This article was originally written for and published Smart Industry.
When the highest inflation rates the world has seen in 40 years hit in early 2022, most pundits were scrambling to discuss the same topics. What is the cause? How long will it last? How will this impact the economy and consumer households? And, of course, who is to blame?
ServiceNow CEO Bill McDermott was having none of this. He wasted no time going on the offensive, declaring “Software is the most deflationary force in the world,” early in the inflation crisis. Soon after, the coordinated increase in interest rates by central banks across the globe began to take their toll. Expectations of a recession and spending decreases led many manufacturing companies to reduce their workforces and budgets.
It’s during this period of high inflation and budget cuts that Microsoft CEO, Satya Nadella, similarly stated “Software is ultimately the biggest deflationary force businesses can use.” Nadella leads the second largest cloud company in the world (behind #1 Amazon), so his contention that cloud technology helps companies do more with fewer resources is not surprising. After all, efficiency and lower total cost of ownership (TCO) have long been a core value drive for cloud-technology providers.
The real question manufacturers should be asking themselves is, “Should I continue to invest in technology in a time of high inflation and budget cuts?” In this type of environment, many leaders reflexively cut investments in new technologies and hunker down. But the best leaders take a more analytical approach and continue to invest in areas that will ultimately save money.
So who is right? The McDermott’s and Nadella’s of the world, who believe that you should continue to invest in technology? Or the leaders who reduce spend across the board?
How the cloud lowers costs
Analytical frameworks can help us decide who is right. Return on investment (ROI) is a simple formula that compares the net profit (or loss) generated by an investment. A similar but more comprehensive framework is the cost/benefit analysis, or CBA, which takes into account more intangible benefits than ROI.
Regardless of the specific method used, manufacturing leaders should take an analytical approach to software investment to determine if the expense incurred today will ultimately increase or decrease profitability over the long term. Three basic questions to consider are:
- Do we have enough cash to invest in the software now?
- How will the new software impact revenue and/or costs?
- How long will it take for that revenue and cost impact to show up?
Answering these questions will usually lead a manufacturer to find value in five key areas:
Workforce productivity—When data is easy to find, collaboration is seamless, and processes are automated across a company, each worker can accomplish more within the same amount of time, affecting both revenue and costs. And with some manufacturers using a hybrid workforce, cloud solutions can be easily accessed anytime from anywhere, so productivity keeps humming along.
Efficiency—Manufacturing companies can benefit from the efficiency of the cloud. Cloud-software customers only need a computer and internet connection to access the capabilities offered. There is no need for customers to invest in infrastructure or operations since the cloud providers handle it, and then spread those costs over a larger customer base to deliver a lower TCO. Single-platform solutions that span multiple departments deliver even more efficiency, since a common tech stack reduces the needs for different administrators, accelerates training, and reduces workload for IT staffs.
Direct-spend reduction—Many software providers’ core offerings are focused on helping their customers direct expenses. An example of this is the big investment in supply-chain technology over the past few years, with many new providers helping manufacturers identify lower-cost suppliers, reduce transportation costs, and reduce obsolescence.
Fast time to value—Cloud software can be launched relatively quickly, so manufacturers can begin to see the benefits of their investment sooner. The faster the time to value, the faster revenue and profit margins begin to grow. CFOs and CEOs are particularly keen on this measure.
Future proof—The best cloud providers constantly launch enhancements and new products to keep up with their customers’ needs. The current generation of low code / no code offerings deliver exceptional value in this area because users can quickly personalize the software on their own instead of relying on developers.
ROI from new technology investments can manifest itself in many forms, each of which boosts revenue and profitability for manufacturers. That’s why stronger manufacturing companies continue to invest in software in this environment. They know it’s key to offsetting their increase in expenses and reduced resources, and it will also better position them to take advantage of the eventual rebound.
Manufacturing companies that are strategically deflating inflation with software will be the strongest revenue drivers in the coming years.
Learn more about leveraging technology to stay ahead of economic forces you can't control. Watch our webinar with Propel CEO Ross Meyercord and Forrester VP/Principal Analyst George Lawrie.
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