Hundreds of fans channel hot air from server racks to a cooling unit for recirculation at a Google data center in Mayes County, Oklahoma.
Photo courtesy: Google
Short-term market volatility can be a distraction, but it shouldn’t deter companies from focusing on long-term opportunities to invest in gaining market share. The CNBC CFO Council’s most recent quarterly survey showed that twice as many companies said they would increase investment over the next year as those anticipating a decrease in spending. Other recent CNBC surveys of senior executives across all C-suite functions also show a continued focus on opportunity, including hiring. But there is perhaps no aspect of budget planning where the long-term view is now more critical than in technology.
A new survey from the CNBC Technology Executive Council shows that more than three-quarters of senior technology executives expect their organization to spend more on technology investments in 2022. None of the respondents said they expect to spend less on technology investments. There are particular areas of technology spending that relate to acute risk management. Almost three-quarters of respondents said they were spending more to protect their business from cyberattacks compared to a year ago. None of the respondents said they were spending less to protect their business.
But it’s not just about the risk of an expensive hack.
A recent comment from JPMorgan CEO Jamie Dimon in defense of spending more on technology points to the right way to think about it. “Sometimes people refer to some of these expenses as upgrading or adopting new technologies. … the term implies that once you get to a modern platform, those expenses should drop significantly – which is rarely the case. … Technology always drives change, but now the waves of technological innovation are coming faster and faster,” he wrote this year in his annual letter to shareholders.
Reid Hoffman’s warning about tech spending
This was along the lines of insight and a warning from LinkedIn co-founder and Greylock partner Reid Hoffman to members of the CNBC Technology Executive Council during a virtual town hall last week. In areas such as AI, companies that fail to invest today are at increasing risk of being left behind.
“In this environment, we are competing to get the best and long-term value from our businesses. So ask yourself: where do I have a competitive advantage and where can I play offense?” Hoffman told the group of senior technology executives.
Even if investments in AI should not be part of the current budget, companies should at least stay on a learning curve with the technology and revisit it later. “You’re sacrificing the future if you completely opt out of AI,” Hoffman said.
JP Morgan’s recent annual survey of CIOs, which compiled the spending plans of 142 CIOs responsible for more than $100 billion in annual corporate budgets, found that the current environment is going to have a definite impact on spending decisions, or at the very least, the timing of those decisions.
In recent years, CIOs set their IT budgets at 3-4% growth when the US CPI was 1-2% (2016-2019). Currently, CIOs are seeing IT budget growth of 5.3% in calendar year 2022 and 5.7% in 2023. This is a big change from the CIO survey of the pandemic period of JPMorgan when IT budgets were expected to contract by 4.8%, but technology analysts at the bank noted that is also the case. does not keep pace with inflation. More and more CIOs plan to postpone purchases until the second half of 2022.
Regardless of how these decisions are made, there needs to be greater collaboration between the IOC and CFO teams. A recent study by technology consultancy Gartner shows that only 30% of CFO-CIO relationships feature a level of personal and professional closeness that will drive the best IT spending decisions. According to Gartner, this is a risk in an environment where corporate margins are under pressure from inflation and potentially stagflation and discretionary technology spending has the ability to achieve greater productivity and offset pressures on the inputs.
In some organizations, the pandemic has offered another way to make technology spending more efficient across the organization, with the unique situation leading to delegation of authority to lower levels of management across functions to approve technology budget items. Technology executives in conversation with Reid Hoffman said this model has proven effective in areas ranging from sales and marketing to finance, removing what can historically be a lengthy RFP process and negotiations between teams and the C-suite – a process that often resulted in cost-savings decisions that delivered mediocre solutions rather than the exact solutions needed by each team.
Between the C-suite’s collaboration on technology and knowing the technology needs that filter through all departments, technology leaders say the focus will be on business value and there has been no pause in the most important initiatives aligned with winning more market share. Technology is more likely to be a method to help navigate changing market conditions than something on which reductions should be targeted. And waiting too long to make technology investments can be a mistake. As the overall economy shifts from an economy where goods inflation was dominating the CPI to rising services inflation, technology prices are part of that mix. The TEC survey finds that more than half (57%) of senior technology executives say they pay higher prices for software, about twice as many as those who say hardware prices are rising.
A member of the CFO Council recently told us that when the annual renewal came from a key service provider, the increase was over 8%, which matches the most recent CPI data. That trend is unlikely to change, but technology spending is often deflationary in nature, another CFO Council member noted.
Paying tech talent remains a major factor, even as headlines point to slowing hiring and layoffs. IBM CEO Arvind Krishna told CNBC on Monday at the Aspen Ideas Festival that he was paying salary inflation of more than 9% to attract talent in a tough hiring market.
Technology costs will not go down, but the more one spends on technology, especially technology that increases productivity, the greater the potential savings in labor cost, so the net result may be less overall expenses. At a time when the cost of acquiring and training talent, and then retaining it, is high, this adds to the deflationary case for technology investments, even if a company spends a higher proportion on technology.
Inflation is not going to stop. IBM CEO Krishna expects high inflation for three to four years. Technology won’t get cheaper, which means inflation and competition are incentives to deploy technology faster. And if competitors use technology, like AI, companies that choose to wait can quickly find themselves behind, Hoffman said.
“We don’t see a slowdown in the B2B space,” Krishna said. He said this goes for retail automation, supply chain resilience, cold chain distribution technology for pharmaceutical companies, computational techniques for faster development of next vaccines and banking where greater personalization embedded in the sale of financial products like loans drives more technology spending.
“When you come to sweeping changes, whether in the supply chain or at a central bank, the first thing to do is to think defensively,” Hoffman said at the recent CNBC TEC event. “Is there a place where something could explode, put us way above our skis? You start with defensive cross control first, but the error stops,” he said. declared.
Business leaders need to accept the reality of the “R-word” – a recession – but not without tying it to a longer-term plan “to have the strongest business possible as we return to growth”, said Hoffman said.
“Don’t spend at all levels, but what is the necessary spend to play offense and not give up on the key option?… Not fall back and give up the trendline that could make your business prosper. … You have to make sure you can keep playing, that’s the defensive game, but immediately after that you have to go on the attack. That doesn’t mean cutting every last dollar,” he said. -he adds.