“There’s a storm coming, Harry, and we all best be ready when she does”.

In two separate networking events we’ve attended this week, meeting companies valued from £10bn with an extensive global HR team, down to 35-person outfits aiming for stellar growth, the story is the same. There are insufficient numbers of developers, especially data scientists, and the consequence is a spiralling of salaries at levels which make the reported 15% annual growth to March 2021 look amateur.

The wise words of Rubeus Hagrid apply to the experience that before the trend comes the anecdote. This week’s chat isn’t positive – there’s a storm already in progress in the tech world, and we suspect a lot of forecasts don’t yet have the full impact built in. The storm is deepening. We are aware of the quantifiable and factual energy input price inflation, which merely affects costs; but the anecdote this time is salary cost. Wage inflation in tech is rampant.

We met a £1bn company with 140 vacancies; a £30m company looking for 10 staff where the effort merits a specific recruiter just to handle those vacancies; a company where a software engineer on £40k has been bid away for £160k…. the list goes on. As we said, 15% to March 2021 now looks like premature negotiating from some chancers who jumped the gun, or more likely are going to throw the dice again shortly.

The pressure from such inflation is two-fold – firstly, obvious cost increases for existing staff. Retention is now a major challenge, and staff loyalty reduces massively with youth, where perseverance in a role is increasingly culturally alien. Even the average performers from the millennial generations expect to continue to be told that they are special, as they always have been. “Company culture” is no longer palpable in a WFH environment where my dog is now my closest colleague, physically.

The second is growth – without investment in new staff, growth is only achievable in a perfectly scalable platform (show me one which really doesn’t create any new cost at all?), and therefore without investment, growth is threatened. The marginal return on investment in an increasingly expensive new techy is therefore diminished in the short term. Costs and revenue are both under pressure.

Gosh, you say, Tech Chat is normally supposed to be light-hearted. Well yes, but with valuations at peaks, and yet costs still rising, we suggest the barometer on the likely direction of forecasts’ revisions has swung towards the negative. For highly valued stocks this can be punishing. Unusually, M&A now represents a lower risk opportunity than reliance on organic growth, meaning a strong balance sheet and a proven integration methodology is a safer bet in the current environment; while those management teams who achieve organic growth at a good margin in this scenario should be lauded to the heights, given the challenges they are facing. As Hagrid would know, that might take some magic. Point your wand at your revenue and declare “Wingardium Leviosa” – if you can say it properly of course, and not many can.

Happy Friday