It is not a surprise that capital budgets are falling as a percentage of total IT budgets. Cloud and SaaS have been diverting capital spending for quite some time. But what is a surprise is that capital spending continues to fall even though it currently only makes up 12% of total IT budgets. IT capital spending will never disappear completely, but just where is the floor?
As shown in Figure 1-9 from the free executive summary of our IT Spending and Staffing Benchmarks 2023/2024 study, IT capital budgets as a percentage of total IT spending have decreased from 19% in 2019 to 12% in 2023. If we were to extend this figure, we would find capital budgets made up 21% of total IT spending in 2016 and nearly a quarter of IT spending in the pre-cloud era. In 2021, capital budgets held flat, most likely as part of the transition to work-from-home required additional equipment purchases.
Of course, capital spending will never hit zero. At a minimum, all organizations need end user devices and telecommunications equipment, which are often capitalized. Moreover, most companies are not equipped to go 100% cloud. A hybrid environment is the logical ending place for most companies. But hosting and subscription models are becoming increasingly attractive to most businesses. In many ways, they offer more flexibility, allow the IT department to focus on the business rather than their infrastructure, and can build sound strategic partnerships with providers.
“There can be too much of a good thing, however,” said David Wagner, senior research director at Computer Economics, a service of Avasant Research, based in Los Angeles. “During the COVID-19 lockdowns, many companies looked immediately to preserve cash. Our surveys showed they delayed capital spending. But what happens if there is no capital budget left to slash?”
We are not at that point yet, but as companies become increasingly reliant on subscription-based models, they become locked into contractual terms that limit flexibility. Some contracts cannot be “turned off” or cancelled. Payments cannot be delayed. This does create a barrier to getting rid of capital spending entirely. And it should drive companies to look carefully at the contracts to maintain as much flexibility in poor economics times as possible.
Where will capital spending bottom out? It is impossible to say, but the trend in reduced capital spending has not hit the bottom yet.
Avasant’s Computer Economics IT Spending and Staffing Benchmarks 2023/2024 study is based on a detailed survey of more than 215 IT executives in the US and Canada on their IT spending and staffing plans for 2023/2024. The study provides IT spending and staffing benchmarks for small, midsize, and large organizations and for 35 sectors and subsectors. These include six new subsectors, namely life sciences, aerospace and defense, chemicals, healthcare payors, professional services, and technical services. A description of the study’s metrics, design, demographics, and methodology can be found in the free executive summary.
This Research Byte is a brief overview of the findings in our report, IT Spending and Staffing Benchmarks 2023/2024. The full 40-chapter report is available at no charge for Avasant Research clients. Individual chapters may be purchased by non-clients directly from our website (click for pricing)