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Radical changes in IT are masked by sluggish information technology budgets

Far from stagnant, corporate IT budgets are actually highly dynamic. Growth is tied to digitization efforts which, in turn, are driving big changes in IT.

Headlines for the last few years have declared continuously that corporate IT budget growth is sluggish at best,...

and stagnant at worst. But the data behind those headlines does not jibe with the excitement about digital technologies and the associated changes in IT underway at most organizations.

Numbers earn headlines, so it's understandable that attention is focused on whether IT budgets are up or down. But digitization -- defined as the use of next-generation technologies and data to develop customer-centric products, channels and operations -- is forcing major changes to IT objectives and operating models. While it's true that corporate IT budgets as a whole are barely keeping up with inflation, it's wrong to assume that flat budgets mean nothing exciting is happening in IT.

Over the summer, CEB collected IT budget data from about 150 companies across the globe that account for nearly $40 billion in IT spending. Our analysis points to five different trends in IT spending, each of which has significant implications for the future of the function.

1.  Most IT budgets are not flat

As technology becomes a revenue driver, speed to market and flexibility to keep up with business changes are becoming at least as important as efficiency and reliability. In response, we're seeing changes in IT organizations.

Corporate IT budgets have been growing at 3% to 5% over the last few years, and next year's budgets, at the median, are forecasted to stay flat. However, the findings mask the budget changes that are happening at individual organizations. While the overall picture looks flat, our data shows that IT budgets are increasing or decreasing at nearly 90% of organizations we surveyed, and at 25% of companies, they are changing by over 10%.

The discrepancy between overall numbers and those of individual companies is due to the fact that IT budgets are evermore linked to business context. In the past, companies used technology primarily for operational efficiency, and so their spending reflected broader trends in information technology adoption and the overall economic environment. Today, the digitization of products, services and channels means that technology spending is closely related to specific business strategies and therefore differs across companies based on where they are on their digitization journey.

2. Business-led IT spending continues to reshape the IT budget

As technology becomes an essential lever of competitive advantage, business leaders are keen to own technology investments themselves. CEB research shows that one-third of enterprise technology spending is now funded outside of IT, and this business-led technology spending is growing at a much faster pace than IT budgets. This means that looking at business technology spending through the lens of the IT budget gives an incomplete picture, and is another reason why changes in IT budgets vary widely across organizations.

At the same time, business-led IT has changed the type of technology spending that remains within the IT budget. Even as business leaders play a greater role in paying for technology acquisition, corporate IT has to continue to build, secure and sustain foundational infrastructure, resulting in changes to budget allocation within IT. For example, we're seeing an increased share of corporate IT budgets dedicated to information security and data analytics, as both are capabilities that are best shared across the enterprise. In 2016, information security spending made up 4.5% of the IT budget and security staff made up 3.5%, both up from the prior year.  

3. Companies dial back outsourcing

Technology spending, for the most part, has historically been treated as an administrative expense and was subject to continuous cost pressure as CFOs sought higher margins. This mindset drove IT leaders to prioritize efficiency, cost savings and predictability through fixed price, multiyear contracts with outsourcing service providers and technology vendors. 

But as technology becomes a revenue driver, speed to market and flexibility to keep up with business changes are becoming at least as important as efficiency and reliability. In response, we're seeing changes in IT organizations. Corporate IT teams are relying more on internal employees and reducing their use of outsourcing and contractors. Spending on outsourcing fell to 11% of the total IT budget in 2016 from 17% in 2013, while IT staff as a percentage of total employees has increased. 

4. Cloud spending soars

The benefits of cloud solutions -- greater flexibility and scale -- have been widely acknowledged, but the hype had not translated into budget realities until this year. After years of hesitation, however, the executive suite is finally having a straight talk on cloud economics. By 2017, one-in-four organizations plan to spend over 20% of IT budgets on cloud and nearly a third of technology pilots next year will involve the public cloud. For comparison, in 2015, only 6% of organizations planned to spend over 20% of their budgets on cloud.

5. New career paths emerge

These changes in IT spending patterns and strategy present unique opportunities for CIOs and their teams. First, as IT spending has a greater strategic impact, CIOs are taking on ownership of digitization-related activities, such as online platforms, and analytics. Of CIOs who have responsibility for activities outside of IT, 71% now devote more attention to digitization activities than traditional business services responsibilities such as managing procurement and facilities.

But it's not just leaders who are seeing roles change -- IT teams are also expanding, as roles that support monetizing data assets are becoming mainstream. In 2017, nearly 40% of organizations expect to have a chief data officer, and more than half will employ data scientists. 

Headlines matter -- they are what encourage us to read the story. But when it comes to news on IT budget changes -- or lack of change -- the headline is misleading. Despite sluggish IT budgets, CIOs are making substantive changes to IT's operating model and skills so they can act as change agents for their organizations' digitization efforts, and those contributions should not be overlooked.   

Sasi Yajamanyam, principal executive advisor at CEB, contributed to this article.

Information technology changes: IT budgets by the numbers

  • Thirty-three percent of enterprise technology spending is now funded outside of IT.
  • Twenty-five percent of organizations plan to spend over 20% of IT budgets on cloud by 2017, up from only 6% that were planning to allocate 20% in 2015.
  • Outsourcing spending fell to 11% of the total IT budget in 2016, compared with 17% in 2013.
  • Information security spending made up 4.5% of the IT budget and security staff made up 3.5% in 2016, both up from the prior year.
  • Of CIOs with responsibility for activities outside of IT, 71% now devote more attention to digitization activities than traditional business services responsibilities such as managing procurement and facilities.
  • In 2017, nearly 40% of organizations expect to have a chief data officer, and more than half will employ data scientists.

Next Steps

Understanding the pivotal role of CIO in digitization

Enterprise digitization in six steps 

How to give a board talk on risk

This was last published in October 2016

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