Tech has been a deflationary force for the past 20 or 30 years.
ARTICLE | March 7, 2023 | 4 min read
Automation lowers development costs while boosting labor productivity
By Peter Burrows, technology journalist and author
Editor’s note: This story originally appeared in the winter issue of Workflow Quarterly.
Uncomfortably high inflation isn’t likely to go away anytime soon. That was Federal Reserve Chair Jerome Powell’s message in early February, when he said bringing surging prices to heel will be “a process that takes a significant amount of time.” For companies contending with an already uncertain macroeconomic outlook, this was unwelcome news. With war in Ukraine and the lingering effects of the pandemic also disrupting business as usual, who could blame leaders for feeling at the mercy of forces outside their control?
At times like these, businesses should remember they have a tool at their disposal to temper the impact of inflation: digital technology.
How so? There are two main forces at work: First, the costs to build technology—particularly software—usually rise more slowly than goods and services that require lots of repeated labor and physical parts. Second, investments in technologies like AI, robotic process automation, and natural language processing (NLP) can provide a powerful boost to productivity and help blunt the impact of inflation for businesses.
The 22% of companies that have completed digital transformations have a distinct advantage over those that have not, posting 17.3% higher revenue growth and 14% greater net margins, according to the MIT Center for Information Systems Research. Given software’s inflation-fighting qualities, companies still at an earlier stage of their digital evolution would do well to lean in now.
“Tech has been a deflationary force for the past 20 or 30 years,” notes Marshall Reinsdorf, a former International Monetary Fund economist who has studied the impact of low digital inflation on the economy. “The fact that information technology products have not been going up in cost like everything else makes this a good time to consider how you can leverage technology.”
According to a report by Michael Mandel, vice president and chief economist for the Progressive Policy Institute, prices for digital goods and services rose at an annual rate of 1.3% between 2019 and 2022, compared to an annual gain of 4.6% for consumer prices overall.
Indeed, the cost of producing the stuff is near an all-time low, according to the U.S. Bureau of Labor Statistics (BLS).
What’s more, one of the primary powers of software is its ability to automate processes—particularly repetitive processes that computers can often do better, and more happily, than humans. In this way, software helps companies make more efficient use of their human labor.
Tech has been a deflationary force for the past 20 or 30 years.
“The whole reason IT exists in the first place is to automate business processes,” says Mark Settle, former CIO of Okta and author of Truth from the Valley: A Practical Primer on IT Management for the Next Decade. “Anything that lets you get more out of your existing investment in talent can have big payoffs.” This is even more true in inflationary environments—like in the fourth quarter of 2022, when real wages grew 4.1%.
Reinsdorf notes that data on the deflationary impact of technology probably understates the true effects on the economy over the long run. That’s because it’s difficult to account for the impact of new features and improvements except through the rearview mirror. For example, current figures from the BLS don’t factor in how companies will use generative AI tools like ChatGPT to augment future labor productivity.
Economic data is continually adjusted to reflect improving quality of products and services. For software, the data might change once it becomes clear that newer versions are much less costly to deploy. “If the price stays the same but the quality goes up, we consider that a price decline,” says Reinsdorf. “Academic researchers tend to think the BLS under-adjusted for quality change in high-tech products.”
While software has always been a hedge against inflation, we live in a time of technical breakthroughs that make it particularly potent. As anyone who has played with ChatGPT will tell you, emerging foundational models can rapidly search and synthesize vast amounts of information and present the results in human-friendly terms.
CarMax, the largest used-car marketplace, has used AI to cull consumer reviews to add short summaries about particular car models. As a result, an activity that would have required 11 years of work by its editorial staff took only a few months, according to a customer case study published by Microsoft. With results like that, it’s no wonder 44% of enterprises plan to spend more on AI in 2023, according to Brian Jackson, principal research director at Info-Tech Research Group.
The rapid maturation of low-code software development is also allowing organizations to drastically reduce the cost of building software. These tools provide drag-and-drop interfaces that noncoders can use to build apps, allowing companies to leverage their expertise more efficiently. Low-code tools can accelerate development timetables by 50% to 90%, according to 451 Research.
“Speed is a competitive advantage, and hyperautomation can be a powerful tool to help speed up the most important processes and operations in a company,” says Chris Bedi, chief digital information officer at ServiceNow.
Hyperautomation can be a powerful tool to help speed up the most important processes and operations in a company.
“It also has the power to improve the productivity of a company and the experiences of customers and employees. Financial impact is a byproduct of those forces.”
Of course, launching expensive digital initiatives in times of uncertainty is easier said than done. Gartner recently cut its forecast for global IT spending growth in 2023 from 5.1% to 2.4%. And a survey of 800 IT professionals by Info-Tech found that just 40% of enterprises are planning to increase their technology spend to stay ahead of inflation.
On the other hand, the deflationary impact of software is not lost on your competitors either. While companies plan to scale back investments in hardware, devices, and cloud, Gartner expects enterprise software budgets to grow by 9.3% in 2023.
This is one more reason to view this period of inflation as an opportunity to harvest the business value of software now rather than put it off for another day.