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

IT budgets 2016: Surveys, software and services

As 2016 approaches, surveys show IT budgets and headcounts remaining largely flat, leaving CIOs the problem of figuring out how to keep the business running while pursuing innovative projects.

A company's IT budget is affected by multiple variables, including the state of the economy, the industry sector in which it operates and its financial health -- not to mention the persuasiveness of the CIO (or other responsible executive) when it comes to fighting IT's corner in the boardroom.

When allocating the resulting IT budget, CIOs need to balance the tactical requirement to 'keep the lights on', by upgrading and if necessary expanding existing systems, with the more strategic requirement to explore new opportunities for digital transformation within the business. All the while, of course, the IT department is expected to deliver value for money by minimising capital expenditure and operational costs wherever possible.

This month's ZDNet special feature explores several aspects of IT budgeting, with particular reference to the upcoming 2016 round. In this introduction, we'll take a look at some recently released survey results -- including from our sister site Tech Pro Research -- and examine how CIOs can get a helping hand with budgeting and IT procurement from specialist SaaS providers and consultants respectively.

Analysts on IT budgets

As noted above, the current economic climate and the industry sector involved are big influences on a company's IT budget. Analyst firm Gartner has recently outlined its view on how the rest of 2015 will pan out for a range of vertical industries, forecasting a total worldwide IT spend of $2.69 trillion -- a decline of 3.5 percent over 2014. Attributing this largely to the strength of the US dollar (and also to slowdowns in emerging markets such as Russia, Brazil and China), Gartner forecasts the biggest spending drops in the government (-5%) and manufacturing & natural resources (-4.5%) sectors, with retail (-1.5%) and banking & securities (-2.4%) holding up best:

it-budgets-2016-gartner-verticals.jpg
Data source: Gartner

In the retail sector, Gartner sees high priority given to spending on technologies that help understand customers better, improve engagement through multi-channel experience and facilitate the buying process. IT infrastructure to accept various mobile payment systems and digital wallets will also be a priority for retailers for the remainder of 2015, says Gartner.

As for the banking & utilities sector, Gartner expects a doubling of IT budget to support digital and other new technology initiatives through 2019, despite a forecast 2.4 percent decline in the 2014-15 period.

IT budget surveys

Computer Economics

Market research firm Computer Economics has published an annual IT Spending & Staffing Benchmarks report since 1990 and is a valuable source of IT budgeting metrics for North American organisations. The 2015/2016 report was based on survey information from 203 organisations, split equally among small (operational IT budget <$5m), medium ($5m-<$20m) and large (>$20m) organisations from the US and Canada. Leading industry sectors in the survey sample were Public & Non-profit (18%), Financial Services (12%), Professional & Technical Services (11%), Retail & Wholesale (11%) and Process Manufacturing (11%).

Headline findings from Computer Economics' 2015/2016 survey are that over two-thirds (69%) of IT organisations are increasing their operational IT budgets this year, with a median year-on-year growth rate of three percent. Larger organisations and services companies are doing particularly well in terms of operational IT spending growth. Capital spending on IT, however, remains flat (43% increasing, 37% decreasing, 20% about the same; 0% median YoY growth rate), while IT headcounts show only a marginal rise.

The finding that IT spending as a percentage of revenue, and on a per-user basis, is falling has two possible explanations: IT budgets could simply be lagging behind the general growth in revenue and employee headcount; alternatively, the effects of a transition to the cloud may be showing up -- cloud migration would increase operational spending and depress capital spending, as observed. Backing up the latter interpretation is the fact that 56 percent of surveyed organisations are increasing spending on cloud applications, while just 10 percent are investing in data centre infrastructure:

it-budgets-2016-computer-economics.jpg
Image: Computer Economics

"In short," concludes the Computer Economics report, "IT executives today are in a good position to think strategically, lobby for IT investment, and deliver real long-term value to the business. We are beginning to see the first signs that cloud computing is having a positive, if disruptive, influence."

Spiceworks

The IT professional network Spiceworks has just published its 2016 State of IT report, including survey results from over 800 IT professionals. Over half (59%) of these IT pros were from North America, with the remainder (41%) coming from Europe, the Middle East and Africa (EMEA). Spiceworks' survey has a strong SME focus, with 91 percent of the survey population from companies employing fewer than 1,000 people. The leading industry sectors in the survey sample were Manufacturing (13%), IT services (11%), Healthcare (10%) and Education (8%).

Spiceworks' survey finds that IT budgets remain flat, with planned spending rising by just 0.7 percent overall (7.9% in North America, -0.3% in EMEA). This is despite the fact that more than half (56%) of IT pros expect their company revenues to increase next year, with confidence slightly higher in EMEA (58%) than in North America (55%). Only a third (34%) of IT pros expect their headcounts to rise in 2016, although again confidence is slightly higher in EMEA (36%) than in North America (32%).

When it comes to the drivers of IT spend for 2016, the picture is more incremental improvement than digital transformation, with end-of-life issues, growth/additional need and upgrades/refresh cycles far ahead of 'new technology features' in the pecking order:

it-budgets-2016-spiceworks-drivers.jpg
Image: Spiceworks

Hardware and software projects will account for most of the 2016 IT spend (37% and 31% respectively), although spending on managed service projects and hosted/cloud-based projects both show increases over the figures for 2015. Interestingly, in this SME-heavy survey population at least, the desktop computer appears to be alive and well: 21 percent of hardware budgets will go on desktops in 2016, compared to 19 percent on servers, 16 percent on laptops, 10 percent on networking, 6 percent on external storage and 6 percent on tablet/mobile.

Another noteworthy finding from Spiceworks' survey is that, although 59 percent of IT pros feel that their organisation does not adequately invest in IT security, they only plan to spend nine percent of their software budget, or six percent of their total budget, on security in 2016.

Tech Pro Research

To accompany this special feature, ZDNet sister site Tech Pro Research (TPR) conducted a survey in August 2015 -- IT Budgets: Drivers, trends and concerns in 2016. The 201-strong survey population were mostly IT managers (46%) and CIOs/CTOs (15%) in organisations from over 20 industry sectors, 49 percent of them located in North America. As with the Spiceworks survey, this one has a strong SME focus, with 84 percent of respondents hailing from organisations employing under 1,000 people full time.

The key findings from TPR's survey were as follows:

  • Year to year IT budgets remain flat (plus or minus ten percent, which is in line with historical trends).
  • The IT budget creation process begins with IT middle managers and key technical contributors.
  • Outside IT consultants play a major role in recommending technologies that organizations adopt.
  • Final IT budget approval occurs at the level of the CFO or the CEO.
  • Most new IT projects approved in budgets are driven by specific business initiatives.
  • To sell their budgets, IT decision makers prefer technology investments that can be expensed operationally, and not as longer term capital expenses.
  • Those approving IT budgets want to see return on investment (ROI) and total cost of ownership (TCO) projections for the IT projects that they are considering for approval.
  • More companies are choosing to in-source rather than to outsource IT.
  • Because more companies are in-sourcing staff, training in vital skills is an important IT budget item for 2016.
  • Top project focuses in IT in 2016 are security, governance and networks.

For more details, see the full TPR report, which is also summarised at greater length here. This chart displays the survey population's budget priorities for 2016, and shows a clear focus on operational efficiency, security and business continuity:

it-budgets-2016-tech-pro-research.jpg
Image: Tech Pro Research

Other priorities that have increased visibility since last year's survey include mobile device management, plus the simplification and automation of many internal IT processes.

Software & services for CIOs

Technology Business Management: Apptio

it-budgets-2016-apptio-gupta.jpg
Sunny Gupta, co-founder and CEO of Apptio.

Many CIOs still use elaborate Excel spreadsheets to create and manage their IT budgets, but specialised Technology Business Management (TBM) software is available, notably from leading SaaS vendor Apptio.

Founded in 2007, privately held Apptio "allows CIOs to run IT like a business," as co-founder and CEO Sunny Gupta puts it. "It's a business management system based on analytics and data that CIOs can use to get transparency into the cost of IT, make better decisions, benchmark themselves against their peers and communicate the value of what IT provides to the business," says Gupta.

Apptio currently has around 250 customers, many of them large enterprises -- although smaller organisations are also represented. "Our smallest customer is managing four million dollars in technology spend on an annual basis, while the largest customer we have is managing twelve billion," says Gupta.

Typically, CIOs have a high-level understanding of their cost base, but lack transparency at a granular level. "For example, what are they spending on compute, when you count labour, hardware, software, facilities, power and cooling -- all the cost drivers?," asks Gupta. "They don't understand fully what they're spending on things like SAP and cloud services, or what percentage of their spend is on 'business as usual' versus innovation, and cannot describe what part of their IT cost structure is fixed versus variable."

The time certainly seems right for a more data-driven approach to IT management. "A lot of CIOs over the last three to five years have been under pressure to cut costs and have used approaches like insourcing and outsourcing to drive some level of optimisation," says Gupta. "But now their budgets are flat or going down and they're being asked to do more. Also, the cloud is not helping because people can see what a unit of compute from Amazon or Microsoft will cost -- but what is the internal cost structure for running data centres and compute, and how can better decisions be based on real data and facts?"

"IT is probably the last discipline that's running on spreadsheets: CIOs put in business systems for every other function, but forgot to put it in for themselves."

— Sunny Gupta, co-founder & CEO of Apptio

Because these problems are pervasive for CIOs, Apptio has created a non-profit organisation called the Technology Business Management Council, or TBM Council, whose leadership includes CIOs from organisations like Microsoft, HP Enterprise Group, Exxon Mobil, Nike and Nationwide Building Society.

"What we've done," says Gupta, "is created an industry-standard taxonomy of the IT cost model [called ATUM, for Apptio TBM Unified Model] and the cloud services are represented in there. What Apptio can do is take a bill -- from Microsoft Azure or AWS for example -- and automatically map it into the standard taxonomy, so at any given time a CIO can compare apples to apples: what their cost structure is, what their outsourcers' cost structure is and what the cloud options are. So they're able to continuously evaluate the options and see which workloads make sense to run where."

Apptio has also launched a quarterly IT Economics Report, which mines the company's repository of customer data for (anonymised) insights into IT spending patterns. The inaugural report finds that, when viewed as 'Cost Pools', 44 percent of typical IT spend goes towards people-related costs, with 31 percent going on technology and 13 percent on outside services. Switching costs to 'Resource Towers', business-facing productivity offerings get the biggest share (49%), followed by infrastructure (29%) and IT operations (18%).

Apptio's customer data harbours three groups of companies (which it calls 'archetypes') that demonstrate different ways of sourcing their IT supply chain -- Technology-centric, Vendor-centric and People-centric:

it-budgets-2016-apptio-archetypes.jpg
Image: Apptio

Technology-centric organisations favour spending on hardware and software; Vendor-centric companies spend more on outside services such as consultants, managed service providers and cloud services; and People-centric firms spend more on internal labour and less on contractors and software.

One topic Apptio has lined up for future coverage in its quarterly report is 'How are organisations optimizing run costs in order to fund innovation?'. According to Gupta, this is a common problem: "Every CIO has 70-80 percent of their cost structure and IT budget tied into 'run IT', or business as usual, with only 20-30 percent focused on innovation. Every CIO we talked to, going into 2016, wants to shift at least 5-10 percent of their cost structure from business-as-usual to driving more digital innovation for the business."

A related problem CIOs are wrestling with, according to Gupta, is how to optimise the utilisation of existing in-house IT infrastructure in order to free up resources to exploit cloud services for projects requiring more agility. Then there's the issue of 'shadow IT': "We are finding that anywhere from ten to thirty percent of the cost structure in an IT organisation may be outside the CIO's control. CIOs are under tremendous pressure to be able to respond, and to govern this shadow IT spend that's happening in the enterprise."

TBM software such as Apptio can give CIOs a much more precise handle on these problems, providing them with better ammunition when it comes to budgeting time. As Gupta sums up: "IT is probably the last discipline that's running on spreadsheets: CIOs put in business systems for every other function, but forgot to put it in for themselves."

IT procurement consultants: Turnstone Services

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David Brook, founding director of Turnstone Services.

Once CIOs have their IT budgets, they will naturally be concerned to achieve the maximum possible value for money from their suppliers -- a challenging task if multiple vendors are involved.

Enter specialist IT procurement consultancies such as London-based Turnstone Services, which employs CIPS-qualified consultants and has experience of negotiating with over 250 vendors. Turnstone claims that it can save clients -- who are typically FTSE 350 and large public-sector organisations -- around six times the fees it charges, on average.

it-budgets-2016-turnstone-savings.jpg
Image: Turnstone Services

"We're a bunch of commercial folk specialising in IT sourcing and procurement," says founding director David Brook, "which makes us a bit of a rare breed because most CIOs will do this sort of work themselves. Our claim is that if you're going for a large purchase like an ERP or a WAN, firstly it's very infrequent and secondly, although IT teams may be technically strong or business strong, commercial skills are quite a different thing -- that's our play."

Despite reports of flat IT budgets, Brook finds "a lot more activity going on, a lot more spend happening: the credit crunch has now lifted, and a lot of companies that were in a holding pattern are left with IT systems that are creaking. We're certainly seeing capex spend going up, both on the acquisition of new stuff and renewals."

A significant portion of Turnstone Services' work has turned out to be 'vendor management' (basically, ensuring that suppliers deliver maximum value to their clients), although according to Brook the company didn't start out that way: "A few clients said, 'It's great that you guys came and helped orchestrate a market tender, but we've got a big vendor portfolio -- can you come and do a day a week?' It may not be that glamorous, but there's often quite a bit of value to be found."

Brook notes that contracts are often weighted in favour of the supplier, and are renegotiable mid-term to improve the client's standing -- which is where Turnstone Services comes in with its 'Contract MOT' review and benchmarking service. This combs through IT contracts clause by clause, grading each one using a traffic-light system in order to build a renegotiation plan:

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Image: Turnstone Services

When it comes to spending on business-as-usual versus innovation, Brook is seeing plenty of the latter: "We're involved in two quite large projects that are not only being badged as 'IT transformations', but they're also going to fundamentally rewire the businesses, and while we lay our stall out as being commercial IT procurement, we've done enough of these to know that process change -- and change management -- is essential." Having said that, Brook notes that "there are plenty of organisations that are still very conservative, running data centres and their own servers, with reams of technical guys who want to get stuck into the Meccano."

The typical Turnstone Services customer has £100-£400 million turnover: "there's enough critical mass of IT going on, but there isn't a huge procurement function with some dedicated IT people in it," explains Brook. More generally, he notes that "as in-house functions dwindle, and more use of the external market is made, we're finding that there's more traction for our services. The rise of vendor management this year is testament to that: with more companies outsourcing data centre, disaster recovery and app development, they're starting to realise that you don't need an army of techies to run those -- that's the wrong skillset and that leads to failure."

Outlook

As 2016 approaches, CIOs find themselves in the (now-customary) position of being asked to do more with the same or less money and little or no extra headcount. Not only do they need to keep businesses running by upgrading and, if necessary, expanding existing systems, but they also need to seek ways to optimise the utilisation of in-house infrastructure and any external services, in order to free up resources for innovative business-transformation projects.

It's a tough assignment, and it's clear that many CIOs will need more than an Excel spreadsheet and a belief in their own vendor-management skills in order to get by.

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