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July 28, 2022

Wage rises and inflation spark price hikes by IT services providers

Vendors are putting up prices as they battle high inflation. Greater automation could help keep costs down

By Ryan Morrison

As tech industry wages continue to spiral upwards and inflation nears double figures, IT services providers are starting to increase prices and re-negotiate contracts with clients to offset the rising costs of doing business. Greater automation, for vendors and end users, could be one way to keep costs down.

IT costs
Tech Mahindra is one of several IT service providers putting prices up. (Photo by VasukiRao/iStock)

India’s Tech Mahindra is among the IT services companies negotiating with client to raise the price of its services. CEO CP Gurnani told Bloomberg the price rise was due to margin pressure from employee wages and a 16% “temporary” dip in net income during the last quarter.

Gurnani said Tech Mahindra had a solid order book and deal pipeline, but added: “In the short term we are working on price increases with our clients.”

Infosys, meanwhile, had said that while pricing remains unchanged across some of its contracts, other clients have already seen prices rise. Infosys CEO Salil Parekh said it is working with its customers to “demonstrate to them the impact of compensation increases”.

“We’ve had examples where we’ve had increases which are related from more of the digital high-value work that we are driving for clients,” Parekh said earlier this week, adding that rising salaries and high levels of inflation were hitting the company’s profit margin.

Vodafone also announced hikes for UK customers as part of its earnings announcement this week.

Though global IT spending is set to increase 5% this year, according to figures from Gartner, the analyst company expects the growth of spending on both IT services and communications systems to slow this year. Gartner says spending on IT services grew 10.8% in 2021, but will rise by 6.8% in 2022. For communications services, spending rose 3.4% in 2021, but is expected to increase up just 0.8% this year.

With spending in these areas apparently slowing down, Rob Pritchard senior analyst at GlobalData believes there is limited scope for price increases to cover rising costs. “There is evidence that service providers can increase their prices for more stable and better off customers in both consumer and enterprise space, but my perception is that any price rises are not as high as inflation,” Pritchard says.

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Inflation in the UK currently stands at 9.4% according to the Bank of England, and while it predicts that will drop back down to 2% within the next two years, prices of some things “may stay at a high level compared with the past”.

While it is expected this will hit consumer products hardest, there will be an impact on the enterprise and technology space, analysts predict, in part due to rising wage demands and higher costs of doing business.

Will greater automation help stem IT services price rises?

Technology could also provide a solution to this problem. “Service providers are looking to automation, AI and so forth to reduce their cost of delivery,” says Pritchard.

This could be in the form of greater automation of internal processes. Pritchard uses Vodafone as an example of a company investing in its in-house tech in a bid to keep costs down. “Vodafone mentioned it is growing its base of software engineers, with 7,000 hires planned,” he says. “I assume is for both new product development and to improve and automate back-office systems and processes.”

Earlier this month Vodafone announced a large-scale “AI Booster” platform in partnership with Google Cloud. This saw the development of an internal machine learning service capable of handling thousands of models per day for internal Vodafone use. The aim was to find efficiencies and improve the customer experience.

For end-user organisations, wider adoption of low code and no code solutions could help keep costs down. These allow regular business users to build digital functions and processes without the need for specialist software development skills.

Though this technology remains in its infancy, a shift to automation is likely to continue through other providers in the coming months and years as they attempt to meet growing demand and rising operating costs coupled with shrinking IT budgets.

Will the cost of IT services continue to rise?

Steven Dickens, analyst from Futurum Research, told Tech Monitor increased prices are a “straightforward response to macroeconomic headwinds”.

“As we are seeing across the board as tech companies announce earnings, inflation is taking hold and margins are becoming compressed," Dickens says. "The only solution to retain margins where shareholders need them to be is to increase prices.”

He said companies like Tech Mahindra and Infosys are under pressure from a number of directions, including the need to increase wages in line with inflation, but that “passing those costs on to their end clients may be hard to pull off”.

He added that greater automation could help, but in the short term may be difficult to introduce in many businesses. “Low code and no code solutions are starting to get traction, but the systems integrators still need to implement these and oftentimes clients are still on legacy platforms that need ongoing development," Dickens says. "Macroeconomic tailwinds will be challenging for sure but new technology is always deflationary.”

Read more: Soaring inflation hits UK IT industry spending

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