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Major upheavals in the markets and uncertainty around the Fed’s actions have caused many firms to reassess their spending in 2023 and pull back on certain costs. In the past, one key area where my firm saw companies cut budgets was technology expenses. Some firms believed they would save money during downturns, aiming to catch up years or months later when the market rebounded.
But playing catchup is misguided. Fortunately, based on data my firm collected this year, some firms are beginning to change tack, recognizing that cutting technology spending during market downturns is not the optimal approach for keeping pace with innovation and digitization standards.
Firms that have cut budgets in the past are now learning that regardless of market fluctuations, it is pragmatic and indeed essential to continue making ongoing technology investments. This holds true even if they can only afford to drive incremental change during times of constrained cash flow.
For organizations thinking about cutting back their technology investment because of recent volatility, here are a few considerations to give you pause.
Technology isn’t a cost center, it’s an opportunity for your business
While a firm’s leadership may evaluate their budget and see big numbers being poured into their technology, it is critical that those costs are considered in context. Any firm wishing to remain significant must undertake some form of digital transformation – this is non-negotiable. And that transformation cannot be paused every time the market dips.
Although it may appear like a cost-saving measure, this approach can cost the business more in the long run. This is true not just from a monetary perspective but also in terms of disruption to long-term innovation plans and meeting clients’ needs.
As a firm expands, its technology budget will naturally increase in tandem as new tools, vendors, and structured support are introduced. Growth in company revenue and size will necessitate a commensurate uptick in spending, especially in areas of the business where it matters most (like tech). While we can’t predict when the market will take a downward turn, we can anticipate that highs and lows will inevitably happen and prepare budgets accordingly.
Think about it like dollar-cost averaging (DCA)
Compare your technology investment to the mindset of many savvy investors.
Markets fluctuate every day, week, month, and year for a variety of reasons. But we know from decades of research and investing that these dips usually even out to the investor’s benefit in the end. That’s why advisors recommend that their clients continue investing small amounts, regardless of market conditions, and avoid fretting over granular, day-to-day movements in their portfolios.
The same could be said of a firm’s technology investment. Changes in the market are inevitable, but they don’t necessarily indicate that the investment strategy ought to shift – especially when it comes to a firm’s plans for improving its technology offerings.
In keeping with this analogy of an investor’s strategy, down markets present opportunities to renegotiate pricing with technology partners. Vendors don’t want to lose out on the firm’s business either, and therefore have a strong incentive to work with firms and organizations during times when cash flow is tight.
Before terminating services, executives should initiate discussions with their technology partners about potential solutions – it might be easier to reach an agreement than they think.
The stopping and starting costs are enormous
As I have discussed, cutting costs doesn’t neatly equate to tangible savings. Whether it’s a workout routine or a company’s technology spend, the starting and stopping costs are consistently higher than expected. One 2022 survey of global IT leaders revealed that while digital transformation projects are achieving escalating improvements, enterprises are on average wasting $4.12 million on failed, delayed or scaled-back projects.
For an example of how this can play out, consider a scenario where a firm is rolling out an organization-wide integration with a client relationship management (CRM) system. Technology integrations at this scale are complex, require strong buy-in across an organization, and must be executed in careful steps. Significantly reducing the investment in that project at a random point could translate to additional costs for the firm as opposed to savings.
The technology may have evolved by the time they pick it back up, rendering their initial plans irrelevant and forcing the firm to start from scratch. They risk losing momentum and buy-in from the team, which could necessitate additional spending on consulting services to get the project back on track for firmwide adoption.
If tech is table stakes, then you don’t take it off the table just because the market is down. Firms typically have strategic roadmaps that outline where they want their businesses to go years into the future, and those maps shouldn’t be abandoned at the first sign of trouble.
Technology is easier to maintain and evolve when the investment is steady, as opposed to when it is sporadic. If there is a plan to improve a firm’s technology, it can be adjusted to reflect real-time changes in cash flow. But it should not be ceased altogether.
Don’t course correct simply because the market turns. Reducing tech spending during downturns can lead to missed opportunities and greater costs down the line than a firm would have shouldered had it remained steadfast to its original plans.
Scott Lamont is director, consulting services, at F2 Strategy, a wealthtech management consulting firm serving complex wealth advisory firms.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
