IT leaders adjust budget priorities as economic outlook shifts

Budget planning during uncertain economic times is never CIOs’ favorite activity. But the next eighteen months aren’t shaping up to be as challenging as some may fear. For the most part, budgets are holding steady or growing in the single digits, with continued investments in security, analytics, and the cloud, among other areas.

Gartner predicts 2023 IT spending will grow 5.1% compared to this year, says John-David Lovelock, distinguished VP analyst at the firm. “We haven’t changed our forecast in three quarters,” he says, noting that the US gross domestic product (GDP) is, technically, already in recession territory and has been for the past six months. He predicts continued GDP softening over the next three years, with minimal, if any, effect on IT spending.

Analyst firm IDC expects more of a moving target on tech budgets due to market volatility, the strength of the US dollar, inflation rates, and continued slow global growth due to economic drag by China and other key countries. If economic factors stay relatively stable, IT spending will grow between 5% and 6% next year, says Stephen Minton, program vice president for customer insights and analysis. He agrees with Lovelock that it will take a major, sustained global recession to cut into that and, even if that happens, Minton says, IT spending will continue to grow, although probably by 3%.

Security tops the list

According to this year’s State of the CIO survey, cybersecurity and risk management are the top investment areas for 45% of IT leader respondents. That’s certainly the case in the corporate technology group at Illinois Tool Works (ITW), a $14.5 billion industrial manufacturing company headquartered in Chicago, says Ron Mathis, corporate IT operations director. ITW is decentralized, Mathis explains, and its hundreds of affiliated companies are treated as entrepreneurial organizations with their own priorities and responsibilities.

But across ITW at corporate, cybersecurity is the top priority “by far,” he says, and it’s been the top investment for as long as he has been with ITW. His teams spend a “significant portion of their time protecting the company’s assets,” Mathis says. His team also upgrades ITW corporate’s packaged software.

Security is also key for Eduardo Ruiz, CIO at the Association of Schools and Programs of Public Health in Washington. “We’re spending significantly more on security,” he says. “Over the years we’ve relied on being under the radar to justify not having to spend so much, but we can no longer do that.” There are more automated attacks that are increasingly sophisticated, and endpoint protection, single sign-on systems, and more staff training are all areas of spending growth in his shop.

Many IT leaders are realizing that their attack surface is “too big,” Gartner’s Lovelock says. Between gig workers, cloud applications, outsourcing, and industry-specific platforms, how they “secure this massive dynamic is changing. They can’t keep ahead by using traditional approaches to security.” And even though many companies already made significant investments in security in the aftermath of COVID, with remote work requiring new tactics, security is now getting both deeper and broader. Nearly three out of five CIOs (57%) who reported a budget increase this year cited the need for security improvements as the key reason for receiving that increase in spend, according to the State of the CIO survey.

Cloud continues to dominate

Cloud migrations are still happening, with 22% of CIO survey respondents tagging that as a top spending priority. Part of that is due to cloud vendors passing along price increases that they’re justifying by saying they need to continue to upgrade their data centers and to pay their employees, according to analysts. Cloud-related services’ cost has risen by between 5% and 7% this year compared to last, IDC says.

Some of the projected growth is due to new users; not everything is yet on the cloud. “We’re nowhere near the saturation point,” says IDC’s Minton. Some industries, including financial services, are taking cloud migrations very slowly because of the sensitivity of the data involved. “We’re still expecting double-digit growth” in cloud expenditures, but at the same time on-premises gear is not completely going away, though it is declining as a share of overall IT spending, he says.

Some custom software requires more time to move to the cloud, as do cross-border applications that are more common in Europe than in the US, he explains. Plus, “it’s hard to turn off a cloud system once you turn it on,” Minton says, and the industry continues to move from CapEx to OpEx spending because of the shift to cloud.

Megan Duty, vice president of technology and project delivery for Puritan Life Insurance Company of America in Scottsdale, Ariz., explains that cloud has been a major focus for her company in the past several years. Keeping those systems going requires the lion’s share of her budget, she says, but cybersecurity, automation, and customer experience-related projects are where the new spending is.

Analytics, automation, and customer experience spending on the rise

Some 35% of CIOs named analytics as a top spending priority, and 27% named customer experience technologies as such. For Puritan’s Duty, that means more creating and improving customer portals like the one the company has launched for its Canvas annuity. Another investment area includes tools given to sales agents.

Ken Piddington, vice president and CIO at US Silica in Katy, Texas, says that his key themes are “speed and agility,” so his priorities are data analytics and automation, which he considers “table stakes” to help all employees do their jobs more effectively and more quickly. “We want to help our organization move faster,” and the goal is to “allow smart people to do the things” that only they can do.

To date, projects including robotic process automation have been mostly taking place within IT, but the plan is to expand RPA more into the field, he says.

Gartner’s Lovelock says that automation efforts in general have been more internally focused, to allow groups outside of IT to become more effective and able to scale without adding new employees. “Companies don’t want to lay off, but they also don’t want to have to hire when they start to grow again,” he explains.

IDC expects that big data and analytics will be one of four key platforms – along with cloud, mobile, and social — driving growth in traditional IT spending over the next five years. “Meanwhile, cost savings generated by cloud and automation will see more spending diverted towards new technologies” such as AI, robotics, augmented and virtual reality, and blockchain, IDC says.

Dealing with inflation, or buying less with more

These days, IT leaders are keeping a closer eye than usual on pricing, and in some cases are buying out their long-term cloud contracts to give themselves more flexibility. “Executive leadership doesn’t want to hear we’re locked in and can’t move,” US Silica’s Piddington says. Vendors “want to true you up but never want to true you down,” he adds, and shorter-term contracts can help incent them to do so.

For maximum flexibility, Gartner’s Lovelock suggests breaking three- or even five-year contracts into six-month terms.

Although the supply-chain shortage and other factors have caused prices to increase for two or three years now, IDC’s Minton says IT buyers have had enough. “There’s pushback now,” he says, and when there was once more tolerance for the reasons behind vendor price increases, IT leaders are now saying they just can’t keep pace and must keep budgets within a narrow range.

Piddington agrees, saying that the situation is forcing IT executives to “be smarter” and understand where the opportunities are within each vendor relationship to “pull the right levers.” Having strong relationships with vendors, and not just engaging in transactional deals, can “give you more potential” to create the flexibility to work with them on pricing. Lovelock agrees, saying “a long-term relationship is worth money to vendors this year.”

Puritan Life’s Duty says she regularly conducts cost reviews. “We don’t have a lot of fat to start with, but every quarter I look at what we will need to do” in the next quarter or two and revise ahead of time. “We review spend constantly and make sure all spend provides value,” she explains.

Paying more for IT labor

Another key item to budget for is IT staff. Of those CIOs reporting an increase in budget this year, 48% said that increase was due to a need to invest in new talent and skills. Still, approximately 20% of all IT jobs are open these days, with a “massive” migration occurring from corporate IT to tech providers, Gartner’s Lovelock says. “We don’t see an end to that for more than five years.”

ITW’s Mathis says acquiring and retaining talent is his second budget priority, only slightly behind security. “It’s just really hard right now — finding and retaining talent and the whole pandemic work arrangement.” He’s lost some staffers to higher-priced offers, even though he felt they were already being paid “very competitively.”

To retain key staffers, IT leaders must be prepared for salary and benefit hikes, and need to become more creative. Just as CIOs have gone from direct control and ownership of all things technology-related to more of an orchestration role, Lovelock says, the talent question revolves around “whether you need to have the skills, or you need to have access to skills. The next wave of labor arbitrage is finding an AI, not finding a new country” for nearshoring or outsourcing, he says.

For the immediate future, Lovelock says, budget issues will be, if not completely stable, at least manageable. Focus on risk management, he advises, and “have a little faith in your CFO and CEO. They recognize the value you provide, and IT budgets won’t be affected in the same way they were in 2009 and 2001.”