Mitigating the impact of inflation on IT: Gartner

Inflation will impact IT budgets. As purchasing power reduces, budgets will become more stretched. Although the total budget may remain static in terms of financial impact, those funds will unlikely be able to purchase the expected level of goods and services assumed when the budget was approved. Technology leaders will be forced to manage cost control and investment priorities even closer than before.

Although technology leaders can’t control inflation, they can mitigate some of its effects by focusing on protecting what’s important, proactively managing consumption and reviewing vendor pricing. From there they can coordinate their organisation’s response. Some mitigations are short term, while others may take time to implement.

A good starting point is to evaluate the areas of spend that add the most value and need to be protected. Then, focus on the budget areas most affected: third-party contracts, labour rates and variable spend relationships.

Protect what is important

Rebalancing conflicting priorities becomes more difficult, but also more vital, in uncertain economic times. Finite and limited funds must be spent wisely. Technology leaders always face difficult trade-off decisions between protecting the business from risk and performance degradation, while investing effectively in initiatives that will deliver value. In inflationary times, these trade-offs come into even sharper focus.

To effectively protect the business, areas most at risk must be identified and an action plan put in place to mitigate against inflationary pressures that may affect them. This includes working with HR to draw up a retention plan to avoid talent drain. It involves assessing and identifying strategically vital vendors and partnering with them to protect the relationship. It also means maximising the return on scarce project budgets by aligning with value and adjusting financial hurdle rates.

Proactively manage consumption

IT costs, like all costs, are ultimately price multiplied by quantity. Typically, IT pricing is the domain of the IT function. Although the business generally determines how much technology it consumes, IT is best placed to drive down the cost per unit, through contract negotiation and driving up efficiency and productivity of resources.

Sharply rising inflation changes this complexion significantly. IT prices are now being heavily determined by external factors, which technology leaders have no way of controlling. As the opportunities to reduce the cost per unit diminish, this necessitates doubling down on efforts to control, govern and lockdown IT consumption. Make sure that the business is only consuming what is truly needed, and only paying for what it actually consumes.

Focus on improving tools and governance. Explore the business case for investing in consumption management tools such as software asset management or cloud management. Make it more difficult for the business to overconsume unnecessary IT resources by reviewing and tightening governance and streamlining the request process. The need for incremental volume can be reduced by getting more from what you already have, through automation and rationalisation.

In addition, change the business’s consumption behaviour by using chargeback. This helps users understand the impact of their technology consumption by attaching costs to major services and consumables. The intent is that, if technology services have a real cost attached to them, then users will make more informed decisions and ultimately consume less, or at least the minimum they need, rather than overconsuming because they are not expecting to pay for it.

Review vendor pricing

Much of the inflationary uplift to IT prices will be forced on technology leaders. Although technology leaders can’t manage inflation itself, they can deploy certain tactics around negotiation and vendor management to at least partially mitigate the effects.

Start by reviewing all incumbent, less strategic vendors to assess if alternative options are viable, at better price points. Also manage vendor pricing renewals by looking for win-win strategies to enhance strategic partnerships that also consider non-monetary benefits.

If vendors try to pass on unfair inflationary prices, force them to explain the real root cause and use readily available data points to counter the offer. Then, draw up a list of trade-off/leverage positions for price negotiations, such as time commitment, acceptable service degradation and consolidation of activity with fewer vendors.

Bryan Hayes is a senior director analyst at Gartner. He advises CIOs on all aspects of IT cost optimisation, business value of IT and IT financial management.

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