phloxii - Fotolia

IT budgets squashed by 20% currency price hike

CIOs could struggle to get the best value from next year's IT budget as the strong US dollar drives up costs

This article can also be found in the Premium Editorial Download: Computer Weekly: Wearable technology proves its worth on the front line

Analyst Gartner has urged CIOs to reassess their budget plans to take account of a 20% increase in the price of dollar-based IT products for 2015 and beyond.

With CIOs preparing to plan their 2016 IT budgets, Gartner warned that prices of servers and software from US suppliers would rise in line with the strong US dollar.

The price hike could curb IT strategies that require spending money with US IT suppliers. In fact, Gartner has recommended CIOs to cut back such spending by a quarter.

In the Gartner report Building IT infrastructure on a euro budget – why your servers, software and services will cost more, analyst Martin Reynolds said: "As the CIO, the most important action is to review your project plans through the second quarter of 2016. Assume there will be a 20% euro price increase on dollar-based IT products, and then make a plan to deal with it."

In June, Gartner's head of forecasting, John-David Lovelock, told Computer Weekly: "We’re looking at the US dollar being high through 2017, but the effect we’re seeing now is around product suppliers re-pricing, using obfuscation and trying to keep the revenue they generate in line [with their in-house projections]."

He warned CIOs to look out for software price hikes. "As software suppliers have increased their prices, we’ve seen users not noticing. CIOs will be surprised by what their IT spend ends up being this year, and there will be a lot of organisations that overspend," Lovelock said.

Will Saas costs rise?

Although there have been no indications yet of Saas prices rising, US Saas providers such as Salesforce have also been affected by foreign exchange fluctuations. For Salesforce, the impact represents 9%. 

In the transcript of the company’s Q1 2016 results, Salesforce CFO Mark Hawkins said: "Foreign exchange continued to impact revenue, with year-over-year headwinds of approximately $52m and a sequential headwind of around $17m. Our geographies also delivered strong growth on a constant currency basis, with the Americas growth of 27%, EMEA growth of 28%, and Asia-Pacific of 27%. Dollar attrition for the first quarter, excluding Marketing Cloud, was approximately 9%."

Geoff Connect, head of ICT for oneSource, the shared IT service for London's Havering and Newham councils, said: "This is yet another pressure on already battered local government finances." 

The councils' main exposure to US licensing is with Microsoft and Oracle, but he said the contracts with these companies have been negotiated in advance as fixed costs for a set period, which protects the IT budget from currency fluctuation.

"The downside means they are hard to reduce, but on the upside, it does insulate us from currency fluctuations," he said. 

But Connell said the councils are waiting to see if their hosting or SaaS service contracts rise because of the strong dollar. "Ultimately, any significant increases may prompt us to re-procure solutions," he added.

Dealing with currency fluctuations

Many CIOs may not have the luxury of having negotiated with key US suppliers in advance, which means their 2016 IT budget could be seriously undermined by software and hardware price rises.

Gartner recommended CIOs to virtualise servers wherever possible, but they may also need to prioritise projects that deliver greater business value. In the report, the analyst said: "Specifically, CFOs will ask for a shift to European sourcing where possible, the acceleration of projects that deliver the most cost-efficient growth, and cancellation or suspension of projects that deliver lower marginal value. CFOs may also have heard from others about how cloud-based solutions may provide better value."

Read more on the dollar price hike

Gartner also suggested CIOs should consider deferring server purchases and extending replacement cycles by up to 25% to save money. "If assurance is needed, third-party maintenance companies will offer attractive pricing, and non-critical servers can go to time-and-materials contracts," the report said.

The effects of currency may affect IT departments' ability to modernise desktop and server infrastructure, such as an enterprise-wide upgrade to Windows 10, Office 2016 or Server 2012 R2.

Speaking to Computer Weekly in April, Gartner vice-president Richard Gordon estimated that 80% of the price of a datacentre server arises from dollar-based pricing of components and labour. This means that for server hardware sold in Europe, a reseller would have to raise its price.

"The cost structure gets wiped out, so the euro price has to increase," he said. "Buyers will either delay purchases or buy lower-priced machines."

The price increase also affects converged infrastructure. For instance, ANS provides the FlexPod converged system comprising Cisco's unified computing platform (USC), NetApp storage and VMware vSphere. CEO Paul Sweeney said the strong dollar has meant the cost to the end customer will also increase.

Read more on IT supplier relationship management