In past times of constrained spending or unexpected downturns in profitability, CFOs and FDs have hastily looked towards IT tech budgets to make-up bottom line shortfalls and reap deep and fast savings. But is that still the case today and why is it that the tech stack now seems to command continued investment even in stagnated growth periods? To understand the shift in budgeting dynamics, and how to plan for future vulnerabilities and variations, economic insights can be gained by assessing previous recessionary windows.
Glance back to the Great Recession between 2008-2010, when a tightening of access to credit and investment funding meant that organizations responded by slashing both personnel and technology budgets to keep businesses solvent. Back then, with infrastructure spending investments curtailed by 15% by major banks in the US alone, such diversions of funds were viewed as especially attractive given that the tech stack looked very different from today – with high investments in capital intensive hardware. As such, tech innovation involved financing large CAPEX tech investments to meet OEM prompted, three year cycles that could often be delayed without significant business impact. As a result, big tech providers suffered revenue losses in a downturn in tech deployments, as freezes and cuts hit. Yet retrospectively, according to tech economists, the two year hiatus in spend did not come without a long-term price in global productivity drops. For example, in the UK, official government figures¹ showed a drop in ‘output per hour’ that fell 4% between 2008 – 2010, as CTOs slashed their investments in automation and productivity tools. Compare that 4% fall, with ‘output per hour’ increases of 3%, in the two years prior.
So, when the last global recession slammed into the world in mid-2020 in the height of Covid-19 lockdowns, departmental cost centres braced themselves for negative impacts. But in this recession, the tech stack became the ultimate enabler – one of the heroes of work enablement. Of course, by three years ago, the tech stack looked more akin to today’s digitally enabled, largely software-driven and as-a-service tech stacks. Yet what happened in the push to supply tools for mandated remote working created a catalyst movement towards productivity enablers. Proving that in modern recessions, cutting tech investments can be counter intuitive. Tech had facilitated the platforms and tools that kept businesses running, improving productivity and hastening returns to profitability.
Of course, businesses individually suffer downturns outside of recessions, when it can be tempting to cut cross departmental overheads in response. But there are real dangers in doing so. Even in financially stretched businesses with short-term profitability gaps, tech spend needs to continue in order to respond to new external threats. Without doing so, already vulnerable organizations can quickly suffer from security lapses, critical application downtime and increased risks.
Most CFOs will be aware of the risks of ignoring such essential tech updates. But securing CFO sign-off to embark on new digital advances in hard pressed climates, hinges on identifying the right investments that will deliver competitive edge, fast returns and appropriate modern security responses. As part of their remit as custodians of the tech budget and to avoid productivity downturns, CIO leads need to seek greater collaboration between themselves and their counterparts within financing teams. Developing ongoing close working ties is essential. According to a recent Gartner study², only 30% of CFO-CIO relationships are deemed to have a level of professional closeness that will lead to the best IT spending decisions. Critically, the research also notes that those who do have strong collaborative relationships are 51% more likely to find funding for digital initiatives. Even for baseline budgeting, it’s essential to regularly educate the financial planners on impacts of cutting investment in the tech stack, keeping management familiar with the significant risk factors to the business.
Top of the list should be ongoing protection from external and internal threats to the IT estate. If an organization allows their tech stack to become out-dated by switching budgets elsewhere, they place themselves into far higher risk groups to experience devastating cyberattacks. Even if cyberattacks are avoided, these companies will incur significantly increased levels of maintenance and frequent patching regimes. Such maintenance can become incredibly resource intensive, incurring increased costs and consuming IT overheads. At a functional performance level, older tech will almost certainly be slower to process data, and that could inhibit and negatively impact the customer experience when it comes to critical processes such as e-commerce or data mining. When an older asset fails within an ageing tech stack, the knock-on impact to the network or servers can severely disrupt workflow, processes, and stop business altogether while the asset is identified, isolated, repaired and/or replaced. Senior management’s understanding and appraisal of the tech stack should not therefore be viewed as a one-off investment that comes around every three to five years. Instead, CFOs should be versed and familiar with those organizations who consider their tech stacks as living, progressive infrastructures that continually evolve and flex to meet objectives.
Ultimately, commitment to ongoing tech investment will ensure better connectivity, increased security, greater employee satisfaction and critically, higher productivity. Understood altogether, these advantages represent the best prospect for fast return on investment and increased profitability.
But it’s reasonable for CFOs to ask if there any parts of the tech stack that are less pressing for budgetary prioritization. To understand this – CFOs need to familiarize themselves with the layers of a modern tech stack and how cutting one part can negatively impact another. It’s often the case that in traditional on-premise environments, tech stack investments are inter-twined. Hardware, including servers and storage, combine with software to provide essential business applications and supporting software solutions such as asset management. Networking assets connect and protect the stack; but these environments need ongoing management and can be hard to flex and require commitment to maintenance and firmware. Therefore, a lot of organizations opt for a hybrid approach with delivery of all – or some parts of the stack – deployed through the cloud. This resultant cloud pay-as- you-consume model is OPEX based and can save immediate CAPEX budget on traditional tech stacks. That being said, cloud is being increasingly scrutinized because of significantly larger egress charges than expected; leading some CFOs and CIOs to consider cloud repatriation efforts.
Back to securing investment for new tech deployments: There are some critical tech investments that may positively impact balance sheets fast. The first area would be in the rollout of financial and accounting tools that will keep spending in line and give management better financial planning and analysis capabilities. The second involves increasing productivity. In recessionary climes to boost output, investment in technology can be a competitive differentiator to beat market competition by adding features and increasing quality. Examples include deploying automation to alleviate repetitive processes in manufacturing; or to building effective e-commerce trading platforms. Using digital platforms also provides data sets that highlight – with certainty – underperforming areas while also giving fast actionable insights for future external growth such as buying patterns or web site performance.
Even with the right data sets in place from which to make informed business decisions, tech budgeting still needs to retain a degree of fluidity to enable unplanned scenarios. Often these situations can be driven as a result of external factors that prompt reactionary change and increase budgetary spend. We discussed earlier how in Covid-19, many companies out of necessity sped up their digital transformation journeys by investing in cloud-based applications that helped facilitate remote working. For those organizations who refused to speed to digital enablement and working platforms, one report³ published after global lockdowns, showed that 40% of organizations experienced significant hits to their revenue and profits because they had delayed digital enablement until work conditions stabilised. By then, their competitors had gained edge, customer share and in some cases, migration of workers, themselves keen to use digital tools that would positively enhance their working days.
Lastly, as with all effective economics, ongoing planning is essential. Not all tech finance planning needs to be done entirely in-house. Expert budget saving partners can be drafted – long and short term – to demonstrate how running a cadence of tracking and optimization programs is essential in times of restrained budgets. These partners providing budgetary counsel come in a variety of forms, and often it can be best to access advice, services and tools holistically through one supplier across the global estate. For instance, asset management services readily advise which assets are running optimally, which are redundant – yet still consuming expensive power, and further identify those that are reaching the absolute end of lifecycle. Often this shows immediate savings of 20% in reduced power consumption to redundant assets alone. Further savings can be derived from cloud spending optimization tools for public clouds which highlight peak usage points and provide alternative recommendations. On-site, server and storage assessment services can identify options to safely extend and optimise. Third party maintenance provision has a large part to play here, providing options to easily extend the lifecycles across the tech stack, significantly extending past stated warranty and support terms.