How To Spend in a Time of Rising Inflation

Image credit: iStockphoto/wildpixel

Sometimes it’s easy to think of the technology area as being separate from real-world macro-economic concerns. But recent events have shown how they are inextricably linked.

There were, for example, the supply chain disruptions due to the pandemic lockdowns, which prompted many organizations to revisit their processes and the technologies they use to manage their inventory and supply chain risks.

Many organizations are now dealing with energy shortages which are limiting productive capacity and prompting a rethink on everything from growth and asset utilization to long-term plans on energy sourcing.  

Auditing energy sources in data centers, for example, has been an exercise in Green IT, but it has also become a cost consideration.

Then there is the acute skills shortage, which means that many organizations cannot recruit the technology talent they want to implement the necessary changes.

Dire warning

Other technology organizations like Twitter and Intel have announced hiring freezes. Meanwhile, Meta’s Mark Zuckerberg issued a dire warning on a staff call recently, which would require scaling back on hiring as he invited staff who “shouldn’t be here” to “self-select” and decide to leave. The crypto crash has also seen Meta shut down its Novi digital cryptocurrency project.

There is also inflation, which has turned from a specter into a daily reality as a combination of all these factors is seeing prices spike faster than they have in decades.

This has pushed up the price of consumer devices, with the cost of iPhones in Japan hiked by nearly a fifth while many companies are scaling back investment plans. Sales of smartphones fell below 100 million units globally in May.

Technology investment group Prosus spent around USD8 billion in buying up companies with ecommerce platforms spanning education, agriculture, payments, and fintech but paused because the cost of capital is too high. In South Korea, 28% of all companies in a recent poll said they were planning to reduce investment levels in the second half of 2022.

CIOs and inflation

So how should a tech leader respond to inflation?

Gartner’s Robert Naegle, a vice-president analyst, tackled this subject in a recent Q&A blog post and made the point that inflation is a pressing issue that poses unique challenges for IT.

He says technology leaders have three choices: spend the same and do less, spend more and do the same, or try and optimize to spend the same and do the same.

Pull out quote “CIOs should compile a list of the vendors they cannot live without and those that may be dispensable”

“If optimization is the goal, current resources will need to stretch — existing infrastructure will have to do more for longer, and existing talent will have to be more productive,” said Naegle.

He says that one of the most immediate impacts will be vendors implementing, or preparing for, price increases which will impact IT budgets. With this in mind, tech leaders should identify contracts with high inflation exposure.

“Pinpoint contracts that tie increases to inflation, such as a specific country’s Consumer Price Index, because variable indexes are likely to lead to dramatic cost increases,” said Naegle.

“CIOs should compile a list of the vendors they cannot live without and those that may be dispensable. For vendors that are vital, look to enhance partnerships using win-win strategies where possible.”

These contracts, he says, should be prioritized for negotiation, “as renewable activity provides the vendor with the opportunity to increase pricing, but also provides a leverage opportunity to proactively negotiate cost protections.”

Proactive management

For less strategic vendors, explore options to consolidate or “migrate to alternative vendors.”

While tech leaders must align with the chief executive and the board around the broader corporate response to inflation, Naegle warned that “cost reduction should not be reactionary.”

“It should be strategic and aligned with efforts being undertaken by the business as a whole,” he said.

“Provide the chief financial officer with a best-worst case budget inflation impact that showcases a range of expectations and aligns IT spend to priority business outcomes.”

He recommended the proactive management of all consumption by sharpening processes and investing in tools to improve cloud, software, and infrastructure consumption controls dramatically.

“Communicate IT’s response to inflation widely, and ensure that business stakeholders agree on the significance, justification, timing, and impacts of both cost management initiatives and new digital efforts,” said Naegle.

With inflation rearing its head along with a period of lower economic growth, many economies are pondering the phenomenon of stagflation. In this context, IT spending and digital transformation projects have new layers of complexity to navigate as organizations look to do the same, or more, with less.

Lachlan Colquhoun is the Australia and New Zealand correspondent for CDOTrends and the NextGenConnectivity editor. He remains fascinated with how businesses reinvent themselves through digital technology to solve existing issues and change their entire business models. You can reach him at [email protected].

Image credit: iStockphoto/wildpixel