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10 ways services companies can manage inflation implications

Inflation. It’s a word that stokes fear within executive teams. In a June 2021 survey of 138 Chief Financial Officers, Deloitte found them optimistic about the global economy but anxious about inflation. Those anxieties might be higher now given supply challenges, wage increases, and rising client demands.

Prior to joining Tercera, I was a Managing Director in Guggenheim Partners Technology Investment Banking Group, advising IT services companies on sell-side and buy-side M&A. I’ve spent more than 15 years in investment banking and consulting, and inflation has never been a big issue. But, those days may be behind us.

Here’s how IT services leaders can start planning now to manage the implications of inflation.

1. Talk with your clients about inflation.

It’s not a dirty word, it’s a business reality. The digital engineering firm EPAM (market cap of $35.37B) handled it well during their Q2 2021 earnings call, saying: “Conversations we’re having with clients are informed by the wage inflation we’re seeing (…) We’re helping them understand [the] conditions we’re facing.”

2. Get out front and raise rates proactively before your costs rise.

Start planning for price increases as contracts renew. If you’ve talked with your clients about inflation, the price hikes won’t feel like they’re coming out of nowhere.

3. Consider value-based pricing.

If you’re not sure what your services are really worth, your clients don’t know either. Consultants can help you understand the real P&L impact you deliver to your customers and price your services accordingly. You might already deserve that price hike.

Or you might not. Buyers in the cloud’s third wave need more than technology alone. They need vendors who can help create a real business impact. What builds durable value is offering the right blend of services and intellectual property. Adding strategy and change management capabilities, or creating industry-specific solutions that solve a clients’ hardest problems, may be in order. The best way to hold the line on pricing is for clients to understand that it doesn’t make sense to switch to a cheaper provider.

The best way to hold the line on pricing is for clients to understand that it doesn’t make sense to switch to a cheaper provider.

4. Be careful about long-term, fixed-price contracts that have no inflation protection.

Master Service Agreements (MSAs) can be indexed to an agreed upon inflation measurement to protect both clients and service providers. The most frequently used indexes are the Consumer Price Index (CPI), Producer Price Index (PPI), and Employment Cost Index (ECI). Client procurement teams shouldn’t fight these clauses if they’re reasonable.

5. Beware of employee burnout.

Increasing utilization may feel like a natural solution to offset wage inflation or manage through a talent shortage in your market. However, this is a slippery slope. Burning out your most valuable talent risks driving them into the arms of competitors – or into your office to demand a raise – and makes it harder for you to recruit new talent.

6. Manage salary costs.

Every technology entrepreneur is already talking about the war for talent. But the war in non-inflationary times is a pillow fight compared to what happens when inflation runs rampant. Things can get out of control fast. Think hard about compensation bands and how you standardize compensation: if you have a hundred associate consultants and you give one of them 120% of what the others are getting, word will get out and the ripple effect will be rough.

But the war in non-inflationary times is a pillow fight compared to what happens when inflation runs rampant.

7. Think “total rewards”, not just salary.

Compensation is a big factor in why prospective employees choose your company, but it’s not the only reason. Think about benefits, work location flexibility, unlimited time-off policies, sabbaticals, progressive parental policies, community engagement, inclusion and sustainability programs, etc. More about that here. Just remember, it’s harder to take away programs than it is to add them so be thoughtful.

8. Get creative about long-term talent needs.

Smart companies start thinking about the talent they need well before they need it. Partner with local universities to create a custom curriculum that attracts lower cost, entry-level talent in areas you know will be important to help you scale. This will not only bring in affordable talent, it will help keep your senior talent focused on higher value activities, help with retention, and cement your company as a strong employer brand.

9. Diversify your delivery mix.

Take a fresh look at how and where delivery happens. The pandemic has forever changed how we think about centralized talent hubs. Now that people (customers included) have become accustomed to remote delivery, it’s a good time to rethink where and how you build your teams. Look outside cities with a high cost of living – the suburbs of lesser known cities might just be your next center for talent.

There are other levers as well to vary your mix and keep rates in check, such as increasing offshore/nearshore delivery, pyramid optimization, and delivery industrialization (automation, methodologies and templates).

10. Think more globally.

Inflation isn’t the same everywhere. Companies working with employees in countries facing hyperinflation can offer hybrid compensation in local currency and U.S. dollars. “Some Argentinian companies paying in pesos have to offer four salary revisions per year otherwise they lose out on top talent”, said Juana Cervio, tech recruitment trainer and co-founder of HumanosReales at Buenos Aires. For more tactics worth considering, this is a good read.

The bottom line? Stay alert, stay flexible.

Amazon’s Jeff Bezos, who did pretty well as an entrepreneur, says about its approach, “We are stubborn on vision. We are flexible on details.”

That’s great advice. Seek out advisors and mentors who’ve managed successfully through past inflationary periods. They can help you keep your balance. Tercera, and many experts in our advisor community, can be a great resource for services founders and entrepreneurs.

Now is a good time to get creative, and think ahead.

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