2014 was a monumental year for IT spending. According to the Society for Information Management’s IT Trends Study, which has been surveying CIOs and other IT leaders going back decades, 2014 was the year that companies, on average, dedicated above 5 percent of their annual revenue toward their IT budget — 5.15 percent to be exact. And the trend continued, with that number jumping up to 5.3 percent in 2015.
But why the increase? Has IT seen some sort of fundamental shift in how it’s regarded within the corporate structure? To answer this, we must drill down deeper into the study and examine which divisions within IT are seeing the largest influx of funding.
The study’s authors asked respondents to list their biggest investments that prior year. Among the top four were analytics (which includes BI, data mining, and forecasting), enterprise resource planning, security, and application/software development.
To understand why we’re seeing these shifts in IT spending, we spoke to Russell R. Torres, an assistant professor of information systems at the University of Mary Hardin-Baylor and one of the lead authors of the IT Trends Study. Prior to his academic work, Torres spent 14 years at management consulting services company Accenture, focusing primarily on building custom applications, so he’s witnessed firsthand how IT has evolved from a department merely focused on keeping the lights on to an essential division that touches every step of the customer journey. Here’s why he thinks IT priorities are shifting to these four categories:
Analytics and business intelligence
According to Gartner, BI spending is projected to hit $17.1 billion this year. “2016 is the year of modern BI and analytics [BI&A] platform,” Gartner’s research vice president Rita Sallam told PC Magazine. “The BI&A market is in the final stages of a multiyear shift from IT-led, system-of-record reporting to pervasive, business-led, self-service analytics.”
For years, companies have been collecting reams of data on customers, knowing that this data would one day be useful. “These applications give them the ability to extract that value that’s been sitting dormant in the data they collected,” said Torres.
[LIKE THIS ARTICLE SO FAR? THEN YOU’LL REALLY WANT TO SIGN UP FOR OUR IT LEADERSHIP NEWSLETTER OVER HERE]
Many of these expenditures, he explained, are dedicated toward salaries, especially as workers with a data analytics background are in short supply (some are being offered six-figure salaries right out of college). “Only recently have universities started programs that churn out people with degrees in business analytics and business intelligence,” Torres said. “They’ve always produced people who understand statistics, but I think this focus now is on applying these skills directly to analytics problems within a business.”
Enterprise resource planning
Businesses are becoming increasingly reliant on enterprise software, with spending in this category increasing by as much as 7 percent per year. Last year it was a $620 billion market, and every indication points to an increase this year. “Businesses now run on software,” said Torres. “That’s just the facts, and so I think this will just continue to be in the top four IT expenditures for the foreseeable future.” In many cases, a company will sign a multi-year contract for a single piece of software, and over that time period they’ll consistently change and upgrade modules to keep up with current best practices; that level of customization is expensive.
The massive spending on enterprise resource planning has made IT leaders increasingly anxious about “vendor lock-in.” “If you’re going to spend multiple millions on this software and multiple years integrating it into your organization and also make a lot of changes in how you do business, the last thing you want is to get to the end of that process and say, ‘Hey I didn’t like that, I wish I’d done something different,’’’ Torres explained. “You’re married to that company for an extended period of time and there’s some reluctance on the part of the C-level executives to make that sort of commitment.”
The interesting thing about cybersecurity is that companies have spent years giving it lip service without making any actual investments in it. Though it was the third largest IT investment in 2015, it was 14th in 2013:
What changed? Some high profile data breaches — Target, Ashley Madison, etc.. — generated a large amount of negative publicity and cost those companies a lot of money; it also caused damage to their brands. “A security breach is a significant cost, both in terms of scaring away potential customers as well as making customers that have had their data stolen whole,” said Torres. “I think the problem in the past is that justifying expenditures on security is a tough thing to do; if you spend a tremendous amount of money on security and it works, then nothing happens; there’s nothing tangible to point to in order to justify the expenses. It’s only now that companies have witnessed the big high profile security breaches getting media attention that they’re more concerned with not being that company that’s being named.”
Application software development
While companies are spending more on enterprise software, they’re also making significant investments in both building out their own software and heavily customizing ERP systems. “I think this is the most interesting of the top four investments companies are making,” said Torres. “As you well know, there have been huge advancements in technologies like cloud computing, and companies have been flocking to them because of the reductions in cost associated with developing those systems. So the fact that they’re spending significantly in software development, i.e. internal development of information systems, is really interesting, and it’s difficult to determine exactly why.”
Though software is becoming increasingly important in most businesses, many of those businesses specialize in services that have nothing to do with software, and because of this they face a rude awakening. “Many of these organizations dive headlong into application software development without any sort of expertise, and even if you’re hiring an outside consulting company to do it, the likelihood that you’re going to be successful is significantly reduced,” said Torres. “If you look at software development in general, a huge portion of software development projects fail, and that’s whether you have expertise or not.” So before you spend thousands or millions of dollars on launching a new mobile app, ask yourself: Does this actually add value? This is a question companies will be forced to consider as IT budgets inch ever upward, making any missteps that much more costly and detrimental to the bottom line.