Many CIOs are better equipped to combat rising IT costs. Are you?

Inflation may have dropped from its high in 2022, but the price pressures on IT budgets have continued unabated. Rising prices have imposed tough challenges on IT budgets, operations and staffing, especially for global organizations with operations in countries where inflation has been running high, such as Poland (10%), India (8%) or Turkey (50%). While inflation challenges have moderated in the US from a high of 9.1% in June, 2022, to 3.7% in September, 2023, the price pressures facing IT have persisted. The technology talent gap continues to inflate labor costs, too, despite big layoffs in high tech, CIOs say, and they’ve seen double-digit increases in SaaS and cloud costs over the last two years.

According to IDC’s July 2023 Future Enterprise Resiliency & Spending (FERS) survey of 856 senior IT and business managers in large enterprises, the IT line items most affected, in addition to rising tech salaries, include SaaS and PaaS costs. Forty-one percent of the CIOs in the survey said they’ve changed their cycle for revisiting IT budgets to at least every month, says Tony Olvet, IDC’s VP of worldwide C-suite and digital business research.

Danielle Phaneuf, partner, Cloud & Digital Strategy at PwC, says that inflation will probably be the leading threat to business for at least the next six months — an assertion 40% of CEOs agreed with in PwC’s 2023 CEO Survey. But despite such challenges, CIOs say they’re meeting them head on. Here’s how.

Review strategy before considering cuts

To deal with rising costs, CIOs say they’re reviewing options such as staff cuts and downgrading service level agreements, as well as ways to increase productivity to combat labor cost increases and other price pressures. But strategically important digital transformations should be protected “because they set you up over time and create more flexibility and adaptability,” says Andrew Blau, MD and US leader, eminence and insights, at Deloitte Consulting.

When reviewing those options, says Phaneuf, CIOs should evaluate their business values, strategy, and goals before implementing any mitigation steps.

“The CIO should be talking with the CEO and this should be collective decision making,” adds David McKee, who has seen firsthand the havoc that a lack of alignment with the C-suite can wreak on operations. McKee, tech founder and digital twins thought leader at Counterpoint Technologies, acts as a part-time CTO for nine companies in the US and Europe. One client cut staff earlier this year, only to discover that another part of the business needed their institutional knowledge for a strategic project. “They weren’t communicating enough and it cost them a lot,” he says. “They ended up bringing most of those people back, at consulting rates, for six months.”

Rising software costs create headaches

Another example is Ameritas Life Insurance, which has operations in the US, but the current 3.7% general inflation rate masks some higher increases hitting IT budgets. “We’ve seen 10 to 15% increases across the board for two years in a row,” says CTO and chief transformation officer Richard Wiedenbeck. On the upside, though, Blau thinks upcoming renewals, which will take place against a backdrop of lower inflation than a year ago, could lower the rate of increases this year.

Ironically, as more of Wiedenbeck’s IT budget has moved to the cloud, the one place where price increases have stayed in check has been for infrastructure. With the move to software and platform as a service offerings, infrastructure has now shrunk to less than 10% of his overall budget. But 90% of the sales calls he gets are from vendors who say they can save him money on infrastructure. “Moore’s law continues to play out in that space,” he says, “but Murphy’s law applies in the software space.”

SaaS has its benefits over on-premises software, but it’s been 20 to 25% more expensive, Wiedenbeck says. And as vendors phase out on-premises versions of their software, Ameritas has in some cases been forced to make the jump. “They just don’t offer an on-prem option; that’s how they get you,” he says, noting that ongoing price increases have been much higher with SaaS than for on-prem software. “They’ve found a way to put 25% increases back into the cost of software. I sign three-year deals, but then I’m facing big price hikes.” With software making up 25% of the IT budget, those kinds of increases aren’t sustainable in a low- to medium-margin business, he says.

Costs for PaaS and IaaS services from the big three providers present additional challenges, Wiedenbeck says. “They’ve all built many subcomponent pieces that are unique to those clouds, and when every piece gets an inflationary price increase, they don’t rationalize the whole,” he says. They just pass on all those increases in areas such as layers of licensing, management of the software stack, and their infrastructure services.

In response, Wiedenbeck assesses whether the value of the service justifies the increased cost. If it doesn’t, he considers whether he can save money by adjusting the risk profile for the service, and examines usage patterns for potential savings. “You need to make well informed, thoughtful, and purposeful decisions that balance cost, risk, and value,” he says.

“With SAP, the biggest cost component is database and memory,” Wiedenbeck says, so he took a hard look at each. “By implementing a stricter data archiving and data retention policy, and resetting service levels, we saved a total of about $3 million,” he says.

IT organizations can save substantial amounts on SaaS contracts by lowering service levels, CIOs say. “Too often we pay for the tier above what we need,” says McKee.

But while Wiedenbeck did change service levels in one situation, he urges caution. “It’s dangerous to get so focused on cost that you start looking for ways to reduce it without better understanding the risks,” he says. “On the flip side, we shouldn’t be so fearful of any risk that we overpay for services and service levels. Inflation shouldn’t make us abandon balance management of cost, risk, and value, [but] I do see it as a great opportunity to revisit those areas and see if we’re willing to adjust that balance.”

Partnering with software vendors is another key to keep costs under control. It should be a mutually beneficial relationship, CIOs say, so be prepared for some give and take. “There’s typically more flexibility on pricing if there’s added value that can found, for example, by introducing other clients or integrating products together, creating a win-win situation,” says McKee.

In some cases CIOs say they’ve been able to adjust contracts by asking for discounts, or by asking to pay less in the current fiscal year and more in subsequent contract years. Another potential strategy for global organizations: leverage lower-cost emerging market pricing as much as possible in your contracts.

Talent costs are crushing budgets

For McKee, the continuously increasing price of tech talent has been a major challenge —especially since it’s the biggest component of most IT budgets. “There’s a lot of competition for the best talent and it’s gotten much worse post-pandemic here in the UK,” he says. “We could be talking at least 30% inflation in this sector, and often the only way to deal with that is to start cutting.”

Prior to the pandemic, he could pay a lower wage to people working remotely in areas of England with a lower cost of living while paying more for talent working in London. The pandemic changed that because when people moved to remote locations, they took their salaries with them — and now they don’t want to come back. “Hybrid work is a luxury we can operate in, but it creates high inflation and exacerbates salaries,” he says.

Wiedenbeck says he can still offer slightly lower salaries to people in areas with a lower cost of living, but the pay differentials are smaller. Since the pandemic, he says, “remote work has shown some disparities that existed due to geography, and we’re starting to work through that.”

Outsourcing costs have also risen, McKee adds. “It might cost us $1,000 per day per developer to outsource,” he says. “You can get three people for that.” And then there’s the extra complexity and costs associated with managing remote teams. “When you outsource your software development team, they’re no longer your team,” he adds. “They’re thousands of miles away and you have less ability to influence them. A lot of people choose that option and realize a year later it’s costing them even more than the alternative.”

So outsourcing can help buffer salary increases. “Capgemini, with a half million people, can absorb cost-of-talent variances better than my organization can with 420 people,” Wiedenbeck says. CIOs in the IDC survey with multinational operations said they also try to keep talent costs under control by leveraging cost differentials between countries.

McKee sees two other ways to address the problem. You can recruit more senior people, where one person can replace three and make fewer mistakes, or downsize the teams, wait for the situation to change and rebuild later. “You lose expertise and knowledge, but that’s the most common approach,” he says.

Some CIOs in organizations with operations in countries where talent costs or general inflation are running high report increasing the frequency of salary reviews to every six months. McKee has pursued this approach, but only on an informal basis, which he says allows for more flexibility and creates “less expectation for an increase in pay.”

Increasing the frequency of salary reviews isn’t in Wiedenbeck’s game plan, but he’s trying a new approach to reign in tech salaries. Starting with data scientists, Ameritas is now offering what he calls a “hot jobs bonus.” If the current competitive salary is, say, $175,000, he might offer $125,000 plus a $50,000 “salary kicker” that gets reviewed each year based on market conditions for that skill set. “It’s a variable part of their salary based on a data point,” he says. “Every year we come back and evaluate that.” While employees believe those salaries will never go down, Wiedenbeck’s experience says otherwise. For example, at one time, Oracle DBAs would command $175,000, but as more people entered the space, salaries dropped to the point where he can get someone for $80,000. But it’s a long-game strategy: That cycle can take 10 years to play out, he says.

The big picture: Get your game plan on

Adapting to cost increases requires flexibility, efficiency, and a well thought out plan of attack. Planning is key to adapting to unexpected increases, says Deloitte’s Blau, but don’t fall into the trap of planning with the expectation that the prevailing predictions will necessarily come true, he warns. “Predictions can be traps,” he says, so IT leaders need to take a broader view of what they need to be prepared for. “That is the secret to resilience.”

McKee adds: “Collaborate with your CEO, and understand where in the company inflation is being felt. That communication is critical.”

Also, sticking to your strategic digital transformation plans is paramount, says PwC’s Phaneuf. “During times of high inflation, efficiency is crucial,” she says. “There’s an opportunity for technological business reinvention amid inflationary pressure, and it might help your organization weather the storm. That’s why CIOs should make strategic investments and optimize resilience, both in the short and long term. Also, consider leveraging a project management office to ease some of the burdens of inflation. PMOs streamline projects, which ultimately help organizations meet rapidly evolving needs.”

Distilling it down, Wiedenbeck says that when making a decision to adapt, look at pricing, partner arbitrage, and risk. “Decide if you’re willing to take on risk to adapt to price spikes,” he says. “And you have to partner with your vendors.”