Analysis: Why the drop in global IT spending isn't disastrous by any means

Introduction and budget challenges

Global spending on IT is down. Not by much – just 1.3% according to forecasts by analysts at Gartner – but it's nevertheless set to shrink from the 2014 figure of $3.66 trillion (around £2.35 trillion, AU$4.5 trillion). It's also a bit of a change from the 2.4% growth forecast in Gartner's update for the last quarter. So what's going on?

"This is not a crash, even if it looks like one," says John-David Lovelock, research VP at Gartner, who calls the figures an "illusion". He explains: "The recent rapid rise in the value of the US dollar against most currencies has put a currency shock into the global IT market." Lovelock insists that by taking out the impact of exchange rate movements, the sector is actually growing by 3.1%.

So everything is okay? Not quite. "This illusion masks a bigger issue that has real implications," says Lovelock. "Every product or service that has a US dollar-based component must have those costs covered at the lower exchange rate … the simple implication is that there will be price rises."

What's going on with IT spending?

"Things are actually ticking over as they should be, and as they're using just one measurement, it may not show the whole picture," says Dr Aleksej Heinze, co-director of the Centre for Digital Business at Salford Business School. "The problem could be artificial in the first place – how quickly will the dollar devalue and Euro increase in value? When figures are given on a global scale, it's difficult to unpick how they've been arrived at."

However, there are wider forces at work in this complex market. There's an economic slowdown in many countries – such as China – which doesn't help. "The Gartner Report seems to suggest that investment in enterprise-level software is growing, so companies are investing in delivering better ROI on areas such as business process automation," adds Heinze. "This shows maturity in the market, and investment in the right areas."

The stakes are high – IT is everywhere, in every organisation, but in total IT is bigger than the entire banking industry according to Experts Exchange, which keeps a running total of global IT spending.

"A large investment bank once said it is an IT company delivering investment banking," says Jon Wrennall, Chief Technology Officer at Fujitsu UK & Ireland. "With this in mind, there is a lot of pressure on the IT department to understand the wider business functions."

What are the main budget challenges facing CIOs?

The major change in global IT budgets is the increased spending on technology directly from business unit budgets, thinks Andrew Horne, MD at business advisory firm CEB. "Last year, for every £1 in the CIO's budgets, another 47p was spent directly by business leaders on technology – up from 40p in 2012 – while on average, companies reallocate 15% of their IT budgets during the financial year," he says. "In some of the most agile and responsive companies this number rises to 30%."

Horne thinks there are two main budget challenges facing CIOs. The first is how to make budgets flexible to take advantage of new opportunities while slashing spending in low-value areas. "A big part of this is continuing to make progress against reducing spending on maintaining legacy systems, as this money is effectively stuck and is hard to reallocate," says Horne.

The second challenge is how to ensure that all money spent on technology is aligned to company priorities, regardless of which department's budget it sits in. "This requires IT to act as a consultant and broker to the rest of the business, providing advice on technology spending and highlighting opportunities," says Horne.

CEB's own IT budget benchmark data for 2015 actually showed a 3.3% increase in IT budgets from 2014 – the highest projected increase for five years – with a trend to CIOs reallocating funds away from maintenance spending to high-value projects like cloud services.

Cloud disruption and wasted money

The cloud as disruptive technology

While it's hardly new, the way cloud computing is spreading is having the effect of a disruptive technology. "There are now a lot more cost efficient services and products available," says Heinze. "Instead of buying hard drives and servers, companies and individuals can now increase their cloud storage space, and they can also rent software or only pay for what they use."

Charging per use or per user is a new and different business model that could temporarily impact global IT investment. "Buyers can spread out their costs, but the value to sellers is that they can increase customer lifetime value," notes Heinze.

Wasting money: procurement, licences and cloud sprawl

Whatever is happening to IT budgets globally, millions are wasted on ineffective procurement models and on licences that are not needed. "Effective IT procurement and licence management isn't easy, especially in the era of cloud computing, but organisations have to be clear about what is and isn't needed to avoid wasteful overspending," says Angelo di Ventura, Director at Trustmarque.

"Software Asset Management (SAM) tools, although useful, are not the answer in isolation … IT departments need a clear understanding of current licensing positions to help companies become empowered, and take back control of their commercial relationships with software vendors."

Software is also being purchased right across organisations – IT departments are losing control as employees demand to work remotely and use third-party cloud services. "Spiralling costs are exacerbated by the sheer ease of buying services, for example, employees paying by credit card at will for new applications," says di Ventura. "Even though companies may have moved to the cloud as a cost-saving measure, it can actually end up becoming even more expensive due to unchecked cloud sprawl."

What challenges does global IT have?

The Next Billion is a hugely arrogant term; it predicts a situation where, at best, half of the world's population still won't be online by 2021. Today, just 40% of the world's population uses the internet. "We're talking about all these wonderful new innovations – the Internet of Things and big data – that IT has brought us, but there's still a lot of people who don't have access to them," says Heinze.

Even in developed economies like the UK, many companies still don't use IT to gain a competitive advantage, as demonstrated by the effect of the latest update to Google's mobile search results algorithm. "Websites that aren't mobile friendly won't be featured so prominently in the search results, so a business that hasn't responded and taken care of this could miss out on potential customers," says Heinze. That's happening right now, right here.

As for big data, it's all hype and no research according to Heinze. "Businesses need to capture it and format it in a way that makes it meaningful and provides useful insights to inform business decisions, which requires a more research and development-focused approach," he adds.

A rosy future?

"Everything we do and interact with is either supported by or enabled by IT and I would argue that, while traditional like for like numbers may show a reduction, if you look at wider business, IT continues to grow faster than any other sector – it's just that we no longer perceive it as IT," says Wrennall. "IT as an industry is already more important, bigger and growing faster than it ever has done. The business models and what you consider as IT have changed – it never declined, it just changed shape."

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