In a technology world is full of promotional half-truths for overhyped products using market data twisted into a pretzel to draw pre-conceived conclusions, the phase, “put your money where your mouth is” has never been more relevant.
Thus, when it comes to technology priorities and strategies, it’s always more valuable to see how the buyers are spending rather than listening to vendor claims about trends and market positions.
Who better than to ask IT executives making budgeting decisions daily about their current and future spending plans? That’s what Flexera, which last year acquired RightScale of cloud survey fame, did in a new survey of 303 vetted C-level executives and senior IT managers at midrange and large enterprises.
Before we dive into the results of Flexera’s 2020 State of Tech Spend Report, it’s worth a reminder that no matter how rigorous the methodology, all such vendor-sponsored surveys exist to drive a narrative or agenda. In this case, it’s about the lack or inadequacy of IT spending controls and concomitant waste and the resultant need for software tools of the type made by Flexera to monitor, analyze and help manage IT spending. The conclusion is undoubtedly correct to some degree, but it's important to put the IT-spendthrifts narrative in perspective in light of the data source. That said, most of the questions are sufficiently generic and objective to lend credibility to the results. With caveats out of the way, onto the data and analysis.
Overall IT spending highly variable by industry
Like all such surveys with small sample sizes, Flexera’s data isn’t a demographically representative sample, but skewed to larger companies (56% with 10,000 or more employees) in North America (62% of respondents). It does include a balanced cross-section of industry groups, with financial services at 19% representing the largest slice and the top-four industries comprising almost half the sample. These respondents report spending an average of 8.2% of revenue on IT with large and North American companies spending at higher rates than smaller or European counterparts. As expected, IT spending varies enormously by industry, with software vendors allotting almost a quarter of their revenue to technology while industrial manufactures spent a meager 4 percen
More companies expect to increase their IT spending next year by a margin of 56-20 percent. However, there’s a notable divergence between North America and Europe budget plans, where 25 percent of organizations plan to decrease IT spending versus only 17 percent in North America. A contributing factor to lower budgeting optimism in Europe is likely somewhat slower economic growth in the Eurozone writ large.
As mentioned above, Flexera found that much technology spending is wasted, but that it’s unclear how much. Respondents reported the measure of unnecessary spending at 12 percent, however, unsurprisingly for an IT cost management vendor, Flexera estimates that its 2.5-times this level. Also unsurprising was the fact that respondents reported that their biggest obstacle to efficiently managing IT spending is a proliferation of manual processes, fully understanding the total cost of delivered services and acquiring relevant spending data.
Changing spending patterns
More significant than the absolute levels of IT spending are the changes in allocation. Currently, 43 cents of every IT dollar goes to software and services, with cloud infrastructure and applications making up a quarter of the total and 22% going to licensed, user-managed software (typically, but not exclusively deployed on-premises). The breakdown will look much different next year since 55% of Flexera respondents plan to reduce on-premises software spending, while more than 80 percent expect to increase the money flowing to IaaS, PaaS and SaaS vendors, many of them significantly.
IT’s shift to the cloud is causing a major reduction in enterprise data center footprint, with a third of respondents planning to significantly reduce the number of data centers in their organization, with another 32% aiming for smaller cuts. Overall, the median number of data centers in operation by all organizations in the survey (remember, with at least 2,000 employees) is about 5.
The shift away from IT operated infrastructure to cloud services has significant ramifications on spending allocations to various vendors, to the benefit of those with strong cloud portfolios and away from some stalwarts of enterprise data centers. The fact that Microsoft and VMware are by far the most heavily used technology vendors, with 65% of respondents making heavy use of Microsoft products, is no surprise. Indeed, when asked to rank usage, fully two-thirds of respondents claim that Microsoft is one of their top two IT vendors. As the Flexera report points out, much of Microsoft’s strength stems from a deep product portfolio that spans both traditional enterprise software and cloud services. However, some cloud vendors are already capturing a significant portion of IT spending, with AWS tied with Oracle at 21% in the share of organizations making heavy use of their products. The strength of cloud vendors will only increase over the coming years.
When asked about spending plans, the growth is all going to the cloud, as the following tables illustrate:
For large, integrated companies like Microsoft, Oracle and SAP the survey didn’t ask for spending breakdowns by product type, but given other data, it’s likely that most, if not all of the spending increase is going to cloud services. Microsoft’s position therefore, is due to its broad IaaS (Azure) and SaaS (Office 365, Dynamics 365) portfolio in contrast to the more immature or poorly-received cloud offerings from the likes of Oracle and IBM.
Business priorities driving spending decisions
Flexera also asked IT executives about their business priorities, which is a good proxy for where the new money is being directed and where there was a significant separation between the top four areas and the rest. These were:
- Digital transformation (DX): 54% ranking in the top three
- Cybersecurity: 49%
- Cloud-first, cloud migration: 40%
- Customer experience (CX): 37%
I’m always uncomfortable seeing DX bandied about as a categorical imperative since its definition is broad and subjective, however, this definition from Brian Solis best captures its essence:
Digital transformation is the evolving pursuit of innovative and agile business and operational models — fueled by evolving technologies, processes, analytics, and talent — to create new value and experiences for customers, employees, and stakeholders.
Given the breadth of projects that might fall under DX, it’s no wonder it was the top priority for most organizations, but diving into the details of individual DX projects at various companies and in different industries would undoubtedly show a broad assortment of technology efforts.
Another way of looking at organizational priorities is to examine which have established so-called centers of excellence (CoE) for various disciplines. Here, the Flexera survey finds data analytics leading the pack, closely followed by DX and cloud service management.
The Flexera IT spending survey confirms many trends that we have been writing about here at diginomica over the past several years, notably:
A continued and accelerating migration of workloads to the cloud (both infrastructure and applications)
A replacement of legacy, mostly manual processes with highly automated, data-driven alternatives (DX)
The use of technology to improve business efficiency (DX), enable new products and services (DX, data analytics) and improve the customer experience (CX).
As the changing spending patterns reveal, the most successful technology vendors will be those that directly address these business and IT strategies with innovative, rapidly evolving products and services. Those that persist in milking legacy products and afraid to cannibalize cash cows and thus, don’t aggressively shift to business models, i.e. from products to services, will see their business eroded by competitors that embrace technology disruption.