The latest CIO survey shows a steady reduction in technology spending

Is the glass half full or half empty? Well, it depends on how you want to look at it.

Chief information officers are holding back on spending, that much is clear. The latest macro survey from Enterprise Technology Research quantifies what we already know to be true, that information technology spending is declining. CIOs and IT buyers forecast that their tech spending will increase by 5.5% this year, a significant reduction from their expectations by the end of 2021. But these levels are still higher than those historical custom – so even though the feel good factor may be in some jeopardy, overall things are pretty good – at least for now.

In this Breaking Analysis, we update you on the latest macro tech spending data from ETR, including the strategies organizations are using to reduce costs, and which project categories continue to see the maximum traction.

Continued decline in spending expectations… but ahead of historical norms

CIOs were more optimistic at the end of last year than they are today. Back then they thought their combined costs would increase by more than 8%. The graphic below shows where they are now.

Of course, by that time the expectation is that the economy is ready to make a semi-ordered return to normalcy. That didn’t happen and, as you can see above, the forecast for spending this year is down to 5.5% growth. This is based on the most recent ETR CIO survey, which included more than 1,100 respondents. We started the year over 8%, then made a significant decline in the middle of the sixth month and, nine months into the year, we’re in the middle of the 5% growth range.

This growth still represents 200 to 300 basis points above historical norms. And looking forward to next year, CIOs expect accelerated growth, back to the 6% level. As mentioned, visibility is less clear than in the pre-COVID years. But the bottom line is that digital transformations will continue to push IT spending above historical levels.

The problem, as we know, is that earnings estimates are falling and forecasts are being lowered every day. As the saying goes, the first failure is rarely the last. Even the semiconductor industry is seeing softness. Just this past week we saw Advanced Micro Devices Inc. which lowered its quarterly revenue forecast by more than $1 billion as PC demand in the second half softened significantly. But again – that’s related to some pretty amazing years of growth thanks to economic isolation.

CIOs are tapping the brakes

We see CIOs taking things a bit slower and these data points below tell an interesting story.

ETR asked respondents about the different actions they take and these two stand out. The top line is “we accelerate new IT projects.” The bottom line is “we cool projects.” You can see the convergence of those two lines, which of course indicates a slowdown.

But again, these are not alarming data points. In Q1 2020, the top line was at 12% vs. 25% today and project freezes were at 22% vs. 13% today. Relatively speaking, dynamic spending is still strong.

In Q1 2020, the top line was at 12% vs. 25% today and project freezes were at 22% vs. 13% today. Relatively speaking, dynamic spending is still strong.

It doesn’t just feel that way because we’re emerging from a historical anomaly.

Vendor consolidation and dialing down consumption are common cost reduction strategies

ETR asked a follow-up question only to respondents who indicated that spending would decrease this quarter compared to the same quarter last year. They want to better understand the most common actions organizations will take to save money. That data is shown below.

The chart shows that the most common strategy is still to consolidate repeat vendors across lines of business. So presumably, CIOs have the latitude to follow shadow projects and implement standards across the organization through consolidation.

Also, there was a big jump in this survey – from 14% to 20% – of respondents who say they will pick up the cloud bill and that relates to the fourth set of bars, which examines consumption-based services. Taken together, 45% of respondents are looking at reducing their on-demand spending. Some of that may be related to software-as-a-service but most of the SaaS spending is focused. However, we are seeing organizations doing more audits to remove or reduce orphaned licenses.

45% of respondents are looking at reducing their on-demand spending.

Cybersecurity remains a priority. Data-related initiatives are seeing a bounce

The last data point we want to focus on is the technology sectors that have the highest priority. The top places are shown below.

While cybersecurity remains a leading technology, even this sector is showing some softness. What is really noticeable is the increase in the data related areas – the second set of bars. This category is now the second most cited to replace the cloud, which remains strong and continues to be an important part of digital transformations.

As we previously reported, the Machine Learning/AI and RPA sectors appear to be somewhat more strategic and discretionary. And they dropped to the 40% mark in terms of Net Score in the overall survey. We don’t show that here but we covered it in our last Breaking Review.

Now remember – these are the top seven sectors – there are dozens in the ETR taxonomy so making this list is a boon from a spending perspective. So while there is some softness in most of these categories, these are the ones most geared towards addressing CIOs.

Takeaways from the latest spending data

These data messages are:

• Spending targets fall in the mid-5% range, but are significantly higher than historical norms. While CIOs are putting projects on hold, they are still progressing at rates faster than pre-COVID levels and fewer projects are going on hold. While there may be a skills shortage here, we think the slowdown is probably more related to economic uncertainty;
• We see the two sides of the coin of “pay-by-the-drink” consumption models. You can dial it up if needed but you can also dial it down. That’s one of the appealing features of on-demand. And we’re seeing companies giving more scrutiny to the cloud bill. And there is little unsurprising opposition to the flaws in the SaaS pricing model that locks you in for specified terms;
• The real savings, however, come from the elimination of redundant vendors, which may favor some of the larger companies such as Microsoft Corp., Amazon.com Inc., Oracle Corp., Dell Technologies Inc. , Salesforce Inc., ServiceNow Inc., IBM Corp, Hewlett Packard Enterprise Co., Cisco Systems Inc. etc;
• With that said, we’re seeing an increase in data-related areas as a priority for CIOs and that could mean companies like Snowflake Inc. is in a strong position to continue to grow. Despite that, as we reported last week, nearly every company and sector in the ETR data set shows some softness relative to spending momentum from previous quarters.

So while it sounds like a significant slowdown, the sky isn’t necessarily falling. There are these factors that are “out of our control” such as interest rates, Ukraine, oil supply, wages, etc. which creates uncertainty and causes companies to be more cautious.

But overall, we remain optimistic because the leading technology companies are well managed and have plenty of runway on the balance sheets. Because of this, they can adjust costs to reflect the uncertain environment and remain flexible in doing so.

Stay in touch

Thanks to Alex Myerson and Ken Shiffman are on production, podcasts and media workflow for Breaking Analysis. Special thanks to Kristen Martin and Cheryl Knight who help us keep our community informed and get the word out, and to Rob Hof, our editor in chief at SiliconANGLE.

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