As we pointed out last year (and the year before), businesses dislike uncertainty as it hampers their ability to make informed plans for the future. Uncertainty is a fact of life, of course, but there's no doubt that geopolitics and macroeconomics have become considerably less predictable in recent years.
For example, in its World Economic Situation and Prospects as of mid-2018 report, the UN's Economic Analysis & Policy Division noted an upturn in the world economy, forecasting 3.2 percent growth for 2018 and 2019, but also sounded a warning:
"However, the improvement in economic growth has been accompanied by an increase in downside risks, including a rise in the probability of trade conflicts between major economies; increased uncertainty regarding the pace of monetary policy adjustment in developed economies; high and increasing levels of debt; and greater geopolitical tensions."
In particular, the UN report speculated that if trade tensions and barriers were to "spiral over the course of 2018, through widespread retaliations and extensive disruption to global value chains," then we could see a sharp drop in global investment and trade. If this drop was equivalent to half that seen in the global financial crisis of 2008, the UN estimated, it could "bring world trade growth to a halt and slow world gross product growth to 1.8 percent in 2019, compared to baseline projections for growth of 3.2 percent."
In the UK, the major source of uncertainty remains the country's impending departure from the EU. Last year, we noted that: "The UK government's detailed plans for Brexit remain frustratingly unclear even after triggering Article 50 in March, embarking on negotiations with the EU27 in June and a 'clarification' speech from Prime Minister Theresa May on 22 September in which a two-year transition period was mooted."
A year on, with EU exit day just months away, the UK is more divided than ever over Brexit, and the shape of a final deal (if any) is still hotly debated. No wonder the UN's mid-2018 report declared that:
"As the United Kingdom of Great Britain and Northern Ireland prepares to leave the EU, the transition phrase will entail significant uncertainty, particularly over future trade relations between the two parties. This increases the risk of businesses diverting investments away from the United Kingdom."
Businesses cannot stand still, even in the face of unpredictable business conditions, because digital transformation is a major ongoing evolutionary pressure whatever the political and economic weather. That said, CxOs could be forgiven for adopting a more cautious 'wait and see' approach to IT and other investments -- particularly longer-term ones -- than they otherwise might have done.
Do the surveys and projections bear this out? Let's have a look.
IT spending: The big picture
Gartner's latest forecast, released in April, put worldwide IT spending for 2018 at $3.74 trillion, up 6.2 percent from 2017. Spending is projected to reach $3.85 trillion in 2019, up 2.8 percent from 2018. This year's growth, in particular, looks good, but uncertainty and trade disputes once again raised their ugly heads in Gartner's analysis:
"Although global IT spending is forecast to grow 6.2 percent this year, the declining U.S. dollar has caused currency tailwinds, which are the main reason for this strong growth," said John-David Lovelock, research vice president at Gartner. "This is the highest annual growth rate that Gartner has forecast since 2007 and would be a sign of a new cycle of IT growth. However, spending on IT around the world is growing at expected levels and is in line with expected global economic growth. Through 2018 and 2019, the U.S. dollar is expected to trend stronger while enduring tremendous volatility due to the uncertain political environment, the North American Free Trade Agreement renegotiation and the potential for trade wars."
Communications Services remains the biggest IT spending category across 2017-2019, although the growth rate is predicted to be relatively flat for 2018/19 (1.1%). Enterprise Software has been the fastest-growing category in all three years, peaking at 11.1 percent in 2017/18. Also noticeable in Gartner's figures is steadily declining growth in spending on Data Center Systems, from 6.3 percent in 2016/17 to 1.1 percent in 2018/19. Growth in Devices (PCs, tablets and mobile phones) also drops to just 1.3 percent in 2018/19:
Gartner's forecasting, which is elaborated further in this webinar, suggests that CxOs are likely to be spending more on enterprise application software, mobile devices, infrastructure software and business IT services in 2019 and beyond, and less on (on-premises) data center systems and associated services.
One mega-trend that's gathering pace in business is technology spending controlled by lines of business (LOB) rather than the IT department. LOB spending -- often called 'shadow IT' -- is set to overtake IT department spending in 2019 worldwide, according to analyst firm IDC. The LOB/IT split is currently around 50:50, but LOB spending has been growing faster than IT spending for several years and is forecast to be 6.9 percent versus 3.3 percent (CAGR) between 2016 and 2021. By 2021, only two of the 16 industries profiled in IDC's spending guide -- construction and telecommunications -- will still see their technology spending led by the IT department.
As business managers rely less on IT departments for technology purchases, CIOs will need to keeps tabs on what's being deployed, and why, and whether LOB-driven technology poses a security threat to the organisation.
What the surveys say
Computer Economics IT Spending & Staffing Benchmarks 2018/2019
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 2018/2019 report was based on survey responses collected between January and May 2018 from 205 US and Canadian organisations -- 35 percent small (IT operational budget <$5m), 36 percent medium ($5m-<$20m) and 29 percent large (>$20m). Leading industry sectors in the survey sample were manufacturing (22.3%), government/non-profit (18.9%) and financial services (13.6%).
This year, Computer Economics reports that "IT organizations are accelerating their rush to the cloud and are increasing spending in an effort to reap the benefits. Our composite sample shows broad, modest growth in operational budgets and even stronger increases in spending as a percentage of revenue, while IT capital budgets and hiring remain flat."
The main difference from the 2017/18 survey is an increase in IT spending as a percentage of revenue (from 2.3% to 2.7%), which the research firm interprets as evidence that "IT organizations are encouraged by their experience with cloud computing thus far and are willing to supplement those efficiency gains with additional spending, especially for business transformation and the continued move to the cloud."
IT operational spending growth is running at a modest 2.8 percent for 2018/19 compared with 3 percent last year. Medium-sized organisations lead the way on growth with 5 percent, ahead of small and large firms (1% and 3.3% respectively). As far as sectors are concerned, professional/technical services and construction/trade services are seeing the biggest increases in IT operational budgets (5%), with manufacturing (2.5%) and government/nonprofit (1.5%) bringing up the rear.
Spending is increasing in 64 percent of organisations and decreasing in 17 percent, giving a net percentage of 47 percent -- the same figure as last year. As with last year, there's a pretty even split between IT execs who feel their budgets are somewhat (43%) or very (8%) inadequate to support the business and adequate (46%) or more than adequate (3%). Mostly, CIOs are making do with what they have rather than asking the CFO for large budget increases, says Computer Economics.
IT operational spending per user is up significantly this year -- $7,988 compared to $6,987 in 2017/18 (a 14.3% increase), although the research firm expects the historical downward trend -- driven by cloud efficiencies, virtualisation and automation -- to continue in the long term.
When it comes to IT capital budgets, which tend to be used for longer-term projects, just under half (47%) of the surveyed organisations reported an increase, with a quarter (24%) about the same and the remainder (29%) decreasing. Capital spending as a percentage of total IT spending is at 18 percent, the same as last year. "Virtualization, the cloud, and other technologies are lessening the need for capital expenditure growth even when times are good," says Computer Economics.
The major IT spending priorities are security/privacy and cloud applications, each cited by a net 75 percent of organisations. These are followed by cloud infrastructure (64%), BI/data warehousing (52%), mobile devices (39%) and DR/business continuity (37%). Computer Economics notes that only 20 percent of companies in the survey have migrated at least half of their business applications to the cloud, leaving plenty of scope for this spending priority to grow.
As far as new spending is concerned, the main focus remains business applications, followed by IT personnel, networking, end-user technology and data centre. Over the last three years, the noticeable trends are increased emphasis on business apps, IT personnel and end-user technology, and decreasing prioritisation of networking and data centre infrastructure -- all consistent with a widespread move to cloud-based infrastructure, storage and applications.
Harvey Nash/KPMG CIO Survey 2018
Celebrating its 20th anniversary this year, the Harvey Nash/KPMG CIO Survey is claimed to be the world's largest global IT leadership survey. It's certainly extensive: the 2018 survey gathered 3,958 responses from CIOs and technology leaders across 84 countries.
In its headline findings, the Harvey Nash/KPMG report noted that although geopolitical instability remains a significant factor, CIOs are now enjoying "bigger budgets and headcount growth" compared to last year. As well as continuing investment in digital and cloud, "we also see data privacy, governance and security draw the attention of boards," the report said, adding that CIOs need to "think smart about how they control and influence technology within the business" given increased investment in 'shadow IT' by business units.
Almost half (49%) of survey respondents reported an IT budget increase in the last 12 months -- the highest level since this metric was first tracked back in 2005:
Looking ahead, a similar proportion (48%) expected a budget increase in the next 12 months, with just 14 percent predicting less money for IT next year. For Harvey Nash/KPMG, this reflects a general return to 'business as usual' following the economic downturn, and organisations around the world investing in digital transformation projects. As far as sectors are concerned, leisure (60%), technology (53%) and professional services (53%) were most optimistic about budget increases in the coming year, while decreases were deemed most likely in power/utilities (23%), government (22%) and education (21%).
CIOs are optimistic about headcounts too, with 47 percent expecting an increase and just 13 percent -- a seven-year low -- predicting fewer staff over the next 12 months. Despite widespread cloud adoption, the report also noted increased insourcing of business-critical and innovation-led activities, which may underlie this finding.
As it has since 2013, the Harvey Nash/KMPG survey examined CIOs' IT priorities, which this year were headed by 'Improving business processes', Delivering consistent & stable IT performance to the business' and 'Increasing operational efficiencies' (all at 62%). Along with 'Saving costs', these priorities have figured prominently over the years. Topics that have increased noticeably in recent surveys are 'Developing innovative new products and services' and -- unsurprisingly -- 'Improving cyber security'.
2018 State of the Global Technology Economy (Apptio)
Apptio's 2018 State of the Global Technology Economy report analysed 25 years of technology spending data from over 3,000 companies worldwide to identify patterns. Apptio develops cloud-based Technology Business Management (TBM) software, and teamed up with benchmarking consultancy Rubin Worldwide to produce the report.
A key plank of Rubin Worldwide's approach to IT spend analysis is to include labour and support costs, rather than simply summing technology vendors' sales. For 2016, this gave a total global IT spend of $6.3 trillion, compared to $3.4 trillion in Gartner's more traditional forecast for the same year.
At $6.3tn, the 2016 technology economy surpassed the GDP of all nations except China and the US, and is growing at nearly 2.5 times the rate of the global economy, said the report, while IT spending per capita is growing at 3.3X the rate of GDP per capita and is expected to reach $1,100 per head in 2020.
In a healthy growing economy, the report argued, IT spend as a percentage of revenue should fall (as IT drives higher business growth) but rise as a percentage of opex (as digital automation drives business efficiency). Taken together, these metrics should result in rising revenue, declining opex and greater profitability. However, gross margins declined over the report's study period, so there's clearly a disconnect somewhere.
Drilling down further, Apptio/Rubin Worldwide found that the top ten percent of companies by operating margin ('top performers') have significantly different spending patterns and outcomes. Top performers grow their technology spending three times faster than average performers and deliver 2-3 times the operating margins (and rising). Top performers' tech portfolios differ too: they spend 25 percent more on growing and transforming the business, 55 percent more on technology relative to opex, and 46 percent more on technology per employee. And when it comes to 'keep the lights on' spending, top performers support 69 percent more income per dollar of IT expenditure to run the business.
Another factor common to these top performers? All of them used some mixture of Apptio's ten core TBM tenets, and 90 percent used all of them.
Although the global economy is on an upturn, political instability in various parts of the world could derail this improvement. Trade conflicts and tariff barriers, in particular, will remain a worry for the IT industry in the short to medium term.
Around the world, IT budgets and headcounts are generally increasing, as businesses continue to pursue digital transformation projects. Noticeable trends are decreased emphasis on data centre spending and increased prioritisation of business applications, new products and services, and cybersecurity.
Successful companies, with the biggest operating margins, generally invest more in technology that grows and transforms the business, and get more from their 'keep the lights on' expenditure.
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