The conclusion to last year's instalment of this article stated that "IT budgeting is challenging at the best of times, but for 2020 an extra helping of political and economic instability -- possibly even global recession -- will make things even harder for CIOs." That was with a backdrop of international trade tensions -- particularly between the US and China -- and, in Europe, the UK's protracted and increasingly painful extrication from the European Union following the 2016 Brexit referendum.
None of these factors have gone away -- but they have, of course, been overshadowed by the COVID-19 pandemic, which began in Wuhan, China, in December 2019 and has come to dominate the fortunes and agendas of individuals and families, businesses and organisations, and nations.
In this article, we'll summarise the emerging macroeconomic trends, examine analyst forecasts for IT spending in 2020/21, and look at the responses of IT professionals to survey questionnaires about their budgets, in order to get a picture of how the IT industry is likely to cope with the pandemic.
In its World Economic Situation and Prospects as of mid-2020 report, published on 13 May, the UN's Department of Economic and Social Affairs (DESA) projected a 3.2% contraction for the global economy in 2020, and losses of "nearly $8.5 trillion in output over the next two years due to the COVID-19 pandemic, wiping out nearly all gains of the previous four years".
At the beginning of 2020 -- in a report containing no reference to COVID, coronavirus or pandemic -- the UN DESA forecast 'possible' global economic growth of 2.5%, or 1.8% in a 'downside scenario'. The mid-year report's revision to -3.2%, which was dubbed "the sharpest contraction since the Great Depression in the 1930s", shows just how hard the pandemic has hit the world economy with lockdowns, disrupted supply chains, depressed consumer demand and widespread job losses.
The UN DESA's revised baseline scenario sees global output growing by 4.1% in 2021 following the 3.2% contraction in 2020. This assumes that lockdown measures will have slowed the spread of COVID-19 and that global economic activity will pick up from Q3 2020 onwards. None of this can be taken for granted, of course, so alternative scenarios are presented. The UN's 'pessimistic' outlook, which follows a second wave of the pandemic and further lockdowns, sees economic output plunging by 4.7% in 2020 and recovering by just 0.5% in 2021. The 'optimistic' scenario, which is predicated on successful tracking, testing and treatment programs and signs of success in the quest for a vaccine, sees a shallow contraction (1.4%) in 2020 and a more robust recovery (6.1%) in 2021.
Among the consequences of the pandemic flagged up by the UN is the fact that the crisis is likely to accelerate the shift towards digitalisation, and that businesses that are further down the digital transformation path will fare better: "Firms that invested in digital technologies and training have been relatively more successful in coping with the crisis than those that did not. Most notably, the ability to work remotely has become vital to ensure business continuity. The relative operational advantage of larger firms in the digital sphere may contribute to further entrenching inequalities between large and small businesses, as many will fail during the current crisis," the mid-2020 report said.
The recent performance of the UK economy shows what a global pandemic can do to a country's finances. According to the Office for National Statistics (ONE), UK gross domestic product (GDP) is estimated to have fallen by a record 20.4% in Q2 2020 (Apr-June) -- the second consecutive quarterly decline after it fell by 2.2% in Q1 (Jan to Mar), tipping the UK into recession. The scale of the COVID-related 2020 recession dwarfs the downturn caused by the global financial crisis of 2007-9:
Record quarterly falls were seen in services, production and construction output in Q2, particularly in industries most exposed to government restrictions, the ONS said. GDP did grow by 8.7% in June as lockdown began to ease, but the June GDP index of 87.3 is still well below the February 2020 level of 105.5.
The ONS compared the UK's recent financial performance to other leading developed countries and found that the UK GDP fell by a cumulative 22.1% in the first half of 2020 -- just below the 22.7% seen in Spain, but more than double the 10.6% fall in the US. The other countries considered were France (-18.9%), Italy (-17.1%) and Germany (-11.9%).
The ONS noted that: "The larger contraction of the UK economy primarily reflects how lockdown measures have been in place for a larger part of this period in the UK compared with these other economies. The Oxford COVID-19 Government Response Tracker captures this information by collecting information on government policy responses to create a 'stringency' index. According to this measure, the UK had an average stringency of 73 in the second quarter -- the second highest of the countries [analysed]."
To complete this picture, we've plotted the H1 2020 GDP declines against this Q2 lockdown 'stringency index' for all six countries:
What the analysts say
According to Gartner's latest analysis (13 July), worldwide IT spending will total $3.5 trillion in 2020 -- a 7.3% decline from 2019. All industry segments will experience declines, Gartner said, ranging from -16.1% in Devices -- despite "a temporary spike in device buying as businesses implemented business continuity plans for COVID-19 response" -- to -3.3% in Communications Services:
Gartner expects that, as revenues decline and IT projects back up, CIOs "will gravitate toward spending on subscription products and cloud services to lower upfront costs". Cloud-based conferencing will see a 46.7% increase in 2020, for example, while Gartner forecasts 13.4% growth in IaaS (infrastructure as a service) to $50.4 billion in 2020 and 27.6% growth to $64.3 billion in 2021.
Overall, the analyst firm seems cautiously optimistic about IT spending in 2020/21, expecting recovery to outpace that of the overall economy.
"With the easing of lockdown restrictions, many enterprises will soon return to a higher level of revenue certainty, allowing some cash flow restrictions to ease and CIOs to resume spending on IT again. This pause and restart will push growth out of 2020 and into 2021," said John-David Lovelock, distinguished research vice president at Gartner. But, he added, "The smooth 'swoop' recovery of top line IT spending masks a very turbulent recovery across some countries, industries and markets."
To help businesses and business units navigate their way through the pandemic, Gartner has developed a three-phase planning framework -- Respond, Recover, Renew -- and plotted various possible pathways and outcomes, both positive and negative:
As lockdowns ease around the world, many businesses will currently be in the 'recover' phase -- restarting their activities, rebudgeting, and planning to 'restore a scalable state'. However, as Gartner notes: "In the absence of a vaccine or cure for COVID-19, any rebound in business activity could easily be followed by another round of response, recover, renew, so the imperative is to absorb lessons learned quickly and build sustainable changes into business and operating models."
Depending on the type and location of the business, the outcome of this planning activity for business units, products or services may be positive (rescale, reinvent), neutral (return) or negative (reduce, retire). It's also likely, of course, that some entire businesses will fail to survive the economic disruption caused by the pandemic.
Analyst firm Forrester has issued a series of tech spending forecasts for different parts of the world since the coronavirus pandemic took off. Here's a summary:
30 July 2020
A big drop in real GDP in Q2 2020 sets the stage for what will look like an impressive rebound in Q3 2020, but the economic recession will not be over and may well get worse • The pickup in computer and communications equipment investment will most likely be reversed • The weakness in software investment is likely to be a precursor to further declines
23 July 2020
UK: tech spending to decline by 9.3% in 2020 and 1.1% in 2021 (computer equipment -9%, comms equipment -11%, software -10% in 2020) • France: tech spending to decline by 6.6% in 2020; 6.3% growth in 2021 (tech consulting services -7%, tech outsourcing -7%, software & comms equipment -6% in 2020) • Germany: tech spending to decline by 5.2% in 2020; 4.1% growth in 2021 (computer equipment -8%, tech consulting services -6%, software -5% in 2020)
24 June 2020
Scenario A (most likely): tech spending down 2.7% in 2020; 4.5% growth in 2021 (tech outsourcing suffers in downturn, software spending leads recovery) • Scenario B: tech spending down 6.4% in 2020; 1.7% growth in 2021 (software spending collapses, services spending slumps; hardware & telecoms suffer less than last [2008/9] crisis; hardware upgrades lead recovery).
29 May 2020
Best case: tech market growth slows to 1.2% in 2020; rebounds by 8.4% in 2021 • Worse case: tech spending contracts by up to 4.8% in 2020; 1.4% growth in 2021
Like Gartner, Forrester has created a framework within which CIOs can assess their IT budgets against their companies' business situation in the pandemic (or any other) recession. There are three modes -- Survival, Adaptive and Growth:
According to Forrester, companies in survival mode will need to cut their tech budgets by 30% or more, those in adaptive mode will need to cut by 10% to 20%, and companies in growth mode need to "economize while investing in growth and supporting key vendors".
Clearly the pandemic has been the dominant issue for business leaders in the first half of 2020, with technology a key component of their tactical and strategic responses. Analyst firm IoT Analytics has put some numerical flesh on the bones of this observation via a keyword analysis of the earnings transcripts of 3,000 US-listed companies, comparing Q2 2020 (during pandemic) with Q4 2019 (pre-pandemic).
Technology topics were plotted on two axes: 'Keyword importance' (how often a topic was mentioned in Q2 2020) and 'Keyword growth' (Q2 2020 mentions versus Q4 2019, indexed to 100):
Not surprisingly, remote working and related topics (video conferencing, remote monitoring and remote healthcare) saw the biggest growth in mentions (>10x) over pre-COVID levels. Supply chain was another big topic, with a near-threefold (2.8x) increase in mentions in Q2 2020 compared to pre-pandemic levels. Although the cloud didn't see an increase in mentions in Q2 2020, it was the second most cited topic after supply chain. If COVID-19 is accelerating the migration of legacy applications and other enterprise workloads to the cloud, future keyword analyses may see a rise in cloud mentions, IoT Analytics said.
What took a back seat during Q2? "Digital acceleration did not include IoT, 5G and AI during Q2 (at least not on a broad scale so it would have a measurable affect in CEO discussions). In fact, some longer-lasting AI initiatives and IoT projects which require an on-site setup were postponed during the crisis and thus less in focus," said the analyst firm. However, IoT Analytics said it expected all three topics to bounce back.
What the surveys say
The 2020 State of IT report provides a useful snapshot of the IT budgeting outlook as of September last year, before the pandemic cast its shadow over the world economy. The survey population was 1,005 business technology buyers from organisations across North America and Europe, covering SMBs to enterprises, and industry sectors including manufacturing, healthcare, non-profits, education, government and finance.
Key findings were:
- 44 percent of businesses planned to increase their IT budgets in 2020, compared to 38 percent in 2019
- Organisations expecting IT budget growth in 2020 anticipated an average rise of 18%; only 8% of businesses expected IT budgets to decline
- Ageing IT infrastructure and security concerns were the biggest drivers of budget growth, although factors varied by company size and location
- Adoption of new technologies such as AI, hyperconverged infrastructure, edge computing and serverless computing was expected to grow, especially in large enterprises
- Pain points were expected to include keeping technology infrastructure up to date, following security best practices and managing hybrid cloud infrastructure and services; small businesses were particularly concerned with security and disaster recovery
Clearly this picture will have been significantly rearranged by the pandemic. The next survey provides a first look at the extent of that rearrangement.
Market research firm Computer Economics, which was acquired by Avasant in February 2020, 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 2020/2021 report was based on survey responses collected from 233 US and Canadian organisations between January and May 2020 -- 34% small (IT operational budget <$5m), 34% mid-size ($5m-<$20m) and 32% large (>$20m). Leading industry sectors in the survey sample were manufacturing (22.3%), government/nonprofit (19.3%) and financial services (17.2%).
To get a handle on the effect of the coronavirus pandemic on IT budgeting, Computer Economics polled its survey base again in April/May 2020, receiving 77 responses. The composition of this supplementary sample was 53.2% small, 35.1% mid-size and 11.7% large companies, mostly in the manufacturing (22.1%), professional and technical services (18.2%), government/nonprofit (16.9%) and financial services (13%) sectors.
At the beginning of 2020, "companies were poised for another year of strong operational budget growth", and more than half of IT organisations (52%) were planning to increase IT staff headcounts. "The outlook for the year was looking strong for IT organizations -- at least until the global pandemic struck," Computer Economics said.
Before the pandemic, IT operational spending was expected to increase by 3% at the median -- slightly above the inflation rate. "Of all our findings, this one is most affected by the pandemic," the report said. Also, while a net 54% of organisations planned to increase their IT budgets, the report noted that "it is highly unlikely that this number will hold".
More encouraging for IT organisations attempting to cope with a recession is the finding that, at the beginning of 2020, only 44% of respondents -- a historic low -- felt their IT budgets were 'somewhat' or 'very' inadequate to meet the needs of the business. According to Computer Economics, the driver behind this -- reducing in-house infrastructure in favour of SaaS and cloud infrastructure -- means that "IT organizations have already been making many of the investments that will help in the downturn".
When it comes to IT spending priorities, cloud -- applications and infrastructure -- led the way in the survey, continuing a trend in recent years that Computer Economics suggests is likely to continue:
"While budgets for new projects may be put on hold [because of the pandemic], we do not expect these priorities to change," the report said.
What did Computer Economics' supplementary survey (also discussed in this webinar) reveal about the effect of the pandemic on IT budgeting, up to May 2020? "Currently, the answer might be a bit surprising. As of May 2020, most companies had not changed their IT spending budgets. And those that have cut their budgets have not made very deep reductions. A small but noteworthy group is even increasing IT spending, mostly to support the increase in remote workers. Most companies are in a wait-and-see mode."
Specifically, 57% of organisations said they were leaving their IT operational budgets unchanged in May, while 30% were cutting spending and 13% were increasing their budgets. Among the 30% of companies cutting IT spending, the median level was quite small -- just 5%. The reason, Computer Economics suggests, is uncertainty: companies "simply do not yet know whether cuts will be needed, or if so, the extent of them".
Capital budgets often suffer in a recession, and the supplementary survey found that, although 61% of organisations were leaving them unchanged, 28% decreasing and 11% increasing, the median level of cutting was deeper at 25%. "This makes sense", Computer Economics commented. "A quick way of saving money is by stretching the lifespan of hardware."
Reducing headcount is another way to save money, and the April/May survey saw 22% of organisations reporting IT staff cuts, with a median level of 10%. "If economic conditions do not recover in the second half of the year, it is likely that there will be additional layoffs," Computer Economics warned. An alternative to redundancies is pay cuts, something that 24% of organisations said they were pursuing, with a median level of 10%. Outsourcing levels were steady, with two-thirds (67%) of budgets unchanged, a quarter (26%) decreasing and just 7% increasing. Among those cutting back on outsourcing spending, the median level was 20%.
Much of the budgetary stasis revealed by Computer Economics' supplementary April/May survey reflects a high degree of uncertainty among organisations over how the pandemic will play out. For example, the survey also found that 60% of companies have not changed their budgets for new projects (33% decreasing, 7% increasing), with a similar picture emerging for cloud budgets (78% unchanged, 8% decreasing, 14% increasing).
However, cloud spending may prove to be a fruitful cost-cutting area going forward. "Price lists for cloud services are rapidly changing, and if IT leaders do not regularly revisit their cloud agreements, they are likely to be overpaying," Computer Economics noted. The leading cloud providers -- Amazon, Microsoft and Google -- all provide their own tools for cost management, and third-party solutions aimed at multi-cloud users are available from vendors including Apptio, CloudCheckr and Flexera.
Survey respondents were pretty optimistic about the likely longevity of budget cuts due to the pandemic and consequent recession, with 43% expecting a return to normal within six months:
The market research firm itself was more cautious, noting that "the length and depth of the recession depend on a great deal of variables, including whether further lockdowns are required, how quickly a vaccine is available, and the extent of further stimulus programs."
Industry sectors will of course be impacted differently by the coronavirus pandemic, as will different businesses within sectors. Here's a summary of Computer Economics' initial projections, showing the breadth and depth of likely IT operational budget cuts across sectors:
Across all sectors (red bar, above), Computer Economics expects half IT operational spending declines -- among those companies that are cutting budgets -- to fall between -5% (25th percentile) and -11% (75th percentile), with the greatest variation evident in the retail sector (0% to -15%). This is because businesses with a heavy online component are likely to suffer much less, if at all, than brick-and-mortar operations such as shops and restaurants. The higher education, transportation and (ironically) healthcare sectors also potentially face severe pandemic-related IT budget cuts. (The healthcare projection reflects the fact that most hospitals have deferred routine procedures -- a major source of revenue (in the US) -- to conserve bed space for coronavirus patients.)
Summing up the initial response of businesses to the uncertainties surrounding the pandemic, Computer Economics said: "The key to handling it all, from an IT organizational perspective, is agility and flexibility. And this might be why we are not seeing greater cuts to IT budgets. Once thought of as a cost center, digital transformation makes IT an essential part of the way business is done in this crisis."
Another follow-up survey is currently in the field, with an updated report expected in early October. Frank Scavo, president of Computer Economics, has provided ZDNet with some early observations, summarised here:
- More companies are now reporting IT budget increases than back in May, mostly due to the need to accommodate working from home
- However, organizations that are cutting IT budgets are now reporting deeper cuts -- double what they reported in May
- Surprisingly, more IT organizations are increasing headcount than cutting it, although some are implementing pay cuts in order to maintain or increase headcount
- The number of companies who are increasing cloud spending has doubled; much of this is attributed to accommodating remote workers via cloud services
- The optimism about how long IT spending cuts would last, seen in April/May, has collided with reality. IT leaders are now much more pessimistic
- Full-time remote working is likely to become much more prevalent: some IT organizations that had less than 5% remote workers before the lockdown are now forecasting that nearly half of their IT staff members will be working 100% remotely once the pandemic is over.
TechRepublic conducted its own survey to accompany this special report, receiving 62 responses, primarily from IT directors (19%), IT managers (18%) and IS/IT executives (18%). Industry sectors were headed by IT & technology (13%), education (13%) and engineering & construction (13%). Large businesses (>500 employees) made up 29% of the sample, 34% were mid-size (50-500 employees), while 37% were small businesses (<50 employees), with 40% in the US, 13% in Europe, 11% in APAC and 10% in Latin America.
Two questions specifically addressed the effect of the coronavirus pandemic on IT budgeting. First, the majority (62%) of respondents said they were tightening their budgets for 2021:
Second, despite an overall reining-in of IT spending, respondents will be making understandable exceptions for remote working and network/internet security:
Nearly one in five companies (19%) also expect IT staff to follow the home-working trend, while only 17 percent are planning to postpone major projects.
SEE: 2021 IT budget research report: COVID-19's impact on projects and priorities (TechRepublic Premium)
Summary & outlook
The 2020/21 IT budgeting cycle has been disrupted by the COVID-19 pandemic and the resulting global recession, which the UN has compared to the Great Depression of the 1930s. The stringency of lockdowns can explain some of the variation in the economic contractions that different countries experienced in the first half of 2020.
Gartner currently forecasts a 7.3% year-on-year decline in global tech spending in 2020 to $3.53 trillion, with 4.3% growth restoring this to $3.68tn in 2021 (still 3.3% down on the 2019 figure). But the analyst firm warns that a relatively smooth recovery of top-line IT spending masks turbulence across countries, industries and markets. Gartner and Forrester both offer frameworks for CxOs to plan their way through the pandemic: Gartner's involves Responding to lockdowns, Recovering when businesses reopen, and Renewing when the 'new normal' is established; Forrester's addresses the challenges for businesses that are in Survival, Adaptive and Growth mode (because some companies will see rising demand for their products and services during the pandemic). A study by IoT Analytics suggests that remote working and supply chain issues were the most important tech-related topics for CEOs (in the US) during Q2 2020.
Computer Economics' annual IT spending survey, conducted during the period the pandemic was taking off, reveals that North American companies were initially poised for continued IT operational budget growth in 2020/21, with a record low level of respondents feeling their budgets were inadequate to meet business needs and IT priorities headed up by cloud applications and infrastructure. A supplementary survey in April/May suggested that most companies were in a 'wait-and-see' mode regarding their IT budgets and new project plans, but were generally optimistic about a return to normal within six months (43%) or a year (20%). The market research firm estimates that, across all industry sectors, IT operational budget cuts will likely fall in the -5% to -11% range. A second follow-up survey, due to be reported in October, will see some adjustments to these mid-year projections, including a more pessimistic outlook from IT leaders.
It's not yet clear how the global pandemic, and the recession it has caused, will play out over the next 12 months: will further outbreaks and lockdowns happen, or will treatments and vaccines usher in more optimistic scenarios? However, digital transformation has made companies more agile and flexible, and the current crisis is likely to accelerate that trend. As a result, if another pandemic comes along, or the current one gets worse, organisations should be even better placed to respond.
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