For CIOs, trying to manage IT spending in a world upended by COVID-19 is like driving at night with headlights that dim unexpectedly: suddenly you can barely see the road in front of you and beyond that everything is completely obscured.
Economic forecasts make for scary reading. Goldman Sachs is now predicting a 6% quarter-on-quarter drop in U.S. economic growth in the first three months of the year and an unprecedented 24% decline for the second quarter. Previously Goldman had forecast a 5% decline in Q2. Other forecasters are also becoming much more bearish.
In response, tech leaders are hitting the brakes on spending. Enterprise Technology Research (ETR) regularly polls large numbers of CIOs and other senior tech executives about their spending intentions. Results released today from a recent survey it has been running suggest that global IT spending this year now looks as if it will be flat, though the ongoing economic fallout from COVID-19 could well drag it down into negative territory.
Going into 2020, ETR’s research showed executives were expecting a 4% increase in global spending, so its new estimate, which is based on responses from over 1,000 CIOs and other tech leaders in America, Europe and some Asian countries, represents a seismic shift in expectations. “The data suggests that enterprises are moving towards a ‘keep-the-lights-on strategy’,” says Sagar Kadakia, ETR’s director of research. Kadakia notes the company saw CIOs’ outlook become far more pessimistic in just a few days as its survey results were impacted by a wave of worsening news about the spread of the coronavirus (see chart).
Other forecasters are also raising the prospect that budgets could shrink this year. Forrester recently issued a forecast suggesting global IT spend could still rise by over 2% this year. However, it included a caveat that there’s a 50% chance it could shrink by 2% or more year-on-year in the event of a deep recession. “From a CIO’s perspective, one thing they are looking at is the share price,” says Andrew Bartels, a Forrester analyst. “If it’s down a lot they will say: ‘I have to do everything I can to help sustain profit margins’.”
Here are some of the things to look out for as tech leaders react:
Immediate and longer-lasting IT budget cuts in some industries
ETR’s results indicate that less than a tenth of CIOs have already decided to make permanent cuts in their 2020 budgets, which means spending could pick up again if the downturn isn’t long-lasting. However, responses received from tech leaders in industries such as airlines, hospitality and manufacturing, which are already seeing massive declines in revenue, suggest their budgets for the year are going to end up considerably lower than for 2019 no matter what happens in the next few months.
Increased spending on technologies that support remote work
The spread of COVID-19 is driving up spending in a few areas, which may mean some CIOs end up spending even more than they expected in 2020 as they race to support.large numbers of people working from home. Investment in everything from virtual private networks and desktop infrastructure to hardware and security software to protect remote worker is soaring. Some companies have even been stockpiling personal computers for workers in case supply chains are disrupted by the virus.
This transition could keep spending here buoyant for a while, but if a recession is deep and long-lasting PCs and other hardware, such as networking gear for datacenters, are likely to be among the first victims of belt-tightening. “Historically, companies tend to make the fastest and deepest cuts to capital spending [in recessions],” says Stephen Minton of research firm IDC in emailed comments to Forbes. He notes that the industry has just come off a big Windows upgrade cycle, so it will be less painful to make shorter-term cuts here.
Cancellation of non-essential tech projects and hires
As part of their digital transformation strategies, many CIOs have been launching exploratory projects with startups and other businesses offering new capabilities that may be nice to have but aren’t essential. These initiatives, and the planned headcount associated with them, are are going to either be delayed or cancelled. Almost a fifth of the respondents to ETR’s survey say they have already frozen IT deployments and new proiects. Kadakia says the results suggest non-essential projects will be pushed out three to six months, as companies focus on immediate actions to deal with COVID-19’s impact.
Cuts in budgets for software and IT service providers
Although spending on software to help keen remote workers productive is increasing, patterns from previous recessions suggest overall spending on code will decline if there’s a prolonged downturn. IDC’s Minton says software investment usually falls one or two quarters after hardware spending, partly because a certain percentage of the spend is tied up in annual contracts that can take time to cancel or renegotiate.
Service firms such as Accenture and IBM that help companies tackle large tech projects will also get some short-term protection from ongoing contractual commitments, but CIOs are bound to look for cost savings here too. Forrester’s Bartels notes that a lot of the money spent with these firms is tied to new IT deployments and projects. If these are delayed or shelved then their services will no longer be needed.
A more turbulent transition towards cloud computing
At least one company told ETR’s researchers it’s speeding up the last part of a cloud project that was almost finished in order to give it the flexibility to adapt fast to COVID-19’s economic impact. IDC’s Minton reckons the global crisis could give a boost to cloud computing and cloud-managed services in much the same way that the Dot Com bust at the turn of the century caused a huge swing towards IT outsourcing. But he also cautions that some companies may choose to delay big cloud implementations or spend on in-house systems instead to save money. One thing that seems very certain in the next few months is that CIOs—and the companies that sell to them—will have to deal with a great deal of uncertainty.