IT Spending Pulse #6: Efficient Growth a Priority as Leaders Invest in GenAI

Authored by: Federico Fabbri, Clark O’Niell, Geoffrey Cheung, Ori Perlman, Heiner Himmelreich, and Ellen Van Daele

For IT leaders, efficient growth is the name of the game. That’s the key takeaway from Boston Consulting Group’s latest IT Spending Pulse, conducted in collaboration with GLG, an insight network that provides access to expert perspectives, which surveyed hundreds of senior IT buyers to identify the key trends and priorities for European and North American business leaders.

When we last surveyed IT leaders in Q4 2022, we saw signs of slowing investment as leaders sought leaner growth. That trend continues in this year’s IT Spending Pulse, with buyers seeking to drive top-line growth while simultaneously keeping total IT spend under control.

Notably, however, this year’s IT Spending Pulse finds organizations of all kinds investigating the strategic implications of emerging technologies such as GenAI. In this context, IT buyers are working to strike a new balance: making the robust investments needed to support innovation and growth, but framing those investments within a restrained and even somewhat conservative approach to managing total IT spend.

Overall, our respondents see IT spend remaining relatively stable, with only modest increases expected as businesses head into 2024. Risk management and analytics remain top priorities, consistent with prior years, as companies seek to drive strategic advantage while effectively managing cybersecurity threats.

The larger shift for IT buyers, as might be expected, stems from their companies’ increasing focus on AI and machine learning — and especially GenAI, which emerged as a key priority for many businesses in 2023. In total, 35% of respondents are now actively exploring GenAI solutions, and companies expect to dedicate an average of 4% of their total IT budget to building out and supporting GenAI initiatives.

Even here, though, IT buyers remain cautious and committed to making efficient investments. While GenAI solutions have been prominently piloted in IT and customer service functions, especially in the tech and finance spaces, many executives believe the business case for GenAI is not yet fully proven. Managing that tension, and capturing new growth opportunities without overcommitting to untested technologies, could emerge as the defining challenge for IT leaders in the coming year.

The IT Spending Pulse survey was conducted during Q2 of 2023, and captures insights from ~360 IT buyers at the Director or Senior Director level or higher, each selected for their clear view of their organizations’ IT priorities and overall budgetary planning. The respondents span diverse industry verticals and geographies, with 60% of respondents from North America and 40% from Europe. The IT Spending Pulse focuses on large (>$1B) and mid-sized companies, with approximately 65% of respondents leading IT spending at large enterprises and 35% holding roles at mid-sized companies.

With that in mind, let’s take a closer look at the key trends seen in this year’s IT Spending Pulse:

1. IT leaders remain focused on cost control

The new IT Spending Pulse shows that IT leaders are paying close attention to cost control. As in previous surveys, buyers’ top priorities have remained largely consistent, with a strong focus on driving digital transformation, increasing security and mitigating risks, enabling growth. Of these three key priorities, the need to enable and support digital transformation remains the top concern for IT leaders, with around 62% of respondents naming it as a top priority.

One important shift in IT leaders’ priorities emerges from the survey. While leaders’ commitment to driving transformation, maintaining security, and enabling growth remain unchanged, the need to control costs has gained significant new traction. In fact, cost control is now IT buyers’ second-highest priority, secondary only to driving digital transformation, with 56% of leaders indicating that managing costs effectively is top of mind for them.

The precise weight given to cost control versus investment in growth varies significantly by industry. Education, banking, and travel and tourism leaders tend to focus more on keeping costs down, while IT buyers in the professional services, media, and retail spaces are markedly more willing to prioritize growth over the need to limit IT spend.

2. A small uptick expected for IT spending in 2024

Given leaders’ focus on controlling IT costs, it should come as no surprise that overall IT spend is expected to grow only slightly heading into 2024.

In the previous IT Spending Pulse, in Q4 2022, 19% of IT buyers said they anticipated decreases in their organization’s total IT spend. This year, respondents were slightly more bullish, with only 15% anticipating a decrease in their IT budgets. Overall, almost three-quarters of IT leaders expect their spending to increase year-over-year, a four percentage point increase from our previous report. Still, such growth will come at a modest pace, with an average predicted increase in IT spend of just 2.9% — a growth rate slightly below that found in previous editions of the IT Spending Pulse.

Respondents see AI and machine learning, including GenAI, as the top area for new IT investments, with the proportion of leaders anticipating increased spending on AI technologies jumping by 18 percentage points from Q4 2022. Cloud services, security infrastructure, and analytics are also top investment priorities for IT leaders. Despite their broader focus on cost control, many purchasers will continue to adopt a best-of-breed approach when investing in these mission-critical areas.

By contrast, IT buyers expect to see continued reductions in their spending on devices, servers, and storage infrastructure. Between 50% and 60% of companies are taking a best-of-suite approach with these products, and around 30% are actively consolidating vendors as they seek to limit their costs. The reduced investment in on-prem infrastructure reflects buyers’ continuing focus on cloud tech and digital transformation, while reduced spending on devices may indicate that companies are increasingly standardizing around longer hardware refresh cycles.

3. Risk management and strategic advantage remain key goals

Despite these modest reallocations of their IT budgets, respondents say their priorities will remain broadly in line with prior years, with their companies focusing chiefly on risk management and securing strategic advantage in the marketplace.

Risk management is now a major priority for 37% of IT buyers, with strong gains in the use of endpoint protection platforms (EPP) and endpoint detection and response solutions (EDR) to detect and manage potential cybersecurity threats. Big data analytics followed close behind, with 33% of buyers citing it as a key priority.

Although respondents’ priorities vary by industry, analytics and endpoint protection platforms remain a priority for most IT leaders. Business operations initiatives are currently the lowest strategic priority, with hardware cloud migration and supply chain cost savings losing the most ground as IT buyers deemphasize agility and supply chain resilience in the post-COVID era and rethink their key goals for 2024.

Companies seeking to manage risk effectively while building the infrastructure needed to win in the marketplace will continue to invest in areas such as security infrastructure, analytics, and emerging technologies such as AI and machine learning. To support these efforts, almost three-quarters of respondents expect to maintain or increase their spend on cloud consumption in 2024. They will, however, seek to make corresponding cuts in other areas, including curbing investments in devices and on-prem infrastructure, rationalizing software licensing, and seeking discounts from vendors to rein in overall software spending.

4. Leaders expect to make significant GenAI investments

As previously noted, IT leaders expect to make significant investments in GenAI as their companies move into 2024. In fact, around 35% of companies are already adopting GenAI solutions, and over half are likely to either build or buy GenAI solutions in the near future, with leaders especially eager to integrate GenAI capabilities into areas such as analytics, CRM, and app development.

This growth varies by industry, with technology and banking companies moving most rapidly to adopt GenAI solutions. Leaders from the retail and healthcare sector, on the other hand, expect their companies to be slower adopters, which is in keeping with the findings in BCG’s AI@Scale Maturity Index. Across all industries, just 8% of IT leaders say they have no plan to incorporate GenAI solutions into their IT capabilities over the next three years.

On average, companies expect to dedicate 4% of their overall IT budget to GenAI investments in 2023, with that figure growing to around 7% over the next three years. To fund these increases, about 20% of leaders plan to increase their IT budgets, while 80% will divert resources from other areas, either by reducing headcount or curbing spend in categories such as CRM and IT operations management. Overall, the tech industry has the largest budget allocation to GenAI, with almost half of tech sector respondents saying their company aspires to be either a market leader or a first adopter of third-party GenAI solutions.

Despite respondents’ broad commitment to investing in GenAI technologies, some concerns remain. While 77% of IT buyers expect GenAI investments to yield positive ROI over the next 3 years, less than half of those buyers have thus far begun successfully quantifying the return on their GenAI spend. As we have written elsewhere, the lack of a clear business case can become a critical impediment to effectively scaling GenAI, and companies will need to carefully weigh projected benefits against the total cost of ownership when determining how much to invest in new GenAI capabilities.

To date, GenAI technologies have been chiefly piloted or explored in IT and customer support applications, and many leaders say they will complete their rollout of GenAI solutions in these key areas within the next six months. Deeper implementation across additional departments is expected over the next year, with 40% to 50% of companies that are already testing GenAI technologies expecting to complete rollout for most of their departments in the course of 2024.

5. Software marketplaces lose share of IT spend

As a share of total IT spend, investments via software marketplaces are slightly down compared to last year, perhaps reflecting software companies’ increasing “verticalization” and buyers’ corresponding preference for working with expert sales teams that have a deep understanding of their specific industry. In total, respondents anticipate placing 10.2% of their total IT spend through software marketplaces, a decline of 1.5 percentage points from Q4 2022.

Despite falling as a share of total IT budgets, however, total marketplace spending is still expected to increase, with more than two-thirds of respondents expecting their total marketplace spend to increase in 2024. Just 5% of respondents now expect their overall marketplace spending to fall, down from 8% of respondents in Q4 2022.

Cloud providers continue to operate the most popular marketplaces, with customers increasing their investments via hyperscaler marketplaces in 2023. In contrast, marketplaces operated by individual vendors such as Salesforce and Atlassian are in decline. With hyperscalers anticipating revenues of up to $2B in marketplace transaction fees by the end of 2025, and a further 3–5X in revenues from increased cloud consumption driven by marketplace activity, individual vendors can expect further competition for marketplace spend from hyperscalers in 2024.

Conclusion: IT leaders expect a balancing act in 2024

Looking ahead to 2024, the current IT Spending Pulse suggests that IT buyers are seeking to strike a careful balance: on the one hand, macroeconomic instability ensures that efficiency and cost control remain key priorities for their organizations. On the other, however, using digital transformation to drive strategic advantage remains a core goal, with IT leaders determined to continue moving away from legacy and on-prem systems and toward innovative cloud-based technologies.

In parallel, companies across a wide range of industries are feeling pressure to invest in GenAI and other emerging technologies — and in many cases, companies are investing in GenAI without necessarily having a clear thesis for how such investments will deliver ROI for their businesses.

These tensions will remain front-of-mind for IT buyers as we head into 2024, with companies seeking to steward limited resources, drive strategic growth, and roll out transformative digital technologies across their operations. A continuing focus on efficient growth will likely serve such companies well in coming months. We’ll be watching to see how these evolving trends continue to play out in our next IT Spending Pulse.