Announcing second-quarter earnings on July 18, IBM Corp. CEO Arvind Krishna commented that his business not only shows no signs of suffering from the pressures of the recession, but may actually benefit from them.
“We see technology as rejection,” he said. It acts as a counterweight to inflation and labor demographics that people around the world are facing.
If current trends are any indication, Krishna is onto something. Enterprises are generally staying the course by increasing information technology spending and investments in areas related to digital transformation, such as cloud migration and software as a service, as the threat of an economic downturn grows.
This is a break from the past. IT budgets have historically followed business cycles because the primary use of IT systems was to process transactions. As the size of the business shrinks, so do technology budgets.
But analysts who track spending patterns say this year is different. As the covid-19 pandemic has seen a significant return on investment in cloud platforms and remote working, companies are expected to rein in technology spending and see further efficiencies.
Post-“as-a-service” failure
“This is the first downturn since ‘as-a-service,'” said Philip Carter, group vice president of Global Data Corporation. “IT has moved from being a capital to an operational expense. of [traditional spending] The tumor is not completely removed, but it is much smaller than the cause.
Risks of an economic collapse are growing amid high inflation, supply chain problems and disruptions fueled by Russia’s invasion of Ukraine. TD Securities USA LLC says there is a better than 50% chance of a US recession in the next 18 months. Economists polled by Reuters estimated it could be 40% next year.
A recent IDC quick poll of chief information officers found that 80% expect a recession in the next 12 months, and most believe it will last for about a year, Carter said. The good news is that nearly three-quarters believe the decline will moderate.
Business as usual
IT budgets usually fluctuate with the economy, but something is different this time. “It’s business as usual from a CIO’s spending and technology vendor’s revenue perspective,” said John-David Lovelock, vice president of research at Gartner Inc.
Gartner’s latest forecast It projects IT spending to grow by 3% in 2022, down slightly from the 4% forecast earlier this year. And some line items are really growing. The research firm sees spending on data center systems growing 11.1% this year, up from 6.4% last year. Software costs are expected to increase by 9.6% and by 12% next year.
Dragging down the total, spending on personal computers, printers and other consumer equipment is expected to fall by 5%. Businesses have “made a big renovation to home-working in 2020, so when inflation starts to bite this year, they put their hands back in their pockets and stop,” Lovelock said.
Other forecasters have recently published similar figures. Forrester Research Inc. expects technology budgets by U.S. companies to grow 6.7% this year, unchanged from expectations a year ago.
“We see the economic downturn as an opportunity for companies to go offensive rather than defensive with technology investments,” said Christopher P. Gill Christs, principal analyst at Forrester. “This means refocusing to a strategy where value is maximized and maximized, not where costs can be contained.”
IDC expects overall IT spending to “modestly outpace GDP growth,” but notes that strong growth in enterprise systems and software has been offset by a slowdown in spending on end-user computing equipment. “With the exception of equipment, growth would be nearly three times GDP growth,” Carter said.
Enterprise Technology Research expects total IT spending to grow 6.6% for the year, down from the 8.3% rate forecast at the end of last year, but more optimistic than most.
He left the back office
Analysts attribute the resilience of IT budgets to three factors, the most important of which is that organizations view technology as a source of competition rather than a back-office function.
“IT is no longer considered a cost center,” says Gartner’s Lovelock. “It’s critical to operations and customer relationships. Digital business transformation is the number one thing happening in IT right now, and you can’t cut your way into it.”
More than 2,900 IT decision makers at colocation vendor Equinix Inc. Research gives clues as to where the dollar will go. Despite economic uncertainty, 72% of executives said their companies plan to expand into new geographies supported by digital technologies.
Asked about the priorities for their technology investments, five of the top seven respondents cited transformational issues such as technologies such as future-proofing the business, improving the customer experience, accelerating innovation, improving the employee experience and digitizing the business.
More than 70% said they would move more functions to the cloud, and 52% agreed that “our IT strategy has become more aggressive and demanding because of the COVID-19 pandemic,” with 28% disagreeing.
The Wall Street Journal recently reported that “expenses such as concept tests … may be pushed back, but businesses have more value than ever in technology, which can improve the customer experience and provide leverage in an increasingly competitive market.” reported. month.
Forrester Gilchrist’s previous experience with recessions may have convinced executives that the last downturn was the best time to accelerate investments that would differentiate companies from their competitors. Even as organizational budgets began to contract during the pandemic, total IT spending has expanded, he said. “This event was a testament to how IT cost structures have evolved over the past decade.”
That’s the case against Detroit-based Rocket Mortgage LLC. “The message I’m hearing from most of my business partners is that this is going to be a tough year, but fall is the time to step in,” CIO Brian Woodring told the Wall Street Journal.
At age 24, Ido Gino never ran a business through the recession, but R Software Inc. The CEO of business name RapidAPI says he learned something from the temporary economic downturn caused by Covid-19 in 2020. A cautionary tale about overreacting,” he said. “We stopped hiring and marketing spending for six months. Then followed two of our best years.”
Democratic spending
The second reason is that IT spending is harder to identify and manage than it was a few years ago. A recent Gartner report found that line-of-business leaders in the average enterprise now spend more on transformational IT projects than the IT organization. As department heads take responsibility for the cloud software they now rely on, they find it difficult to meet budget constraints.
“Customer experience is coming from the marketing and the factory to the ‘Internet of Things.'” Digital transformation is much less an IT budget discussion than a C-suite budget discussion.
A third reason is that IT budgets are becoming increasingly difficult to cut. The costs of maintaining and managing data centers and enterprise software comprise up to 80% of IT budgets in large organizations, and shifting operations to the cloud has been shown to yield only modest savings.
Gartner’s Lovelock says, “IT is so agile and so important that there’s no fat left to trim.
A worsening skills shortage has driven up wages and costs to maintain basic services. Globally, we have 200 vacancies in the IT department and we can’t fill them, the CIO at a global consumer packaged goods manufacturer told IDC.
The extent to which IT spending continues to hold back became more apparent this week when bellwether companies such as Microsoft Corp. and Alphabet Inc. reported quarterly earnings, particularly as they spent heavily on cloud computing. IBM’s Krishna described the company’s pipeline as “very healthy,” and SAP SE’s recently reported better-than-expected results indicated strength in its cloud business.
Although there is reason for optimism, the full extent of any recession is still unclear and plans are subject to change. “As earnings decline and stock prices follow, as executives’ fortunes evaporate, how many of those surveyed are talking about the next great thing: a great digital game?” asked InfoWorld columnist David Linthicum earlier this month. I hope that priorities don’t change when everyone realizes what a hard slog digital transformation will be.
