Many CIOs are better equipped to combat rising IT costs. Are you?

Talent costs are crushing budgets

For McKee, the continuously increasing price of tech talent has been a major challenge —especially since it’s the biggest component of most IT budgets. “There’s a lot of competition for the best talent and it’s gotten much worse post-pandemic here in the UK,” he says. “We could be talking at least 30% inflation in this sector, and often the only way to deal with that is to start cutting.”

Prior to the pandemic, he could pay a lower wage to people working remotely in areas of England with a lower cost of living while paying more for talent working in London. The pandemic changed that because when people moved to remote locations, they took their salaries with them — and now they don’t want to come back. “Hybrid work is a luxury we can operate in, but it creates high inflation and exacerbates salaries,” he says.

Wiedenbeck says he can still offer slightly lower salaries to people in areas with a lower cost of living, but the pay differentials are smaller. Since the pandemic, he says, “remote work has shown some disparities that existed due to geography, and we’re starting to work through that.”

Outsourcing costs have also risen, McKee adds. “It might cost us $1,000 per day per developer to outsource,” he says. “You can get three people for that.” And then there’s the extra complexity and costs associated with managing remote teams. “When you outsource your software development team, they’re no longer your team,” he adds. “They’re thousands of miles away and you have less ability to influence them. A lot of people choose that option and realize a year later it’s costing them even more than the alternative.”

So outsourcing can help buffer salary increases. “Capgemini, with a half million people, can absorb cost-of-talent variances better than my organization can with 420 people,” Wiedenbeck says. CIOs in the IDC survey with multinational operations said they also try to keep talent costs under control by leveraging cost differentials between countries.

McKee sees two other ways to address the problem. You can recruit more senior people, where one person can replace three and make fewer mistakes, or downsize the teams, wait for the situation to change and rebuild later. “You lose expertise and knowledge, but that’s the most common approach,” he says.

Some CIOs in organizations with operations in countries where talent costs or general inflation are running high report increasing the frequency of salary reviews to every six months. McKee has pursued this approach, but only on an informal basis, which he says allows for more flexibility and creates “less expectation for an increase in pay.”

Increasing the frequency of salary reviews isn’t in Wiedenbeck’s game plan, but he’s trying a new approach to reign in tech salaries. Starting with data scientists, Ameritas is now offering what he calls a “hot jobs bonus.” If the current competitive salary is, say, $175,000, he might offer $125,000 plus a $50,000 “salary kicker” that gets reviewed each year based on market conditions for that skill set. “It’s a variable part of their salary based on a data point,” he says. “Every year we come back and evaluate that.” While employees believe those salaries will never go down, Wiedenbeck’s experience says otherwise. For example, at one time, Oracle DBAs would command $175,000, but as more people entered the space, salaries dropped to the point where he can get someone for $80,000. But it’s a long-game strategy: That cycle can take 10 years to play out, he says.

The big picture: Get your game plan on