The cost of technology and the impact on transformational investment

There’s no question that technology can be transformational for businesses. From the latest software implementations to hardware, technology can help keep costs down, improve productivity and performance, and drive sales.

This is especially true as offerings in fields such as cloud, cybersecurity and generative artificial intelligence (to name just three) expand and grow in relevance for businesses.

All technology comes with a capital outlay, which can be significant. In addition, however much a business believes in the power of technology, it also has a responsibility to manage its risks, including cash flow and currency risk, where applicable. 

These risks are important to bear in mind because, while software and other technology services are typically imported or licensed overseas, South African businesses will usually bill their own customers in South African rand.

Contracts will usually extend over several years, so this means that the buyer is exposed to potentially significant medium to longer term currency and interest rate risk. This is relevant because of the South African rand’s historical volatility and ultimate depreciation against major currencies like the US dollar.

South Africans will be painfully aware of this in the current uncertain global climate – after hitting a rate of R13.41 against the US dollar in June 2021, the rand had weakened by 25% at the end of May 2023 – and for businesses, the impact on any major expenditure would have been substantial. 

The above will have implications for any contract with extended terms, where payments have to be made over a longer period and over multiple budget cycles.

In short, for businesses to be able to leverage the technologies that are available in the market – in many cases for solutions that will only have a beneficial impact further down the line, following an extensive implementation process – they will need to consider their payment options.

Using the right payment solution is one way in which these risks can be mitigated the overall upfront cost impact reduced and the long-term costs managed.

Payment solutions should therefore look at issues such as:

·       Preservation of capex budgets by considering a managed services solution

·       Project management by aligning payments to the benefits over the useful life of the technology solution

·       Flowing from this, ensuring the predictability of payments

·       The ability to defer initial payments until the project goes live

·       Whether a simple, structured payment solution that encompasses all requirements can be provided; and/or

·       Whether the chosen technology partner has developed extended payment solutions with reputable financial institutions 

To stay relevant in a world of rapid change in technology – the rise of ChatGPT and similar language models that are likely to have commercial applications in the near future are just one example – expenditure on new solutions is not a nice to have but an essential. However, the cost of these solutions should not be a barrier, provided you have the right payment solutions in place.   

 ICIB Disclaimer