Sharply rising IT costs have CIOs threading the needle on innovation

Many CIOs expect significant price increases in the cloud and other IT products and services during 2025, requiring those with stagnant budgets to make difficult decisions about IT spending.

CIOs surveyed by Gartner at the end of 2024 expect an 8.9% cost increase, on average, for IT products and services. These price hikes, along with continued AI investment, are driving a projected 9.8% increase in worldwide IT spending, according to Gartner.

The analyst firm had previously forecasted an 8.2% increase in worldwide IT spending for 2025. It now projects $5.62 trillion in IT spending this year, up from $5.11 trillion in 2024.

CIOs expect cost increases for their recurring IT spending, including managed services, SaaS, and PC and mobile purchases, says John-David Lovelock, distinguished vice president analyst at Gartner.

AI built in ahead of demand

In some cases, price hikes for IT products and services will come with feature improvements or expanded functionality, but CIOs will also be forced to pay more for some of the same offerings, Lovelock says.

Moreover, some IT vendors are building AI functionality into their products and services and charging more for it, even though customers haven’t demanded it, he adds.

“Within two years, it will be virtually impossible to buy a PC, tablet, laptop, or mobile phone without AI,” Lovelock says. “Whether you want it or not, you’re going to get it sold to you.”

Vendors have begun to build AI into software as well, he says, and in many cases, charge customers for the additional functionality. IT consulting services will also add AI-based services to their portfolios.

Cloud prices headed skyward

But the biggest expected price hikes are for cloud computing services, despite years of expectations that cloud prices wouldn’t increase significantly, Lovelock says.

“For many years, CIOs were taught that in the cloud, either prices went down, or you got more functionality, and occasionally both, that the economies of scale accrue to the cloud providers and allow for at least stable prices, if not declines or functional expansion,” he says. “It wasn’t until post-COVID in the energy crisis, followed by staff cost increases, when that story turned around.”

Faiz Khan, founder and CEO of multicloud services provider Wanclouds, agrees that cloud prices are likely to go up this year. “That doesn’t necessarily mean that most enterprises are expanding the amount of cloud storage they need,” he says. “The Gartner folks are right in saying that there is continued inflation with IT costs on things such as storage, so companies are paying more for essentially the same storage this year than they were the year prior.”

But in some cases, organizations are moving to a multicloud approach, giving them additional IT resources as they pay more for cloud services, he says. In addition, demand is growing for cloud-based GPUs used for AI model training.

“We’re seeing enterprises spending more for more expensive GPU configurations on the cloud and also needing more hours of work time with these GPUs,” Khan says. “So that is undoubtedly added spend versus the cost simply going up.”

AI investments despite lower expectations

In addition to price hikes, AI spending will drive the worldwide IT spending increases, Lovelock says, even though generative AI is heading into Gartner’s famed trough of disillusionment. Expectations about the power of gen AI are falling, but many organizations will still increase their spending on AI projects or hardware.

“Any technology that’s going to change the world does have to pass through the trough,” Lovelock says. “CEOs have stopped talking about firing everybody and running the entire company with gen AI, and about doubling revenue and transforming their industry, but they are now talking about productivity improvements and quality improvements coming from gen AI.”

IT leaders are becoming more grounded about their gen AI goals as they begin to better understand its potential, adds Rakesh Sancheti, chief growth officer at Tredence, a data science solutions provider.

“Generative AI is no longer seen as a one-size-fits-all solution, and this shift is helping both solutions providers and businesses take a more practical approach,” he says. “We don’t see this as a sign of lower expectations but as a move toward responsible and targeted use of generative AI.”

Several IT leaders say they also expect the IT spending increases projected by Gartner, with AI inspiring some of the new investments. But price increases are also “a huge driver” of spending increases, says Dmytro Romanchenko, CEO of software developer Syndicode.

“Vendors are cranking up prices across the board, forcing companies to be sharper with their budgets,” he says. “IT spending isn’t just about chasing innovation anymore — it’s also about staying afloat amid rising costs. Businesses pour more into maintaining the status quo while squeezing value out of every dollar.”

To counter price increases, some Syndicode clients have abandoned ambitious IT expansion plans in favor of streamlining their current services, Romanchenko says. One client has been automating processes with AI but has had to cut back on other projects to fund the AI efforts, he adds.

Some companies are reevaluating their IT “nice to haves” and instead focusing on “must haves.”

“Cloud services, software licenses, hardware — everything’s creeping up,” he says. “It’s like the IT world’s version of sticker shock. Vendors are justifying it with things like higher energy costs or beefed-up security features, but it all adds up for businesses.”

Some organizations are spending more on IT now to reduce costs over the long term, says Tredence’s Sancheti. Automation tools, cloud migration, and energy-efficient systems are examples of short-term spending to reduce future costs.

But price hikes are also a factor in increased spending, he says, with the cost of AI hardware and AI and data science experts driving up prices. In addition, cloud and SaaS renewals are pushing up prices after many organizations originally signed up at discounted rates.

He’s recently seen some organizations defer large-scale digital transformations or infrastructure overhauls because they don’t have the funds left after covering higher cloud and software costs. Other organizations are focused on optimizing their current IT assets or renegotiating vendor contracts, he says.

“CIOs are facing a tough balancing act,” Sancheti says. “On the one hand, they need to invest in transformative technologies like AI to stay ahead of the curve. On the other, they’re grappling with rising costs that are eating into those budgets.”