You might not have noticed, but the products you’re buying at the grocery store are getting smaller. That’s right: They’re shrinking. In the wake of the COVID-19 pandemic, which sent raw materials prices soaring, many companies are trying to find ways to cut costs.
So if that box of Cookie Crisp (part of a balanced breakfast, they say) feels a little light, you’re not imagining things; General Mills has decreased its family size boxes from 19.3 ounces to 18.1 ounces.
Economist Pippa Malmgren coined the term “shrinkflation” to describe instances where companies reduce the size of products while retaining prices. However, prices aren’t staying the same. In May 2021, global food prices were the highest they’ve been since 2011.
While the Federal Reserve insists the current period of high inflation is temporary, the ripples are being felt throughout every sector of the economy, including software development.
The 💜 of EU tech
The latest rumblings from the EU tech scene, a story from our wise ol' founder Boris, and some questionable AI art. It's free, every week, in your inbox. Sign up now!
If you think “shrinking” the amount of effort you put into projects is the best way to keep prices low, you’ll end up harming your company’s integrity and failing to meet client expectations. That’s not the right way to deal with inflation in the software development industry.
The state of professional services
For some C-suite decision-makers, there are few options but to increase the charge for professional services. Firms are grappling with pressure to decrease professional services costs, increased competition and commoditization, and the rising cost of talent. Some of these pressures have been mounting for years, while others directly result from the recent economic downturn.
Thankfully for those of us in the software development space, there were fewer obstacles during the pandemic due to the demand for digital innovation. The surge in remote work made software vital to businesses’ survival.
According to an IBM survey, the pandemic accelerated digital transformation at 59% of organizations. Additionally, the Worldwide Developer Population and Demographic Report indicates that the number of developers increased by 2.5% in 2020 (albeit slightly less than the projected growth of 4%).
The amount of money being poured into digital transformation could balloon to more than $2 trillion by 2022. According to Twilio, 79% of companies claim that COVID-19 increased their budget for the effort. Maybe this will make some of the laggards get off the proverbial pot.
Sidebar: The ridiculous thing about digital transformation hasn’t changed. It’s not a process with a defined end. Business owners will never wake up and discover that — poof! — their companies are transformed. It makes a lot more sense to view it as an ongoing process. (I’ll step down from my soapbox now.)
Organizations still have plenty of work to do, which bodes well for your business despite software industry competition. Your best-in-class digital services are the key to meeting executives’ digital innovation goals.
Cost, which has historically been the main factor impacting business decisions regarding technology investments, should theoretically become a smaller barrier.
However, something about this shift feels different. I’ve been in software development for 15 years. My advice? Make sure you can compete in the modern market.
How to best compete in this market
Researcher Aaron O’Neill estimates 2021’s global inflation rate to be 3.5%, which is significantly higher than 2016’s 2.7%. In the US, professional services experienced an average annual inflation rate of 4.86% between 1961 and 2021.
Considering other professional services are experiencing increased demand — CNBC reports that home renovations will cost more and take longer — it’s safe to assume the inflation rate will rise in the software development space as more businesses invest in digital innovation.
While shrinkflation might work in business-to-consumer industries like food and beverage, it’s not a tactic you should use to combat inflation.
Clients need software products that thoroughly address their pain points and improve existing workflows. If you’re producing something that’s ineffective, you’ll see fewer repeat customers and likely experience a decrease in revenue. No one wants that.
Assuming this pricing spike is inevitable, how should you decrease how much you charge for professional services moving forward? Here are my three tips:
1. Embrace new tech that will attract top talent
Top talent can be 400% more productive, according to a study in Personnel Psychology. And if your workers are more productive, you’ll see increased profits, according to Gallup.
But how do you attract high performers? By focusing on emerging technologies. These technologies can make existing processes more efficient, but they can also act as a draw for talent.
Software developers are looking for companies that are the “next big thing.” Artificial intelligence, blockchain, and more will inevitably shape the world in countless ways. Top talent wants to drive that change.
Increasing investment in and commitment to AI is now a necessity. What looks like magic to your competitors in five years is actually the result of today’s good planning. And AI is not a set of niche technologies — it is most effectively deployed horizontally across an organization.
According to Boston Consulting Group, digital laggards tend to view AI as a standalone solution, which limits its effectiveness in their organizations.
2. Invest in your current employees to keep them around
Workplace culture might be hard to define or quantify, but plenty of studies show that close-knit teams and inclusive office environments are associated with higher levels of employee engagement and productivity. And as I mentioned before, productivity improves profitability.
This isn’t to say you should underpay or overwork your employees. That mistake can result in poor performance and turnover, which is counterproductive to your goal.
Rather, you should make sure your firm values workers’ contributions, rewards them, and continually presents them with new opportunities for personal and professional growth. Nothing beats working for a company that genuinely supports its employees.
3. Put in the work upfront
According to George Cressman, president of World Class Pricing, “Delivering professional services requires great skill in diagnosing customer needs and understanding the relationship between very diverse components of a customer’s business. It requires skill in tailoring a solution to precisely meet a customer’s needs, and communicating that effectively.”
In short, your clients will be far more excited to work with you if you do as much of the discovery work for them as you can. The corresponding savings in software development costs can mitigate the impact of the current inflationary trend.
When you can hand your new partner well-defined personas, highly relevant user journeys, accurate requirements, and in-depth market research, everything moves faster. This upfront heavy lifting won’t eliminate the need to recalibrate once projects are underway, but it can reduce the number of steps from start to finish.
Even though it seems counterproductive, software development consulting rates can keep the overall cost of the project down. Moreover, with a detailed plan in hand before development begins, clients can be assured that you’re building the right thing the right way.
To be frank, software development is expensive. It was expensive two years ago, and it will be expensive two years from now.
Resisting the urge to raise your prices will help you stand out among your competitors. If your work is clever, comprehensive, and cost-effective, your business will reap the benefits of what could be a prohibitive trend for potential clients.
Get the TNW newsletter
Get the most important tech news in your inbox each week.