This is the first of four articles that explore the outlook for technology spending — and why corporate tech budgets are bound to rise. The other three are CFOs Holding CIOS’ Feet to the Fire, which looks at how finance chiefs asking top tech execs to justify their spending; IT Budgeting Descends to Business Units, which reports on the cloud’s role in decentralization; and Effective Tech Spending: a CFO’s View, in which a finance chief tells why her peers need to know a whole lot more about IT.


Spending on information technology is on the rise again, as growth-minded companies rush to embrace new trends in IT. Corporate technology budgets will swell in the next two years, a number of surveys and forecasts indicate.

According to Gartner, for example, North American enterprises will increase their IT spending by 3 percent in 2013 and another 3 percent in 2014. “I think we’ve seen the end of cost cutting as an overall market trend,” says John Lovelock, research vice president for health care, technology and service providers at the technology consultancy. “That still exists for companies that are struggling, but the overall tone in the market now seems to be that we have stability in economic-outcome expectations, that [companies] can get back to strategic planning and IT investments to drive that strategy.” (For other forecasts, see “Rising Expectations” at the end of this article.)

Four big factors are driving IT spending, says Lovelock: social media; mobile devices, such as smartphones and tablets; information, including big data; and cloud computing.

The proliferation of mobile devices in the workplace is having a significant effect on IT spending, says Lovelock. With employees commonly using three or more devices, companies are expanding or reconfiguring their networks and server capacity, he says, as well as paying for higher telecommunications bills. 

More Discretionary Outlays
Allan Krans, a senior analyst in the software and cloud practices at Technology Business Research, says companies are using savings in their nondiscretionary IT budgets to boost their discretionary IT spending.

“Although the overall increases in the total budget may not be huge, part of the strategy for these companies is to continue reducing overhead, reducing maintenance and increasing efficiency a lot, so you can free up resources” for the discretionary projects, says Krans. “That’s fairly universal.”

Much of the savings on the nondiscretionary side of IT spending is coming from process improvement and infrastructure improvement. Companies are saving on overhead and maintenance costs by moving their in-house IT to cloud-based solutions, says Krans. Public cloud computing, in which companies share space on third-party servers, and private cloud solutions, where companies use dedicated third-party servers, are options for about 80 percent of IT services, he says. 

Research from Krans’ consultancy has shown that an emerging best practice is to look to reduce spending on existing services by 20 percent, because those savings will be needed to invest in new services, delivery methods, analytics and other new IT initiatives. “That model needs to happen, or else you’re falling behind, and you’re not keeping pace with the new trends in IT,” says Krans. 

In banking, a big IT priority is new solutions for customer management and channel management, according to Krans. Ongoing mobile and online banking projects continue to be priorities, as well as automating services, he says. 

Angelo J. Valletta, senior vice president and chief information officer at Sun National Bank in Vineland, N.J., says Sun uses savings from nondiscretionary spending to help offset increased spending on the discretionary side. The latter includes outlays for adding mobile-phone check-deposit services this year, as well as for technology to enhance branch services. Sun also plans to add mobile-phone person-to-person payment services, says Valletta.

How Crawford Spends
Crawford & Co., an Atlanta-based provider of claims-management solutions for insurance companies with 2012 revenues of $1.3 billion, is also using savings from its nondiscretionary budget on the discretionary side, according to CFO Bruce Swain. Last year, Crawford outsourced the hosting and support of its data center, while retaining ownership of the center. The company transferred its data-center hardware to a third party that hosts the equipment and provides the necessary technical hardware support for such things as network performance and storage. Crawford also outsourced support and help-desk tasks.

“We saved a significant amount of money in doing that,” says Swain. “And we’ve basically put those savings back into the business and invested more in development activities around the applications our business uses to serve clients.” So while the company’s IT spending this year is flat compared with last year, a larger proportion is spent on more value-added, client-facing business solutions, as opposed to the “keep-the-lights-on infrastructure,” he says.

Each year in September, the company’s management crafts a three-year strategic plan, says Swain, with input from the administrative and business-division heads. Once the plan is done, annual budget planning commences, starting with capital expenditures. Most of the capex budget is directly linked to year one of the strategic plan.

Management gathers the desired projects and puts them through a multi-day “challenge session,” says Swain, evaluating the business case and potential return on investment for each. At the end of the process, the wish list is narrowed to the projects that the company will actually fund.

The capex budget amounts to between 2.75 percent and 3 percent of revenues, says Swain. Most of it, about 75 percent, has a significant IT component. Much of that is software, but it also includes servers and other infrastructure, tablets, desktop replacements, laptops and other devices. Computers have to be regularly upgraded, in part because of increasing software complexity but also because the nature of Crawford’s business (claims adjustment) requires employees to have the technology in their hands, says Swain. 

A Roadmap for IT
Crawford also produces a document outlining its IT strategy three to 10 years into the future, called the Global Systems Roadmap. The company’s chief information officers develop and update the roadmap. The ultimate goal is to replace disparate systems in each country that Crawford operates in with a unified IT platform, says Swain. 

Part of Crawford’s evaluation of proposed IT projects is based on how they would fit in with the goals of the roadmap. Another part of the evaluation is based on risk factors—the length of the project, say, or the number of interfaces it would have or the amount of infrastructure or external resources it would require. Then there is return on investment. The minimum ROI for any project to be considered by the company is 12 percent, but that can rise to as much as 24 percent for riskier projects.

Calculating the ROI of IT spending is typically more difficult than for other areas of spending, says Swain. The costs are usually easy to figure—a platform for a new-product launch, for example, might require hardware and the purchase or development costs of new software.“The more nebulous piece, or the piece with the most risk on it, is the return from the business,” says the CFO. “How confident are you that you are going to realize your sales projections and profit streams from a new product in order to justify the investment?” 

Based, then, on strategic fit, global fit, risk and ROI, each proposed IT project is given an overall score.


Rising Expectations

 

Surveys show more IT spending is on the way.

 

  • In March, a CFO Research Global Business and Spending Monitor survey of 519 senior finance executives at companies with at least $500 million in annual revenues found that more finance chiefs were planning to increase their IT spending than in previous years. Thirty-nine percent of the respondents said they planned to spend more on IT systems, up from 33 percent in 2012 and 32 percent in 2011. Also, the percentage of respondents reporting plans to increase IT spending was higher than for any other spending category in the survey.
  • Respondents to the Duke University/CFO Magazine Global Business Outlook Survey for the second quarter projected their technology spending to increase an average of 5.6 percent in the next 12 months from the previous 12 months. Seventy-three percent projected an increase in technology spending, while only 27 percent foresaw flat or declining tech spending.
  • Research by Gartner shows that North American enterprises will increase their IT spending by 3 percent in 2013 and 3 percent again in 2014. (That’s actually low from a historical perspective—from 2005 to 2008, some industries were increasing IT spending by 8 percent to 11 percent a year.) The retail, insurance and banking sectors are projected by Gartner to have the largest increases in IT spending, at 5.6 percent, 5.5 percent and 5.5  percent, respectively.
  • According to Technology Business Research’s surveys of companies with 1,000 or more employees in the four sectors with the greatest levels of IT spending—banking and financial, health care, the public sector and telecommunications—IT spending is projected to increase in the 1 percent to 3  percent range in 2014.

    This is the first of four articles that explore the outlook for technology spending — and why corporate tech budgets are bound to rise. The other three are CFOs Holding CIOS’ Feet to the Fire, which looks at how finance chiefs asking top tech execs to justify their spending; IT Budgeting Descends to Business Units, which reports on the cloud’s role in decentralization; and Effective Tech Spending: a CFO’s View, in which a finance chief tells why her peers need to know a whole lot more about IT.


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