I consult, write, and speak on running better technology businesses (tech firms and IT captives) and the things that make it possible: good governance behaviors (activist investing in IT), what matters most (results, not effort), how we organize (restructure from the technologically abstract to the business concrete), how we execute and manage (replacing industrial with professional), how we plan (debunking the myth of control), and how we pay the bills (capital-intensive financing and budgeting in an agile world). I am increasingly interested in robustness over optimization.

I work for ThoughtWorks, the global leader in software delivery and consulting.

Tuesday, April 30, 2024

The era of ultra low interest rates is over. Tech has painful adjustments to make.

Interest rates have been climbing for two years now. The Wall Street Journal ran an article yesterday with the headline the days of ultra low interest rates are over. Tech will have to adjust. It’s going to be painful.

When capital is expensive, we measure investments against the hurdle rate: the rate of return an investment must satisfy to exceed to be a demonstrably good use of capital. When capital is ridiculously cheap, we no longer measure investment success against the hurdle rate. In practice, cheap capital makes financial returns no more and no less valuable than other forms of gain.

There are ramifications to this. As fiduciary measures lapse, so does investment performance. We go in pursuit of non-financial goals like "customer engagement rate". We get negligent in expenditure: payrolls bloated with tech employees, vendors stuffing contracts with junior staff. We get lax in our standard of excellence as employees are aggressively promoted without requisite experience. We get sloppy in execution: delivery as a function of time is simply not a thing, because the business is going to get whatever software we get done when we get it done.

Capital may not be 22% Jimmy Carter era expensive, but it ain’t cheap right now. Tech has to earn its keep. That means a return to once familiar practices, as well as change that orchestrates purge of tech largesse. Business cases with financial returns first, non-financial returns second. Contraction of labor spend: restructuring to offload the overpromoted, and consolidation of roles or lower compensation for specialization. Transparency of what we will deliver when for what cost, and what the mitigation is should we not. An end to vanity tech investments, because the income statement, much less the balance sheet, can no longer support them.

Some areas of the tech economy will be immune to this for as long as they are thematically relevant. AI and GenAI are TINA (there is no alternative) investments: a lot of firms have no choice but to spend on exploratory investments in AI, because Wall Street rewards imagination and will reward the remotest indication of successful conversion of that imagination that much more. Yet despite revolutionary implications, AI enthusiasm is tempered compared to frothy valuations for tech pursuits of previous generations, a function of investor preference for, as James Mackintosh put it, profits over moonshots.. Similarly, businesses where there is a tech arms race on because innovation offers competitive advantage, such as in-car software, it will be business as usual. But these arms races will end, so it will be tech business as usual until it isn’t. (In fact, in North America, this specific arms race may not materialize for a long, long time as EV demand has plateaued, but that’s another blog for another day.)

Tech has had the luxury of not being economically anchored for a long time now. If interest rates settle around 400 bps as the WSJ speculated yesterday, those days are over. The adjustment to a new reality will be long and painful because there’s a generation of people in tech who have not been exposed to economic constraints.

This is the Agile Manager blog, as it has been since I started it in 2006. Good news, this change doesn’t mean a return to the failed policies of waterfall. Agile had figured out how to cope with these economic conditions. Tech may not remember how to use those Agile tools, but it has them in the toolkit. Somewhere.

That said, I also blog about economics and tech. If the Fed funds rate lands in the 400 bps range, tech is in for still more difficult adjustments. More specifically, the longer tech clings to hopes for a return to ultralow interest rates, the longer the adjustment will last, and the more painful it will be.

The ultralow rate party is over. It’s long past time for tech to sober up.