Allen Bernard - June 27, 2019

Is your IT innovation budget growing?

Digital transformation is changing the face of business but is IT spending on innovation growing in response? The answer is all in how you look at it.

The short answer to the question of whether your IT innovation budget is growing is, no. The long answer, like most things IT related, is more complicated. If you look at IT spend over the last 25 years or so, it runs at a pretty predictable 75/25 split for keep-the-lights-on (KTLO) funding vs. net-new projects funding (i.e., innovation).

The challenge of understanding where that money is going and the business impact it is having, however, is harder to discern from these top-line numbers. When IT was primarily focused on improving business operations, then close to 100 percent of both sides of the 75/25 divide could have been considered KTLO since "technology innovation" was a bit of an oxymoron back then, i.e., it was often more trouble than it was worth.

Today, however, with technology front and center in every aspect of your customers' business and personal lives, figuring out what part of IT spend goes to running the business vs. growing or transforming the business (innovation), is a little more opaque. Also, IT spend on innovation today is now undertaken in service of the business' desire to embrace digital transformation.

And, finally, the terms "digital transformation" and "innovation" are going to mean different things to different people depending on the state of their IT maturity and the industry they are in.

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So, from a topline budget perspective, it would appear that innovation is not being funded at higher levels than in days past. But, given that today's IT spend is trending away from internally-facing, fixed CapEx intensive projects like data centers, campus LANs,  and new workstations, and more towards solutions like cloud infrastructure and applications, one could argue that these dollars are going towards innovation.

According to Computer Economics IT Spending and Staffing Benchmarks survey 2018/2019, cloud application spending in 2018 was tied with security and privacy as a top IT spending priority. Cloud infrastructure came in third.

This is because cloud infrastructure and applications give businesses the flexibility and scale they need to try new ideas and bring new services and products to market faster, with less upfront cost and effort. The widespread adoption of cloud-based productivity tools like project management and team collaboration applications have also shown themselves to be an improvement over similar services provided by IT.

Your IT innovation budget is being delegated

Also, spending on technology is done increasingly at the department level. This further muddles data indicating whether or not innovation spending is increasing as a percent of IT's budget. According to a 2018 TechPro Research special report, Digital Transformation, A CXO's Guide, "IT digital transformation budgets increased from 2016 to 2017 for 53 percent of survey respondents … Half of all survey respondents said that departments other than IT, such as marketing, funded their digital transformations."

This data was echoed in the Harvey Nash/KPMG CIO Survey 2018 and Computer's Economics finding as well.

"We found that, worldwide, 48 percent of the companies that we surveyed were spending more than they did the previous year in digital transformation," said David Wagner, vice president of Research at Computer Economics. "The type of technology that was getting the largest increase was cloud applications. As a whole, security was right behind it, and businesses applications and cloud infrastructure were also ahead of digital transformation. But digital transformation was above things like upgrading legacy systems integration and data center automation."

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According to the Nash/KPMG survey, this is the fourth year in a row of steady spending on shadow IT although the overall numbers are relatively low with only 44 percent of respondents saying that more than 10 percent of the company's overall technology spending was done at the department level.

Unlike department level spending, the big reason IT spend is going cloud isn't to fund innovation activities directly, it's to save money. On average, IT spending on personnel (not headcount) is down 10 percent year over year, and Wagner thinks this will continue to drop as more infrastructure and applications move to the cloud. The Nash/KPMG survey, however, does state that about half of the CIOs it surveyed expected headcount to increase in 2018. These numbers are slightly older than the Computer Economics survey data.

"It is a big-time success because they're controlling costs," said Wagner. "So one of the things we're seeing is companies are trying to get out of the data center business. One of the ways they're doing that is shedding infrastructure. So, cloud of both types, both SaaS and infrastructure, are a higher priority because it's allowing them to support just as much IT without as much infrastructure costs."

A lot of companies' IT shops are using this found money for their IT innovation budget without having to increase their overall spend as a percentage of revenue. Years of case studies conducted for the annual Technology Business Management Awards prove, at least anecdotally, this to be the case: IT departments are funding innovation initiatives using the money saved by moving applications and infrastructure to the cloud. Application rationalization, using rolling forecasts, and better project management discipline also contribute to this pool of resources.

According to the Nash/KPMG and Computer Economics studies, most CIOs see their budgets increase. So, one could reasonably argue that, if spending on corporate-owned assets is on the decline, and IT spend on digital transformation and cloud are on the rise, that at least some of this new money will go towards fueling the types of projects that the business will consider innovative.

While there is no definitive answer to whether or not an IT innovation budget is on the rise due to digital transformation, it is safe to say that if it were not, then most businesses would not be deploying mobile apps or incorporating AI in their business processes or wouldn't be engaging in omnichannel marketing or any of the other myriad activities fueled by digital technologies.

It is safe to say that, on the whole, organizations of every size and shape are leveraging digital technologies to change and, hopefully, improve operations, customer interactions, speed products to market, introduce new services, revamp old ones, and expand market share.

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