Special Feature
Part of a ZDNet Special Feature: IT Budgets 2016: A CIO's Guide

How business decisions are driving technology spending

The decisions behind IT budgets are no longer made in isolation as businesses learn how important it is to align IT investments with business strategy.

For a long time the technology investments businesses made were mainly in areas that would help keep back-office systems running. But today, businesses are increasingly relying on technology to deliver the company's overall business strategy.

Examples of Australian businesses that have bumped up their technology investments over the years include major banks, such as Westpac, which recently announced it was boosting its annual investment spending to AU$1.3 billion to accelerate the digitisation of the business. Meanwhile, the Commonwealth of Australia racked up AU$628 million in total information technology service expenses during the first half of the 2015 financial year.

Similarly, during the federal government's 2015 budget, it allocated AU$250 million for the Australian Bureau Statistics to undergo an IT overhaul to eliminate its legacy woes; while another AU$254 million was handed out to the Digital Transformation Office in the Department of Communications.

This is evidence of businesses shifting the way technology funding is allocated and the role technology now plays in any organisation.

Gartner research director Derry Finkeldey said technology has become more ubiquitous in organisations, and therefore the understanding of how technology can drive business strategies is increasingly considered as part of driving growth for the business.

"I think [technology] is less arcane to people outside of IT. Our consumer experience is driving a deeper understanding of technology in general, and so it is more accessible for business people to understand and be involved," she said.

She said that budgets for technology investments haven't increased; the money where businesses are choosing to spend their money has shifted.

"We're seeing a lot of that spending being driven by the line of business. For example, analytics is really about making business decisions, and so these are business initiatives rather than run the business type IT decisions," she said.

"Our research shows that increasingly IT decisions are being made by buying teams, and they will usually have involvement by the line of the business and IT. Most recently our results show that only 25 percent of decisions are made purely by IT. I think there will be some areas where the CEO will get directly involved, but it's more of a case of where the decisions are aligned with the direction and strategy set by the CEO."

Tim Coventry, Business Analyst principal, emphasised how important it is for businesses to align their technology investments with their business strategy priorities. He said this has only started to recently happen, and it is being driven by board members who have an understanding of technology.

"If you ever look at a lot of technology investment it's done in isolation to the business strategy, so it's all about aligning the business strategy with the IT investment. In actual fact, we're seeing now if you have good business strategy planning in line with technology planning, technology can actually help with business initiatives," he said.

Coventry warned that businesses often make the common mistake of not thinking about how technology they invest in will play a role in their overall strategy.

"We've noticed people think you can go straight from strategy to delivery. We believe there's an iterative step between that, and that's clearly around understanding business requirements. You need to know how to link your strategy to business requirements and then to technology. We often find there's iteration between those three layers; you can't just jump from strategy to technology," he said.

"Our research shows that increasingly IT decisions are being made by buying teams, and they will usually have involvement by the line of the business and IT."

— Derry Finkeldey, Gartner research director

Forrester senior analyst Thomas McCann agreed, saying that while it's evident businesses are putting a majority of their budgets into digitising the customer experience, it doesn't necessarily mean they're doing it right.

Based on Forrester's Customer Experience Index Australia 2015 report, while half of Australian firms say improving customer experience is their top strategic priority, no-one is delivering excellent customer experience.

"What we saw in this research is those companies with digital-only business models are currently not doing any better than your traditional multichannel companies, primarily because the digitisation features and functionalities they're offering aren't really aligned with their customer needs," McCann said.

He advised that for businesses to deliver good service, they have to align their technology investments with their business strategy.

"I have not come across a major organisation in Australia that has done that yet. In actual fact, most of the large organisations and institutions do not have a well-defined customer experience strategy -- and those that do have one, those strategies belong to a particular department or group," he said.

"So it doesn't matter how digital you go. If an organisation doesn't know what experience it's trying to deliver, it's not going to be delivered."

According to Gartner, while total technology spending is expected to slow down by more than half in 2016 to a growth rate of 3.46 percent compared to the 8.8 percent growth rate in 2015, the majority of spending -- AU$29.6 billion -- will go towards IT services, which accounts for product support services and outsourced services including consultation, implementation, and business process.

Finkeldey attributed the large portion of spend for IT services to the growing decision by businesses to move to the cloud, something to which small to medium-sized businesses, particularly startups, are leapfrogging, unlike enterprises, which are focused on moving away from their legacy technologies first. She added that SMBs favour outsourcing and are more dependent on external services rather building their own infrastructure.

"We're starting to see more of a shift to cloud models or to hybrid models where it is outsourced. It's a shift, but I would expect 'run the business' percentage to reduce," she said.

Software is another segment in which technology investment is expected to grow. Gartner has predicted that by 2016, the value of the segment will be AU$13.1 billion, up from AU$12 billion from 2015. This will be reflective of the growing investment businesses are making into enterprise software such as customer relationship management and analytic-driven tools, Finkeldey said.

The finding aligns with Gartner's survey from 2015 that showed the top technology priorities in Australia for 2015 were business intelligence and analytics, followed by cloud and mobile. Finkeldey believes this trend is expected to continue into 2016.

"I think analytics will definitely remain as a top-three priority because it's really the basis for good decision making. We have all this data and we're generating more of this data, and the more we can understand it the better we can drive better decisions, and more efficient use of the resources we have," she said.

"It's an area where we're seeing continued advances with advanced analytics and machine learning, but also the wealth of data now coming from things that we connect to sensors, and the internet of things becomes a reality and more successful to analysis, and that will make it increasingly important."

In turn, Finkeldey believes that as businesses focus on how technology can help create new business, they will reduce the investment spending on technology used to run the business.

"I think we probably expect to see 'run the business technology' become less of an organisation's overall IT spend, and more focused on investments in technology that actually help drive and create the business. In some respect technology is ever evolving, so there will always be some legacy."

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