IT vendors set to use headline inflation to justify price hike
"It shouldn't affect costs, but it will", warns software asset management intelligence organisation The ITAM Review
Published on 19th February 2022
Both the UK and the US have recorded the highest inflation figures for decades. With inflation in the Eurozone hitting similar levels, the news is set to mark the end of more than a decade of ultra-low interest rates in the West.
But while these measures based on consumer prices are bound to influence the IT sector, as prices for labour and raw materials climb, pre-existing pressures in technology markets are likely to eclipse these external influences.
Gartner distinguished research vice president John Lovelock told The Register said: “Currently, there is a major war for talent going on within the IT industry. There are certain sets of skills that are very high demand right now.
“And CIOs are losing out on that battle. In the US, roughly a third of IT staff are open to the idea of working in a new location. What difference does the price of fuel make to SAPs delivery of licensed software? You know, again, what does the price of aluminium mean to Amazon, Microsoft or Google providing cloud storage?”
As Americans paid higher prices for a wide range of goods including food, electricity and shelter, US inflation has hit 7.5 per cent, a rate not seen since 1982, when Ronald Reagan was president, and “Eye of the Tiger” was in the charts.
Yet it is likely inflation will fall in most categories of tech hardware, Lovelock argued, because price rises over the last year were down to exceptional demand during the worst months of the pandemic.
“We saw 25 per cent more PC shipped last year than we projected would be shipped back in 2019,” he said.
“That’s the type of demand that we cannot keep up with. Given the time it takes to bring your chip manufacturing up to speed, most of the hardware price increases that we seen are down to oversize of demand. But it has now started to ameliorate in semiconductor prices. Were at a high last year; they’re coming down this year.”
In the UK, the consumer price index hit 5.5 per cent this week, up from 5.4 per cent in December. The last time the island nation had seen rates of this sort, Conservative prime minister John Major had just won a general election and The Shamen were about to launch “Ebeneezer Goode” into the hit parade.
Wages
Recent ONS figures show salaries, overall, are lower than headline inflation, but that’s not true in many IT roles, said Bev White, chief executive of recruitment agency Harvey Nash Group.
“The ONS data also raises concerns that pay rises across the economy are not keeping up with the rate of inflation. Nevertheless, in tech we’re seeing that intense competition for some roles is still having a significant ratcheting effect on salaries.
“Over the last 12 months we’ve seen salary increases far above inflation for Software Engineers/Developers and Big Data/Analytics professionals. Tech salaries are also increasing right across England and Scotland, which is demonstrating a real levelling up of salaries across the UK,” she said.
Prices
While headline inflation may have little effect on IT prices, users should be wary of vendors using the macroeconomic figures to retro-fit justification to price rises in the pipeline, warned Rich Gibbons, service director with software asset management intelligence organisation The ITAM Review.
“With the subscription model coming into software more and more, all the vendors are putting their prices up anyway one way or another anyway. We’re concerned that inflation in the economy will be used as a sort of backwards-facing justification for price increases already coming down the line,” he said.
Microsoft price increases of around 25 per cent will begin next month for Office product subscriptions, he said, affecting users needing to renew contracts after that date.
Users can try to negotiate with the big vendors, Gibbons said. “Whether that would have any impact is a different matter. It is one of those things. But if prices go up, you can look at your usage, and your position across the board. There can be some great opportunities to negotiate on cloud, for example, and that can balanced prices rises elsewhere.”
No matter what the cause, price inflation was still a reality in the IT hardware market, said Ian Nethercot, supply chain director of UK hardware reseller Probrand.
“External inflation is potentially a problem for sure. We’ve seen prices continually rising for the last 12 months, being driven by a number of factors: logistics, shipping, energy prices. All of this adds up. We’re seeing price increases come into place from the tier one vendors, and after that, everyone else follows.”
He said price rises of 10 per cent were becoming the norm among vendors including HP and Cisco.
Although the pandemic-induced constraint on chip supplies was starting to ease, it was still affecting prices and lead times, Nethercot said. For most hardware, businesses were being quoted July and August for fulfilment. In networking equipment, lead times were between 300 to 400 days, he said.
Lead times, together with ongoing price rises, were making businesses think twice about launching major technology upgrades, he said. “But we are seeing price rises make businesses put off purchases. Projects are being put back and that will continue until prices stabilise or come down.”
