On-premise IT spending showing cracks as cloud first, digital transformation rules

Earnings reports from technology giants indicate that spending for on-premise deployments is unraveling faster than originally thought.
Written by Larry Dignan, Contributor

Traditional IT spending--on-premise data center gear and licensed software--is flagging amid the COVID-19 pandemic and accelerated cloud migrations for digital transformation.

If we've learned anything from the latest earnings reports from enterprise technology vendors is that old-school IT purchases are fading fast.

IBM, SAP, Intel and possibly Microsoft are dropping hints that demand is shifting to the cloud in a hurry. As a result, those smooth business model transitions are going to result in a few crash landings.

SAP's third quarter earnings put an exclamation point on the shifting IT buying patterns. SAP said it will shift its products to the cloud faster than expected because that's how customers want to buy.

Christian Klein, CEO of SAP, said:

Nobody can predict the COVID-19 economic impact beyond 2020. But given recent developments, it is prudent to assume a more gradual recovery, which we have now done. For our on-premise business, we have seen significant investment delays in 2020 in several hard-hit industries and across all industries and geographies, we see an increasing demand to accelerate the move to the cloud. We do expect software license revenues to decline further from today's levels also in the future, considering our accelerated cloud transition.

Those comments were previewed a bit earlier when IBM reported its third quarter earnings. IBM CEO Arvind Krishna said:

Regarding today's environment, clients continue to balance short-term challenges and opportunities for transformation. In the short term, they are focused on operational stability and cash preservation. We see this especially in our largest software license transactions and delays in some services projects.

Intel CFO George Davis on the chip giant's third quarter earnings conference call cited "intensifying COVID-related demand impacts" across the data center, enterprise and government units.

Meanwhile, Microsoft said it took a fiscal first quarter hit to on-premises licensing sales. Now Microsoft's commercial cloud revenue offsets those declines, but it's worth noting that there appears to be a pause in software that's not in the cloud.

Microsoft's Windows OEM Pro business was down 22% in the first quarter.

What happened?

It has been clear for a while that traditional IT spending was going to go cloud first. The COVID-19 pandemic accelerated that shift. Today, CIOs are tasked with digital transformation, supporting a decentralized workforce and being agile and data driven enough to satisfy customers anywhere. Licensing software and buying data center gear with three-year time horizons just doesn't add up. 

The risky CIO move is spending the IT budget on-premises. Simply put, no one is going to be fired for going to the cloud. There's a good reason for that state of affairs and it can be summed up in two words: Technical debt.

CIOs are already mired in technical debt and the last thing they want to do is acquire more. IDC said the following in its 2021 CIO agenda report:

Through 2023, coping with technical debt accumulated during the pandemic will shadow 70% of CIOs, causing financial stress, inertial drag on IT agility, and "forced march" migrations to the cloud.


The Monday Morning Opener is our opening salvo for the week in tech. Since we run a global site, this editorial publishes on Monday at 8:00am AEST in Sydney, Australia, which is 6:00pm Eastern Time on Sunday in the US. It is written by a member of ZDNet's global editorial board, which is comprised of our lead editors across Asia, Australia, Europe, and North America.


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