The year 2021 saw a post-COVID boom with a 27 percent increase in S&P 500’s equity valuations. The Fed funds rate fluctuated around zero, reducing the costs of borrowing, and the massive growth led to increased spending across industries. Shifting to 2022, the experience has been different, the Fed funds rate has increased significantly, and the conflict-fed inflation genie has yet to be put back in the bottle. The slowing economy and continued inflation foreshadow a difficult profitability environment for 2023.
The big squeeze on margins
As the economy cools, most companies face a slowing growth rate in their revenues while at the same time inflation continues to increase the cost of inputs. We see six factors contributing to downward pressure on revenue growth and upward pressure on costs. These are highlighted in the figure and virtually all industries are susceptible to these factors.
Individually, companies cannot control macroeconomic factors or monetary policy, but they can optimize costs. We see 2023 as the year of cost reduction. While the 2023 data for tech and IT spending is not available, initial surveys indicate a reduction in IT spending as a percentage of revenue. This has increased the importance of cost control measures for CIOs and other technology leaders. They need to act immediately to release margin pressures.
So, what should CIOs do?
Technology’s portion of the total cost has been growing across most industries. Given this trend, CIOs can expect to be asked to contribute to overall cost-reduction programs. We have been here before and believe that a disciplined and thoughtful efficiency program is needed by many CIOs to become leaner and more focused on driving business value.
To this end, we see two major sets of actions, outlined below.
1. Immediately manage costs
2. Prepare for future growth
So, what now?
Act fast, and act decisively to take an action now. Technology is a key cost driver, and leaders need to take swift action to secure significant cost reductions in 2023.
This is not the first recession that many of us have dealt with and most likely will not be the last. What leaders need is a partner who understands trade-offs in a cost-reduction exercise and can help them navigate it successfully.