Capital Budgets Fall to 13% of IT Spending

IT capital budgets have shrunk as companies accelerate the migration away from on-premises infrastructure.
Capital Budgets Fall to 13% of IT Spending
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In the next 12 months, half of the North American IT decision-makers surveyed by Spiceworks Ziff Davis said their companies would be increasing tech spending, and only 6% said they intended to cut back. 

But the kind of spending organizations will undertake is changing. This year, capital budgets will make up the smallest percentage of IT spending ever at U.S. and Canadian companies, according to Computer Economics, a service of Avasant Research. At the median, such spending will account for only 13% of total IT budgets, according to data released on Wednesday, down from 24% in 2013. (See chart.)

Businesses maintain capital budgets to fund long-term investments in IT infrastructure, equipment, or major system development or implementations. But these budgets have downsized as companies accelerate the migration away from on-premises IT infrastructure and convert more of their workloads to the public cloud and more of their applications to subscription models, according to Computer Economics’ IT Spending and Staffing Benchmarks study for 2022/2023

While 70% of the 225 surveyed executives said their company would be increasing IT operational spending in 2022, only 49% said their IT capital budgets would increase. About one in five (20%) indicated they would be cutting IT capital spending.

“Companies are shuttering data centers and shrinking footprints in favor of the cloud,” according to the Computer Economics report. “As cloud infrastructure, cloud storage, and software-as-a-service (SaaS) take over for on-premises software and storage, data centers are no longer a priority for new spending.”

“While companies may always need to refresh end-user devices and a few critical on-premises workloads, this is probably still not the bottom for capital spending.” — David Wagner, senior research director, Computer Economics

About 39% of companies report now having at least half of their applications in the cloud, up from 29% in 2019. Cloud infrastructure has gone from an average of 2.3% of the total IT operational budget in 2021 to 5.7% in 2022, Computer Economics found. Cloud applications and cloud infrastructure are the top two IT spending priorities for this year.

“While companies may always need to refresh end-user devices and a few critical on-premises workloads, this is probably still not the bottom for capital spending,” said David Wagner, senior research director at Computer Economics.

Plans are for operational IT budgets to increase a median of 5% in 2022. IT spending per user will rise to $8,932 from $8,248 in 2021, or about 7%. The increase in employees working from home is one reason, according to Computer Economics. In addition, inflation, supply chain disruptions, and equipment shortages are pushing up IT costs. Total IT spending as a percentage of revenue remained relatively flat, at 2.6%.

Computer Economics did offer a warning about the switch from capital to operational spending for IT. While cloud applications and infrastructure offer an elastic and scalable approach to IT spending, it is easier to hold off on capital spending in a given year — say, to stretch the life of a server farm. To reduce operational spending by renegotiating an existing SaaS subscription contract, on the other hand, can be difficult.

“While many cloud offerings are based on usage, companies may still find they end up locked into paying for services they are not taking full advantage of,” according to the Computer Economics report. “As companies reduce their capital spending, they should be careful to negotiate cost flexibility into their contracts.”

If the COVID-19 pandemic was any indication, even if the U.S. enters an economic recession companies probably won’t slice away at their IT budgets in 2022 and 2023.

“The pandemic lockdowns drove home the lesson that IT was a strategic necessity and that a digital strategy was imperative in all sectors,” said Computer Economics. “We tracked IT spending throughout the worst of the pandemic in 2020 and into 2021 and saw that, for the most part, companies cut anything else they could before cutting IT budgets or laying off IT personnel.”

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