for 40 years, and it takes agile and responsive strategy to allocate resources efficiently while tackling that pressure — and still achieve the organization’s desired outcomes.”
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