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The 2018 CIO budget plan: The goal is lofty, but is the money there?

Digital transformation and underlying technologies -- cloud, AI, DevOps -- dominate CIO strategies this year, but it's unclear whether CIO budgets are up to the task.

Anudeep Parhar got an impressive spending increase: His IT budget for 2018 is up 12.5% from 2017.

That's well above what most CIOs will see for increases for this year -- if they even get a bump in spending at all.

While not every CIO budget is on par with Parhar's when it comes to spending, how he plans to allocate his budget yields insights into what IT will be doing with its money this year, according to analysts, surveys and reports.

Parhar, CIO of Entrust Datacard Corp. of Minneapolis, said a large portion of his increase will go toward a cybersecurity program that has grown significantly in recent years alongside the complexity of the threats and regulatory requirements. Investments in IT's engineering and DevSecOps programs, which include increasing use of automation, have grown, too. Cloud computing spending is also up, as Entrust Datacard shifts more of its workload to hosted solutions.

Of particular note, Parhar said, is money earmarked in the 2018 budget for innovation -- a line item appearing for the second year in a row. This innovation spend stands at 2% of the overall budget, a figure he hopes to bump to 5% in upcoming years.

Anudeep ParharAnudeep Parhar

On the other hand, capital expenses remain flat, Parhar said, as the company moves away from on-premises applications that require servers, storage and other hardware purchases, in favor of cloud computing. Overall, Parhar said his 2018 CIO budget reflects a strategy to "bring core capabilities that help the transformation of our company" by focusing on cloud, iterative development and security initiatives.

"The number represents growth," he said, referring to the double-digit budget increase, "but it's very much by design. A lot of our spend is about bringing in incremental changes that make our company more nimble."

A focus on digital transformation, but will funds fall short?

That kind of thinking mirrors larger trends. Like Parhar's budget, 2018 IT spending in general reflects increased investments in cybersecurity, cloud computing, Agile development and other initiatives that fuel the digital transformation needed to compete today and in the future.

However, analysts said most U.S.-based CIOs aren't enjoying the kind of bump in spending that Parhar received for this year.

According to CIO budget-related findings from the 2018 Gartner CIO Agenda Survey, which gathered data from 3,160 CIOs from 98 countries and all major industries, enterprise IT budgets are expected to grow 3% across the globe, with increases of 3.2% in Europe, 2% in North America and 2.1% in the United States. The Asia-Pacific region is seeing enterprise IT budgets growing at the rate of about 5.1% annually.

The 2018 State of IT report from Spiceworks, a professional network for IT professionals based in Austin, Texas, found, based on its survey of 1,003 respondents from North America and Europe, that a significant 11% of companies expect their IT budgets to decrease in 2018, with the remainder split almost evenly between budget increases (44%) and flat (43%) budgets.

What to make of the numbers? It's complicated.

Andy Rowsell-JonesAndy Rowsell-Jones

"A couple of facts that leap off the page: Firstly, budgets are growing again, even though this appears to be at a modest rate," Andy Rowsell-Jones, an analyst with Gartner, wrote in an emailed response to interview questions.

The increases bring IT organizations back to the CIO budget levels before the global financial crisis, during which IT budgets declined, Rowsell-Jones noted. That, combined with a wide swath of IT budgets showing no increase in spending at all, could limit the kind of innovation that companies need from their technology teams as the world becomes increasingly digital -- and competitive, he said.

"But the other fact that leaps off the page is that … when you look at the digital high performers in particular … you see much higher rates of IT budget increase, faster growth and better profitability. In those businesses, information technology is clearly seen by senior leadership as core to the business or agency strategy."

Rowsell-Jones defines "digital high performer" as IT organizations that "engage digitally and at scale with citizens and markets, have much more and better digitalized processes internally, and have reached a high maturity in terms of their digital endeavors."

Of the differences between U.S. company spending in IT and that in other areas of the world, notably Asia-Pacific, Rowsell-Jones had some concerns about the West's capacity to realize its digital ambitions, digital high performers excepted: "Whilst one year's numbers are not a cause for alarm, the underlying trends certainly don't look favorable for the old industrial powerhouses of the U.S. and Europe."

Playing catch-up ball

Randy McCleese, CIO at Methodist Hospital in Henderson, Ky., said he didn't see an increase in his 2018 budget, although he said his 2017 IT budget had gotten a big boost over the prior year.

He said most of his budget is going toward two big areas: First, funding keep-the-lights-on requirements; and second, meeting cybersecurity and related regulatory requirements, which for him will entail hiring a managed security service this year.

"It's like we're on a treadmill; we're not getting ahead, we're just keeping up," he said.

McCleese said many CIOs spend significant percentages of their annual spending just trying to keep up with refreshing hardware and updating software as needed and maintaining adequate security portfolios that become more complicated and costly each year as the threat landscape increases. He's also catching up from deferred updates during the global recession.

That doesn't leave a lot of room for spending on pilot programs to test new technologies, such as increased use of mobile technologies or intelligence programs to assist the healthcare teams' care for patients, McCleese said.

"We don't have enough people or enough money to do those kinds of things," he said.

Budget priorities also reflect how top-tier executives think about technology, McCleese said, adding that he and many other CIOs find that they're still trying to convince other executives of the value in IT investments.

"If the highest level of the organization understands what technology can do for the business, it makes a significant difference on those of us trying to implement [innovative] things," he said. "But if the highest levels of administration don't see the value of IT, it's harder to get the money to move forward."

Savings power investments

Red Hat CIO Mike Kelly, who oversees a 500-employee IT department, said he's investing this year in several big initiatives aimed at both process improvement and digital transformation, including programs to improve the company's data and analytics program, as well as its cybersecurity posture and an initiative to modernize some of its legacy systems.

Kelly said he does indeed have a bigger budget for 2018; he couldn't disclose actual figures but said the increase is "commensurate with the growth of the company." Red Hat, headquartered in Raleigh, N.C., provides open source enterprise IT offerings and posted $2.4 billion in revenue in 2017 -- an 18% increase over the prior year.

More to the point, though, Kelly said the way funding for big initiatives comes through in the annual budget is much more nuanced than whether the total budget is up or down.

He said he believes his team's "job [is] to drive productivity and process improvement in the core of our operations and demonstrate how that drives savings and then to use that [savings] to fund additional work for the company."

This approach ensures that IT is disciplined in its spending and that all its projects are focusing on delivering an ROI while still leaving room -- and money -- for IT innovation, Kelly explained.

"The most important thing about the budget for me is being transparent," he added. "If there's a really good idea we can rally around, we'll figure out a way to fund it."

IoT, AI, virtual tech vs. legacy systems

Peter TsaiPeter Tsai

Peter Tsai, a senior technology analyst at Spiceworks, said what's more telling than whose CIO budgets are up or down in 2018, perhaps, is how companies are spending their technology funding.

According to Spiceworks research, 45% plan to hire new staff -- with the larger companies more likely to hire than small and midsize organizations. And 48% of companies plan to adopt or ramp up their investments in new technologies, with money going to the internet of things (IoT), artificial intelligence and virtual reality technologies.

"We see increases in all three of those areas in the next year," he said, adding that spending for cloud initiatives is also taking a notable piece of the IT budgets at most companies.

But Spiceworks research also found that many companies are still spending on legacy systems, simple maintenance costs and projects that had been shelved over the past few years (as companies continued their post-recession mindset of keeping spending down).

"Most of the budget is just going to the typical everyday hardware you need to run a business," Tsai said, noting that in many instances money for new technology isn't "as big a portion of the pie" as legacy line items.

Scaling digital businesses a challenge for many

Rowsell-Jones said Gartner has found that U.S.-based CIOs generally are focused on digital transformation and innovation initiatives and are challenged with "how to scale the digital businesses [and] grow them from a series of experiments and small-scale successes into something more far-reaching and profound."

He said CIOs list business intelligence/analytics, general digitalization technologies and cloud services as the most significant technologies for the coming year, as they work toward delivering on the promises of digital transformation.

But the 2018 CIO budget carves out spending on cybersecurity technologies as well as emerging technologies such as IoT and AI. Some CIOs are investing in 3D printing, conversational interfaces, augmented reality/virtual reality and block chain as well.

Rowsell-Jones said he, too, found that CIOs are shifting spending away from infrastructure, data centers and on-premises monolithic applications like ERP systems in favor of more nimble cloud offerings.

On a whole, he said Gartner found that "nearly 20% of IT budget spend is attributable to digital activities, a number that is expected to grow to nearly one-third of the IT budget by the end of the decade."

Rowsell-Jones added, "Some of these investments will be a simple repurposing of existing investments, not new money."

That, however, may not be enough for CIOs to effectively compete, analysts said.

Anna FrazzettoAnna Frazzetto

"The reality is you need adequate money to invest and investigate," said Anna Frazzetto, global IT outsourcing executive and chief digital technology officer at Harvey Nash Inc. Robust IT spending will play an outsized role in which companies will thrive in the future.

"We've reached the point where we do view IT as the key ingredient for competitive advantage, and what allows companies to leapfrog is technology innovation," Frazzetto said.

"What we're seeing is that [companies] who spend more money in IT are the ones who are gaining market share versus the companies that still have the mentality that the CIO reports into the CFO and is viewed with a cost center-back office mentality."

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