Inflationary Pressures on Software Contracts
Inflation and the question of how "transitory" is "transitory", is on top of mind for most business planners in 2021. When it comes to software contracts, some organizations are looking to lock in current rates for multi-year commitments. This may be a very smart strategic decision that could pay dividends over the next few years.
While technology (software) in macroeconomics can be a deflationary force (enabling higher productivity at lesser overall operational costs), individual software contracts on average do increase in price year over year. From 2009 to 2019 sources indicate a raise in software prices went up an average of 62%.
However, interestingly enough in 2020 and 2021 that trend has dropped off slightly. The question remains however, will that most recent data revert to the mean and thus see higher inflation growth in 2022?
Based on the universal rising cost of labor and equipment, even software manufacturers will see extraordinary inflationary pressures that they will have to absorb or pass on to their customers. Many will do so in the form of incremental increases to their recurring contracts (monthly or annual subscriptions).
Fueled with this knowledge, strategic buyers may opt to lock in lower rates now for longer term or multi-year contracts. Not only may buyers hedge against inflation for the duration of the contract, but oftentimes suppliers will provide an additional discount in return for a multi-year commitment. This can become a double-down win for the buyer.
While this concept can apply to all software contracts, in the building management and physical security sectors this idea of a longer operational expenditures can also add assurances and stability to the systems and standard operating procedures put in place for an organization and their staff. Knowledge of a longer-term commitment to a software application and consequently a strategic business partner, can increase the value of training and ancillary integrated systems.