IT Inflation:  Where it is Headed, and What To Do About It

Guidance for CIOs and IT buyers on how to control IT budget overruns
Pinterest LinkedIn Tumblr

We have all become accustomed to rising prices in our everyday lives, whether it be at the petrol station, grocery store, or our favorite restaurant. Hardware, software, and IT services prices have also been increasing dramatically over the past year. Hardware prices started to increase earlier, with the logistics nightmares caused by COVID, and have continued their upward arc ever since. 

These developments stand in stark contrast to the usual tendency for hardware prices, which for decades have been marked by falling prices for equivalent computing power. According to IDC Chief Research Officer Meredith Whalen, “Over the past few years, we have seen a distinct departure from the secular trend of falling hardware prices, caused by COVID supply chain disruptions and shortages of certain raw materials, and now exacerbated by the war in Ukraine. The increase in software and services prices have now also picked up, adding to the challenges facing CIOs and IT buyers.”

The price rises in IT differ greatly depending on hardware and software category and vendor, the maturity of the technology, IT service supplier and geographic region, and of course the volume and leverage which the purchasing organization can bring to bear in negotiations.  “IDC tracks the prices and volumes of hundreds of categories of hardware, software, and services on a quarterly or semi-annual basis, and captures actual deal data on hundreds more IT contracts per quarter,” says Brian Clarke, Group VP for IDC’s pricing research. “Our data indicates an approximate 18-20% rise in enterprise client (laptops and PCs) pricing over the past two years, approximately 10-15% rise in server and storage pricing, and 5-7% increase in enterprise software pricing, including IaaS cloud prices (Azure, AWS, Google). In the same period, we have seen average consulting day rates go up by 5-7% globally.”

But how are these increases being reflected in actual prices paid by organizations? “My team and I work with large IT buyers on pricing issues on a daily basis and we see intense interest currently in how to anticipate and manage inflation,” says Teodora Lowenstein, of IDC’s Sourcing Advisory Service. One of the largest challenges senior sourcing professionals are facing is how to manage internal stakeholder expectations as upper management is still looking for sourcing/procurement to drive YoY savings. In many cases the conversation has to move from cost reduction to cost avoidance and the impact will differ widely from vendor to vendor.

Many IT procurement professionals are wondering what to expect going forward, and CIOs are considering how to adjust business plans. According to IDC’s Stephen Minton, who is responsible for assessing the impact of global economic trends on IT, “It’s a tricky time, with upward pressure from logistical problems, the war in Ukraine, and the rise in the price of fuel.  However, some key central banks have started raising interest rates, which will have a damping effect on prices as they hit the broader economy. The trillion dollar questions are how long the supply side challenges will persist, and whether the monetary tightening will lead to a global recession. We at IDC expect 18 to 24 more months of elevated rates of IT inflation, in the range of 7-8% across all IT categories, followed by a moderation to slightly below average rates in the 2 to 3 years following that.”

What is to be done? How can organizations hedge or manage these increases? There are a number of steps which can be taken to keep opex and capex spending under control, despite the inflation. According to Joe Pucciarelli, who leads the group of analysts who produce research and guidance for CIOs, here are some of the most common approaches to control IT budget overruns:  extend the replacement cycles for end-user and data center hardware, within reason and while maintaining focus on security and upgradability.  These cycles have been getting longer over the past decade, and certainly in the wake of the 2008 downturn;  monitor hardware, software and services prices on a deal by deal basis to ensure that you are getting best in class discounts; rationalize your software estate to avert paying for licenses or maintaining software which is no longer in use or is redundant;  practice brutal prioritization of your IT and software dev projects, with direct input from senior management, to avoid spend on low value activities; evaluate your existing outsourcing agreements and internal service provision to check alignment with current market rates and quality levels; and finally, optimize your IaaS cloud deployments to avoid overspend with effective tools and an actionable roadmap.

And at the end of the day, after all these steps have been taken, and probably in parallel, consider unavoidable increases in the IT budget, and your plan to explain to senior management and the board the need for this increase. “One important element in gaining acceptance for increased spending is your ability to convey the overall value of IT to the organization,” says Marc Dowd, who advises CIOs and other digital leaders around Europe. “If you have laid the foundation by becoming a partner in the growth and success of the organization, and have led the charge as IT becomes integral to the delivery of goods and services to customers, chances are the budget will get approved, and the impact of IT inflation on your organization can be absorbed and offset by the increased value you are providing to customers.”

One thing is certain, while inflation is pumping up global IT Spending- it’s crucial to have a game plan in action. That’s exactly why IDC’s Sourcing Advisory Services provides guidance to CIOs and technology buyers on saving millions of dollars on IT investments. To learn more, click the button below.

Chris is responsible for advising enterprise IT buyers on best in class pricing and deal terms for large-scale contracts with major IT vendors. Mr. Murphy's research coverage focuses upon a wide variety of IT purchasing areas spanning enterprise infrastructure and client hardware to software as a service, cloud computing, managed print and professional services. Mr. Murphy has led recent benchmarking efforts in emerging categories such as Artificial Intelligence, Big Data, and Cyber Security.