Computer Economics bullish on 2015 IT spending - but why?

Profile picture for user jreed By Jon Reed November 19, 2014
Summary:
Computer Economics has an optimistic report on IT spending in 2015 - enough to encourage a skeptic like me. There are implications for cloud budgets, and the changing role of IT.

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As a perpetual skeptic, I remain charmed by the optimistic amongst us - especially those with the numbers to back it up. This time, the good news comes by way of Computer Economics, who surveyed 128 IT organizations worldwide. The numbers point to a steady, if unspectacular, rise in IT spending. The implications for overall economic recovery are also (cautiously) positive.

The report, IT Spending and Staffing Outlook for 2015 (available for purchase and/or to paid subscribers) makes the case for a decent 2015 of IT spending across industries, regions, and, perhaps most notably, company size. Computer Economics President and Senior Analyst Frank Scavo answered several questions I had about the report - I'll get to those after running through the highlights.

From a macro-economic standpoint, 2014 got off to a sluggish start, at least partially explained by the harsh weather conditions. But as Computer Economics explains, the second half of 2014 marked a return to modest economic growth, despite geopolitical concerns ranging from Ebola to the rise of the Islamic State. IT executives see their businesses as continuing to improve, with 2015 budgets reflecting those conditions.

Projected IT spending increases - behind the numbers

One not-too-surprising aspect to these numbers: the budget increases are on the operational spending side, with a projected 3 percent median increase. That's a direct contrast with IT capital spending, which shows no signs of increase (meaning: no infrastructure spending increases).

Given the second year in a row of no increases in IT capital spending, Computer Economics speculates this comes down to the impact of cloud spending, which typically impacts operational budgets. The data backs this up.

In North America, for example, a substantial 72 percent expected an increase in their operational IT spending budget, compared to only 13 percent who expected a decrease. Perhaps most encouraging, the three percent median increase in operational IT spending is a gain on a sustainable, five year trend:

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Reprinted with express permission of Computer Economics, all rights reserved

The numbers varied by factors such as industry and geography - though not enough to cast doubt on the overall trends. One factor in a sustained recovery is projected growth across company sizes. Computer Economics reports these median IT spending increases in North America:

  • Small companies: 2 percent
  • Midsize companies: 3 percent
  • Large companies: 3.5 percent

Breakdown of IT spending increases by industry sector in North America showed the expected variation, with manufacturing strongest at 3.5 percent, along with professional and health services. Financial services came in at 3 percent, while public/non-profit sector spending increases lagged at 2 percent, likely slowed by stagnant property taxes and lack of new construction.

By region, Computer Economics reported North America's projected IT spending at a 3 percent media, followed by EMEA at 2.5 percent and Asia Pacific at 2 percent. Computer Economics sees those numbers as overall positive - when the economic struggles of Europe and China are taken into account.

Finally, lending weight to the theory that cloud spending is impacting the strength of operational sversus capital budgets, at least two of the top five IT areas earmarked by respondents in North America for additional spending are cloud-related, three if you add security (BI and mobile round out the top five).

Inside the report: Scavo's analysis

There's plenty more in this report on staffing trends, and the shift towards IT as a growth driver. Here's what Scavo had to say:

Reed: What should enterprise IT customers take away from this year's report?

Scavo: The business climate is improving worldwide. This is leading to a more favorable outlook for IT spending. IT spending growth is not as robust as it was in the middle of the last decade, but it is certainly better than it was in the dark days of 2009 and 2010, when many IT organizations experienced budget cuts and significant layoffs.

Reed: Did you see any surprises compared to last year's edition?

Scavo: The big surprise, which actually started last year, is that IT capital spending growth is relatively weak compared with IT operational spending. IT organizations are increasing their budgets, but it’s largely on the opex side, not the capex side. This has been the case now for two years, which means we can officially call it a trend.

Reed: How is cloud adoption impacting spending levels?

Scavo: We think that the weakness in IT capital spending growth in general, and data center spending growth in particular, is connected to the increase in cloud computing. As we reported earlier this year, the economics of cloud computing are very strong, which encourages this shift. So, our latest survey finds that the leading area of spending growth is “cloud applications,” while the weakest is “data center infrastructure.”  That sums it up right there.
 
Reed: IT firms seem to be shifting from cost control to investing in growth indicators such as improved service. Is this a reflection of IT's attempts to shift from cost center to "partner" with the lines of business?

Scavo: We added a new question to our survey this year, asking our respondents whether, in crafting their IT budgets, the emphasis is more on controlling costs or improving service levels. We were happy to see that the emphasis was much more on the side of improving service. I think that IT executives are realizing that line of business leaders have options. If IT doesn’t serve them, they can always look elsewhere - either to building their own systems or looking to their own outside cloud providers.

Reed: One shift you noted on the IT staffing side is a shift from contract to more permanent hires. Obviously hiring full time staff is a positive economic indicator - is it also an indicator that IT must cultivate internal talent to not only support the business but spur business growth?

Scavo: We think it’s just another indication that the business outlook is improving. We see this in every recovery. When economic recovery begins, IT organizations hire more contractors because they aren’t sure whether the recovery will last. But once it gets some legs, they become more comfortable bringing on full time staff. Still, most IT organizations maintain a mix of full time employees, contingency labor, and outside service providers. Each of those groups has its place in a well-managed IT organization.

Final thoughts

Though the sample size of this survey is modest, the breadth of companies surveyed is significant enough to take the results seriously (companies with budgets under $50 million were excluded from the survey). The projected increases are modest enough to warrant some caution: a disruptive global event could change these projections in a hurry, something the survey authors also concede.

Yet the consistency of operational spending over a period of years does encourage, dare I say it, a healthy sense of optimism. As for how organizations should respond to these projections, that's for the white board. But the central message of IT-as-growth-driver, fueled by cloud-related efficiencies, is a mindset shift - and a wake up call to customers, service firms, and individuals alike.

Bonus: I recently shot two informal Google Hangout videos with Scavo. The first, on "Punching above your weight as a services firm," is up.

Image credit: Optimist or Pessimist © lassedesignen - Fotolia.com

Disclosure: Computer Economics is a diginomica affiliate partner. We have no commercial relationship at this time, but we do get preferred access to research material. Scavo and I do not have a business relationship, though we attend many #ensw events together on the analyst track.