Special Feature
Part of a ZDNet Special Feature: IT Budgeting 2015: Planning the Next Stage

CIOs must argue for smarter, more strategic technology investments

As the budget for traditional IT infrastructure shrinks, decision makers will increasingly reallocate their funds in 2015 and beyond into cloud, mobility, and big data where they are seeing areas of growth.

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Traditionally, if the back office of a business went down, or staff members had issues with their computers, IT would often come to the rescue to ensure that everything technology-related ran as smoothly as possible.

But nowadays, IT has joined the front line of the business, which has given rise to the role of the chief information officer. We're now seeing CIOs join the likes of the chief executive, chief operating officer, and chief marketing officer in the boardroom, helping make company-wide decisions.

CIOs spread their wings

There has been speculation that the role of the CIO is slowly dissolving, and that most IT decisions are now partially — or entirely — made by other departments. Not so, says Gartner research director Derry Finkeldey: instead, the complete opposite is happening, with IT more involved in the line of business than ever.

"The biggest shift, or the very visible one, is to marketing, as it's still front and centre, and that's reflected in our forecast for high growth of CRMs continuing. But we're starting to see more cross-functional departments making IT decisions, and other lines of business as well," said Finkeldey.

"We say now IT is the business," she continued. "It means that technology has matured; it's strongly embedded in our everyday life, and likewise within business. So now, the business is saying we have this outcome to meet, they're already doing their research about what might meet those needs, and certainly more and more they come to IT with those requirements and work on them together."

In some ways, IT has become a business of its own and is responsible for servicing the rest of the business, and this has changed the way the IT budget is managed and spent. Gartner has forecast that by 2018, enterprise IT spending will grow to $3.2 trillion from $2.7 trillion in 2013, indicating that as enterprises spend on digital businesses, the IT budget will continue to grow.

Shifts in the IT budget

A bulk of the IT budget for next year will continue to be in the "less sexy" side of infrastructure found in the back office, Finkeldey said. However, that's expected to continue to slowly shrink as businesses reallocate larger portions of their budget towards new technologies, such as cloud, mobility, and big data, because they would no longer need to spend portions of their budget on managing their IT infrastructure or data centre.

"We certainly see shifts in the IT budget, because growth was previously very strong in areas like storage and physical servers, but clearly that growth is reducing, as there are shifts to virtualisation and higher uptake of cloud models," she said.

At the same time, these new forms of technologies and the service delivery models of the cloud are changing the way that IT is consuming technology, most evident in the shift of IT spending from a capital expense (capex) to an operating expense (opex) model.

The Michael Page 2014-15 CIO Viewpoint report found that increasingly, instead of IT having to handle the environment, more businesses are opting to outsource these jobs. Around 28 percent of CIOs responding to the survey currently outsource 40 percent of their work, while 24 percent utilise offshore facilities to complete 40 percent or more of their workload.

"There is a greater consumption of opex-based models, because of the breadth and maturity of cloud services; now that it's available across SaaS and IaaS, there will be a significant transition. This will mean a greater reduction in the management of IT infrastructure and application in-house, or it'd be moved off to a third-party service provider for flexibility," said Raj Mudaliar, IDC Australia IT services research group senior market analyst.

"Then what savings come out of that will be allocated into new technology, and if the company has the luxury of additional IT budget, that would go towards new technology."

Mudaliar predicts that 90 percent of enterprise IT growth in the future will be driven by the new technologies, rather than traditional IT.

"What we're seeing is a significant shift in the line of business becoming more proactive when it comes to technology decisions. Earlier, the changes that were driving business today is not from within but from outside. So the line of business is becoming more and more proactive, and increasingly sponsoring technology projects," he said.

Security and legacy updates

Another area where enterprises are expected to dedicate a pool of money towards is security, a space that's gaining a lot of traction as the vulnerability of businesses continues to escalate, as exemplified by recent hacking events, such as Apple's iCloud , plus data breaches at  Target  and Home Depot .

"Security risk management and governance is right on top of the priority list when it comes to industry initiatives as far as ICT is concerned for the next 12 months," Mudaliar said. "I think this is becoming more and more important, because the IT environment is becoming fluid and security risk management and governance — whether it's to do with brand reputation of the enterprise — it's the top of the mind when it comes to ICT investments."

Realistically, though, technology transformations don't happen overnight. For this reason, IT budgets will continue to go towards application modernisation and development for now. Gartner has predicted that modernising legacy core systems to support the growing digital business will continue to consume portions of the IT budget. For example, 20 to 40 percent of IT budgets in the insurance sector will be dedicated during the next five years to overhauling systems. Similarly, in the transportation market, introduction of mobile technologies, smart transportation, and legacy upgrades will make up 5 to 10 percent of IT budgets until 2018.

"What has happened is Australia, being a very mature market, it has a lot of legacy as well, whether it's datacentres or applications; right now, we're moving into this new era of 'third platform', and what is happening is these legacies are the toughest bits of the IT environment to be moving into more flexible, cloud-based environments," Mudaliar explained.

"So what that means is enterprises are going to be spending a lot time and effort and money in re-architecting and modernising the applications to be able to deliver better services in this new third platform era.

"This will only accelerate as we move forward; they have this big challenge at hand. Moving infrastructure is pretty easy; you can do your consolidations of your datacentre and decommission datacentres because you have mature service providers who can manage your applications from a third party.

"But the application is pretty complex, and that's beginning to shift, and that will be a focus for enterprises. The architecture and application modernisation and rationalisation will be two key things moving forward, at least in the next two to three years."

Sector-specific factors

Naturally, though, some sectors are more technology driven than others, and will therefore have larger IT budgets than others. The financial services and government are the front runners, which Gartner's Finkeldey refers to as the "Goliath" spenders in the market.

If we take a look at Australia's big four banks, each are running their own versions of a digitisation program that involves overhauling their infrastructure to move parts into the cloud, and making ongoing enhancements to their mobile applications to improve customer interactions. Meanwhile, the federal government has launched a whole-of-government approach to implementing cloud technology within the government.

"They're quite highly visible, because a lot of what they do is customer facing and touches us directly. But when we look at how IT budgets are split, there are obviously differences by industry; but, by and large, there are a lot of similarities where the proportion of the budget goes to running the business and infrastructure, as opposed to software," Finkeldey said.

"It's more proportional to the size of the industry. What we see is that financial services are so huge because they spend a very high proportion of their revenue on IT compared to other industries, like retail or manufacturing, that spend a much lower proportion of their revenue."

Finkeldey highlighted that retail has been another sector that has uplifted its level of "innovation" over the last two years through new technologies, such as analysing big data for the benefit of improving loyalty programs and adopting tap-and-go payment technology to enhance the speed of customer service.

Meanwhile, Gartner has consistently projected that healthcare providers will lead IT spending growth, with a 4.33 percent compound annual growth rate (CAGR) from 2013 through 2018, and banking and securities to follow closely behind on 4.27 percent CAGR.

At the same time, Deloitte technology consulting partner Robert Hillard argued that depending on how customer focus-heavy a business is, there are variations on the level of IT spending. Hillard said that while almost "every business is a people business of some kind", the budget is also determined on how much a business wants to interact with customers via technology.

Outlook

However, overall, as technology continues to amplify revenue-earning capacity for most companies, organisations are increasing investment into their IT function, with the majority surveyed in the CIO Viewpoint admitting that they will be increasing their technology budget for the coming 12 months.

Almost two thirds of survey respondents reported that their IT budget has grown this year, while 20 percent of CIOs reported that their budget has remained the same. The remaining 20 percent have been allocated a smaller budget than in 2013. This shows a significant shift as compared to last year's survey results, when only a third of CIOs were granted a larger budget to carry out their work.

For most CIOs, the allocated budget translates to 1 to 2 percent of total company revenue, followed by 2 to 3 percent for 24 percent of respondents and 5 percent or more for a further 24 percent of respondents.

But the real challenge that CIOs now face is that even though they have a seat on the decision-making team, it's now about convincing the rest of the business that technology investments need to be done strategically, Hillard said.

"They don't have to work as hard to convince people to invest in technology, but they have to work very hard to get people to invest into technology strategically," he said.

"It's very easy to pull out your credit card for cloud, or to buy CRM or storage online, but what they have to do is be able to say it's not just about buying a CRM or a personnel system online. But it's then about having a strategic investment plan to keep on investing into it year after year, and build it into something like a portfolio."