CIOs are squeezing their existing and future suppliers for more value as the devaluation of the pound against the US dollar and the euro lead to massive increases for computer hardware.
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Anson Chuang is CIO for the specialist IT procurement agency BuyingTeam, which negotiates IT supply contracts for firms such as British Airways, the British Council, Channel 4 and Universal Media. He said the devaluation has not affected software and outsourcing contracts yet, but US-based suppliers were putting through massive price hikes, blaming currency values for 25% of the difference from a year ago.
According to the X-Rates.com foreign exchange website, it cost Brits 50.76p to buy a dollar and 74.71p to buy a euro in January. Today the figures were 88.42p and 66.89p respectively. This reflects falls of 32% against the dollar and 18% against the euro.
Charles Ward, chief operating officer for Intellect, the suppliers trade body, said the devaluation would result in winners and losers. "On the negative side we might see an increase in the price of IT equipment, if suppliers chose to pass on the increased costs of importing," he said. It was unlikely to affect prices at the low-end of the market, he said.
David Roberts, chief executive of the Corporate IT Forum, said the very large firms' prices would be affected by their hedging strategy. "If they are trading in sterling they will have to pay more, but if they are in receipt of dollars, they may have more flexibility," he said.
Alan Bowling, chairman of the SAP Users Group, which this year faced down attempts by the software firm to raise maintenance pricessaid IT departments had to check their services contracts with their suppliers. "A home-based contract in UK currency will likely be unaffected immediately by any currency fluctuations," he said.
Chuang said he was seeing more suppliers with long term deals to supply consumables such as desktop computers defaulting on their contracts. "It depends on the penalty clauses in the contract, but if they cannot supply (at the agreed price), they will not supply," he said.
To protect themselves against currency fluctuations suppliers were slashing the period for which their quotations were valid. "The quotes were usually valid for 60 to 90 days," Chuang said, "now it is from 14 to 45 or 50 days."
CIOs are fighting back by extending the refresh rate of their hardware from the usual three years to four, said Chuang. They were not cutting their gross budgets, but they were asking for a lot more for their money, he added.
His firm was receiving more enquiries than usual, he said. "CIOs were quite protective about their internal procurement staff, but they are now turning to anyone who can help them get dramatic increases in value," he said.
So far the outsourcing sector appeared unaffected by the devaluation. This was partly because many of them are done in local currency, with the risk left with the supplier's internal price transfer system.
IT functions outsourced abroad may face greater economic risk from currency fluctuations, said SAP Users Group's Bowling. "These contracts can be similar to a fixed-price mortgage, as depending on the volatility of the market, users could be in for a nasty shock at the end of contract term" he said. "The same, of course, applies to future purchases of software and hardware from outside of the UK."
Intellect's Ward expected the costs of new off-shore contracts and renewals to rise, but said long term contracting may negate this. "Conversely, near-sourcing will become a more attractive option, although we are yet to see evidence of this on a large scale," he said.