If enterprises learned one lesson in recent years, it’s that technology can guide businesses through difficult times.
Cloud supported the pivot to remote work and gave companies the tools and agility to manage one type of economic crisis. Now, business leaders are leaning on digital transformation to overcome a different set of challenges, as inflation, workforce woes and ongoing supply chain disruptions contribute to a growing macroeconomic malaise.
IT budgets are set to increase in 2023, reaching a worldwide total of $4.6 trillion, a 5.1% increase over last year according to Gartner projections released in October. Whether or not that will keep up with the inflation rate, which is slowing but was still above 7% in the final months of 2022, is one of many open questions impacting enterprise budgets.
“Because of the macroeconomic situation, we are starting to see a general caution exercised by the C-suite,” Ragu Rajaram, global cloud consulting leader at EY, told CIO Dive.
That puts greater pressure on CIOs to justify spending. But companies aren’t anxious to impede modernization with major budget cuts.
“Digital technology is a very important differentiating factor in today’s market,” Stewart Buchanan, VP analyst at Gartner, said in an interview with CIO Dive. “Along with talent, it’s one of the last things CFOs tell us they want to cut.”
Contingency budgets
IT spending projections aren’t carved in stone. Last year, Gartner issued a midsummer correction, downshifting to 3% year-over-year growth from its initial projection of 5%.
CIOs should acknowledge economic realities and be prepared to alter spending accordingly. Rather than presenting a monolithic budget, they should devise contingency plans for best- and worst-case scenarios, as well as for the middle ground, Buchanan said.
“Stop planning one budget. You need several budgets or lots of options in your budget. The more options you have, the more likely you are to not only survive, but thrive in the current economic situation,” Buchanan said.
Once options are in play, CIOs can navigate changing economic conditions based on business needs, provided they have a clear, data-backed understanding of the situation. CIOs should prepare to communicate situational changes to other stakeholders, Buchanan said, and to demonstrate they are doing the following:
- Spending available funding wisely.
- Factoring in inflation in an acceptable way.
- Dealing with the vendors responsibly and making sure price increases are not egregious.
“Ten or 15 years ago, the complaint was that IT costs are fixed so you can’t do anything,” Buchanan said. “The challenge now is to unfix those costs, embrace variability and move to a more flexible spending model.”
Variable vendor costs
The move to cloud and “as a Service” infrastructure, platform, software and security solutions unfixed IT costs, building flexibility into enterprise budgets. This has been a blessing and a curse for companies, particularly those that embarked on rapid migration in the race to modernize.
Cloud opened up new avenues for data, analytics and ML applications. The promises of optimization and efficiency gains tempted some companies down the path to unpredictable cloud bills and wasted spending.
Now, companies are fixing mistakes they made by moving quickly to cloud without effective governance, according to David Linthicum, chief cloud strategy officer at Deloitte Consulting.
Cloud is a utility. Companies are billed for storage and compute. “In a couple of minutes, you can onboard a terabyte worth of very expensive storage space,” Linthicum said.
While it’s relatively easy to monitor spending in a single cloud deployment, hybrid multicloud ecosystems are harder, but not impossible to manage. Mistakes made early in the migration process are now opportunities to find savings through FinOps tools and stronger governance.
Negotiating better deals with vendors can also help CIOs manage IT budgets without slowing modernization.
Vendors may be willing to ease pricing on longer-term contracts, Buchanan said, but there are limits to what they can offer.
“The product management teams use a lot of clever pricing and analytics modeling,” Buchanan said. “You’re not negotiating with a human being anymore. There’s a lot of AI behind the person you’re talking to. It’s not just whether or not your account manager likes you anymore.”
