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How the cost of living crisis is impacting IT

The worsening economic climate is leading to job cuts across the IT sector, with Microsoft only the latest to announce thousands of layoffs - but CIOs will still struggle to find the talent they urgently need

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The announcement from Microsoft chief executive, Satya Nadella, about the company’s need to cut 10,000 jobs is indicative of an industry set on realigning costs as the economic slowdown worsens. Over the last few weeks, Salesforce announced a 10% reduction in its workforce, Meta is reducing its workforce by 13% while Amazon said it would be cutting 18,000 jobs.

In a Securities and Exchange Commission filing, the Microsoft CEO and chairman said: “We’re living through times of significant change. When I think about this moment in time, the start of 2023, it’s showtime - for our industry and for Microsoft. As a company, our success must be aligned to the world’s success. That means every one of us and every team across the company must raise the bar and perform better than the competition to deliver meaningful innovation that customers, communities, and countries can truly benefit from. If we deliver on this, we will emerge stronger and thrive long into the future; it’s as simple as that.”

Industry research conducted over the last few months has shown a big decline in IT spending. Forrester’s European Tech Market Forecast, 2022 to 2027 report, for instance, highlights recession looming across Europe. The economies of Germany, Italy and Sweden are expected to see real gross domestic product (GDP) declines in 2023 as their economies move into recession. Referencing the Bank of England’s predictions, Forrester said the UK economy was likely to be in recession throughout 2023 and for the first half of 2024. According to Forrester, UK GDP is only likely to recover gradually.

Tommaso Aquilante, associate director of economic research at Dun and Bradstreet, said: “Financial conditions are already tight and wage growth, though increasing, remains slower than inflation, giving the Bank of England some reassurance on the risk of a wage-price spiral dynamic in the UK economy. The overall economic outlook remains negative, and it is imperative for companies to maintain a holistic view of their supply chain, financial pipeline, partners and customer needs to navigate the current challenges effectively.”

The challenging economic climate has meant that many people have curbed discretionary spending, such as upgrading devices. Purchases tend to be governed by budget constraints rather than “nice to have” features offered on higher-specified hardware.

Gartner reported that device purchases experienced the biggest decline since the analyst firm started tracking the market. Its data for PC shipments showed that 65.3 million units shipped in the fourth quarter of 2022, a 28.5% decrease from the fourth quarter of 2021.

Skills and budgets

In the past, moving workloads to the public cloud and replacing on-premise IT with software as a service (SaaS) has been among the levers IT leaders can pull when assessing how they make the most of smaller IT budgets.

But, speaking to Computer Weekly about the overall effect on corporate IT spending, John-David Lovelock, distinguished vice-president analyst at Gartner, discussed how IT leaders are now discovering that the budget allocated for public cloud infrastructure and services is insufficient.

Last year, a number of public cloud and enterprise software providers increased their subscription charges and annual maintenance fees due to high levels of inflation and increases in datacentre energy bills and staffing costs. Businesses often negotiate long-term multi-year contracts to get the best subscription rate but the price hike means CIOs will find their existing cloud and enterprise software subscriptions no longer last as long.

Lovelock warned. “If you have made three years' worth of payments for a product at a particular price and have assumed this money should cover all the monthly payments for the term of the contract, due to cost escalations, that money is no longer sufficient. You have to pay more.”

Yet in spite of the poor economic climate, Nadella’s statement on the Microsoft cuts includes references to customers continuing to push forward their digitisation strategy. Following on from initiatives that began during the pandemic, he said: “We’re now seeing [customers] optimise their digital spend to do more with less. We’re also seeing organisations in every industry and geography exercise caution as some parts of the world are in a recession and other parts are anticipating one. At the same time, the next major wave of computing is being born with advances in AI, as we’re turning the world’s most advanced models into a new computing platform.”

One thing is absolutely clear. The IT sector will need to plough money into improving the technology IT buyers use to enable their organisations to operate efficiently during these difficult times. For CIOs and senior IT executives, the challenge is how to attract the right talent, especially since hot skills like AI, data science and anything to do with digitisation, are in high demand.

In fact, almost half (46%) of IT decision-makers who took part in a buyer’s sentiment survey for Rimini Street admitted the cost-of-living crisis has led to the inability to meet salary expectations for new and existing staff. CIOs are having to compete on staff salaries and packages directly with the industry, which, in spite of the announced job cuts, will need to hire more talent, as it drives forward tech innovation.

Gartner's Lovelock believes that although CIOs have been insourcing and developing their internal tech talent pool, the worsening economic climate will mean that it is going to be far harder to compete on salaries with the tech sector. Gartner's IT spending forecast for 2023 shows IT services growth of 5%, which suggests CIOs are planning to buy-in more external IT expertise to fill the skills gap exacerbated by the difficult economic climate.

Read more about IT budget constraints

  • IT leaders in European organisations are facing a shortfall in their IT budgets this year, but the situation is expected to improve after 2024.
  • Oracle and the CBI are seeing much the same picture of cautious technology investment of UK businesses in 2023, in the context of long Covid and the energy price inflation crisis.

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